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Escalating US-China trade tensions has ‘raised the stakes’ for both sides: Barclays

The escalation of the trade battle between the U.S. and China has raised the stakes for both sides of the dispute — but it’s too early to gauge the potential fallout, according to Michael Gapen, Barclays US Chief Economist.

“The wild card is the uncertainty component. How much do equity markets sell off? What does it do for the confidence of households and businesses? Do they invest less and hire less? Those indirect spillover effects, we really won’t know until they happen,” Gapen told Yahoo Finance on Tuesday.

Stocks sold off on Tuesday after U.S Trade Representative Robert Lighthizer indicated higher tariffs on Chinese goods are coming later this week, sending the Dow plunging 473.39 points, its biggest drop since January 3, and the S&P down 1.65%.

While the potential collapse of the U.S.-China talks is rattling U.S. investors and would likely send shockwaves throughout the global economy, Gapen told Yahoo Finance that China has more to lose than the U.S.

“They’re more leveraged to trade, growth is slowing, and they’re trying to reshape the way their economy is structured,” said Gapen. “The U.S. is still basically a closed economy. Exports are only about 15% of GDP and we import more from them than they do from us, so relatively speaking, they have more to lose in this game.”

In terms of the impact on GDP growth, Gapen suggested in the interview that the starting point would be that it would drag down GDP by a few tenths of a percent, but it could easily escalate.

FILE - In this Nov. 9, 2017, file photo, U.S. President Donald Trump and Chinese President Xi Jinping participate in a welcome ceremony at the Great Hall of the People in Beijing, China. Trump is to meet with Xi at the Group of 20 summit in Buenos Aires, Argentina, on Friday, Nov. 30, and Saturday, Dec. 1. (AP Photo/Andrew Harnik, File)

In a recent note, Barclays maintained its base-case view on a trade deal being reached, but acknowledged the “increasing likelihood of our worse-case scenario happening.” The worst-case scenario includes a breakdown of the trade talks and higher and wider tariffs being imposed.

“We still think both sides ultimately would like a deal that they can live with. I don’t think either side wants a tit for tat escalation in protectionism that will hurt growth and reduce confidence in financial markets and business, but this puts up a roadblock...I think it’s moved tariffs much closer to the base line and we’ll see what the Chinese bring on Thursday.”

Chinese Vice Premier Liu He is still set to lead a Chinese delegation in the United States later this week, raising hopes that a trade deal will be reached and prevent the tariffs from being raised.

Seana Smith is the anchor of The Ticker.