President Trump asked the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs and Monday night said if China "refuses to change its practices" and continues with its own newly declared tariffs, then the additional levies would be imposed on Beijing.

"I suspect we're not going to cause the economies to collapse with Smoot-Hawley on steroids," Blankfein said, referring to the 1930s protectionist act that brought import taxes to historic levels.

"I don't think we're in a suicide pact on this," Blankfein said during a luncheon interview at the Economic Club of New York Tuesday.

Despite escalating trade threats between the United States and China, Goldman Sachs CEO Lloyd Blankfein says the two countries won't mutually destroy their economies.

In response, the Chinese Commerce Ministry said the latest threat of more tariffs violates previous negotiations, and Washington "has initiated a trade war that violates market laws and is not in accordance with current global development trends."

Blankfein, who is preparing an exit from his job after a 12-year tenure as CEO, said this is part of a negotiating tactic by Trump, and it may be similar to recent talks with North Korea, which included "a lot of bluster."

Blankfein advocated a different approach, and said this was not the course he would have recommended. While China could run out of things to apply retaliatory tariffs to before the U.S. did, Blankfein criticized the "tit-for-tat" approach being used.

"That's what you would do if you're crazy and wanted to end free trade," he said. "That's what you would do if it was a negotiating position, and you wanted to remind your counterparty just how much fire power you had to bring to the negotiation."

While he acknowledged China is frustrated with "sudden aggressiveness" of U.S. policy, Blankfein was also sympathetic to U.S. companies doing business there.

"Anyone who has transacted with China has appreciated the potential of China, had good experiences and had frustrating experiences in China," he said. "And at various times one or the other comes to the fore."

Goldman Sachs was one of the first American banks to make inroads to China. In November, the investment bank established a $5 billion investment vehicle with China's sovereign wealth fund aimed at putting money into U.S. companies. At the time, Blankfein was traveling with President Donald Trump as part of a business delegation led by Commerce Secretary Wilbur Ross.

"This was an early effort, symbolic in the whole scheme of trade but an important symbol of what China wanted to do to support U.S. trade," Blankfein said.

Markets factored in the possibility of a trade escalation Tuesday. The Dow Jones industrial average tumbled more than 300 points, while government bond yields and commodity prices also mostly moved sharply lower.