The trade war has now become a reality as the United States officially imposed tariffs against China.
US President Donald Trump imposed tariffs on $US34 billion ($46 billion) of Chinese imports, with China saying it would be forced to retaliate but not outlining exactly how it would do so.
The duties on Chinese goods could be followed by another $US16 billion of goods in two weeks with could follow President Trump saying the final total could eventually reach $US550 billion, a figure that exceeds all of US goods imports from China in 2017.
US customs officials will begin collecting an additional 25 per cent tariff on imports from China of goods ranging from farming plows to semiconductors and aircraft parts.
China set to hit back
China has previously said it would respond by imposing higher levies on goods ranging from American soybeans to pork, which may in turn prompt Trump to raise trade barriers even higher.
Perhaps surprisingly the Australian share market rallied strongly right through the tariff announcement, with the ASX 200 closing the week at a 10.5 year high of 6272.2 points, up 77.7 points for the week.
That is the best result since January 2008 and came on the back of a recovery in bank shares and Telstra, despite a softening in mining stocks.
A statement from China’s Commerce Ministry said the US had “violated World Trade Organisation rules and ignited the largest trade war in economic history.”
“Such tariffs are typical trade bullying, and this action threatens global supply chains and value chains, stalls the global economic recovery, triggers global market turmoil, and will hurt more innocent multinational companies, enterprises and consumers.’’
The week ahead
With the trade war between the US and China moving from a threat to a reality, most of the week ahead will be consumed by what happens from here on.
It will be particularly interesting to see where the US dollar trades compared to the Australian dollar as that will push share market valuations around significantly.
If the US dollar rises, that will be good for companies with large US dollar earnings exposure while domestic stocks will be assisted should the US dollar fall.
On the domestic front after a busy first week of the financial year there is not too much to get excited about.
Monthly business and consumer surveys together with housing and lending finance data are the most prominent statistical releases.
Internationally, China has a busy week with releases on consumer and producer prices, trade, money supply and lending data for June.
Its trade war partner the US will also be releasing inflation data that will be closely watched for its impact on the pace of interest rate rises.