Financial market participants are not paying enough attention to the escalating U.S.-China trade war, Societe Generale Chairman Lorenzo Bini Smaghi told CNBC on Friday.

"I don't think a trade war is very good, said Bini Smaghi, an Italian economist and former European Central Bank board member. He acknowledged there is a need to "put pressure on China to liberalize."

However, the world's two largest economies need to find a way to resolve their trade dispute before it spills over and drags down global growth, Bini Smaghi told "Squawk Box."

"If it gets worse, the whole world economy is going to slow down," said the chairman of SocGen, the Paris-based banking giant.

The Trump administration on Monday announced tariffs of 10 percent on another $200 billion worth of Chinese imports, rising to 25 percent at the end of the year.

In response Tuesday, China said it will institute retaliatory tariffs on U.S. goods worth $60 billion.

The question now is whether Trump will follow through on a threat to put tariffs on the rest of Chinese imports, which totaled $505 billion last year, according to federal data.

The president has said he wants to prevent China from stealing U.S. technology and he wants to reduce America's trade deficit with China, which was $375 billion in 2017.