Now it’s getting serious.

Monday saw the worst day for U.S. stocks so far this year after President Trump announced new tariffs on Chinese imports last week and China responded by allowing its currency to fall to its lowest level in a decade.

The benchmark S&P 500 index SPX, +1.59% fell 3% and the Dow Jones Industrial Average DJIA, +1.33% lost 2.9% on Monday.

“The best historical market comparison to (Monday’s) selloff is August 2015, when the S&P 500 declined by 6.3% and had several days of 3% moves,” Datatrek analysts Nicholas Colas said. “Both 2015 and 2019’s swoons started with a sharp devaluation of the Chinese yuan. The difference now is that the move comes as part of the US-China trade war. Our work says we should expect further declines in US and global stock prices.”

But what are the implications for the U.S. economy rather than the stock market ?

The yuan’s slump on Monday came after Trump last Thursday pledged to impose 10% tariffs on $300 billion of Chinese goods beginning Sept. 1 and this time the levies will hit imports of consumer goods like mobile phones and televisions, rather than components used in manufacturing. Goldman Sachs pointed out that the majority of imports affected in the latest tariff round are consumer goods (62%), compared to capital(28%) or intermediate (10%) goods, which constituted the bulk of the previous three tranches.

China retaliated on Monday by suspending purchases of American farm crops and letting the value of its currency fall, effectively making Chinese goods cheaper to buy and negating some of the damage from U.S. tariffs.

The latest escalation in Trump’s trade war with China follows the move in September last year to impose a 10% tariff on $200 billion of Chinese products which prompted China to retaliate with tariffs on $60 billion in American goods.

“It’s adding further stress to an already stressed trade environment,” says Gregory Daco, chief U.S. economist of Oxford Economics. “It adds up to a very significant slowdown in economic growth.”

An existing 25% tariff on $250 billion in Chinese imports -- as well as duties on imported appliances, steel and aluminum – are already set to reduce economic growth by 0.3 percentage points next year, Daco said. The proposed tariff on $300 billion in Chinese shipments would shave off another 0.1%, cutting growth by nearly half a percentage point to 1.7%, he said.

If the trade war escalates beyond that – with the 10% tariff rising to 25% or new tariffs on European auto imports – a recession would be likely next year.

The new 10% tariff, if it takes effect, already has led Moody’s Analytics chief economist Mark Zandi to raise his probability of a recession over the next 12 months to 50% from 35%.

Tariffs on Chinese goods are now back to levels we associate with pre-1930s protectionism, Nobel prize winning economist, Paul Krugman, noted.

Before Trump’s latest announcement last Thursday, the average tariff on Chinese goods imported to the U.S. was 18.3%, up from 3.1% in 2017, according to the Peterson Institute for International Economics. After, and if, the new round takes effect, the average tariff will rise to 21.5%.

“And the trade war is reaching the point where it becomes a significant drag on the U.S. economy,” Krugman argued. “The Fed probably can’t offset the harm the trade war is doing, and is probably getting less willing even to try.”

Indeed St. Louis Federal Reserve President James Bullard said Tuesday the U.S. central bank can’t be expected to react to every twist and turn of a trade war. The Fed “can’t realistically move monetary policy in a tit-for-tat trade war,” Bullard said, in an interview with Agence France Press.

Traders on Monday raised the chances of a half percentage point interest rate cut at the Fed’s September meeting as bond yields TMUBMUSD10Y, 0.657% tumbled. Bullard said the Fed has already done “quite a bit” to help cushion the economy from the uncertainty generated by the trade policy dispute. The St. Louis Fed president voted in favor of the central bank’s decision to cut its benchmark interest rate by a quarter-point last week and said he has one more rate cut “penciled in” for this year.

In total so far the Trump administration has imposed at least a 20 percent tax on the roughly $500 billion worth of goods the U.S. imports from China each year.

“So that’s a $100 billion a year tax hike... and I don’t think it’s outlandish to suggest that the overall anti-stimulus from the Trump tariffs is comparable in scale to the stimulus from his tax cut... And that stimulus is behind us, while the drag from his trade war is just getting started,” Krugman argued.

The latest tariffs suggest a vicious circle may lie ahead. Trump raises tariffs and this leads to Chinese currency depreciation, which yields complaints by Trump about tariff evasion and currency manipulation, and then more tariffs are likely. But neither the U.S. nor Chinese economies are suffering enough yet to force a trade deal. Indeed, analysts believe China’s president Xi, who does not face re-election, is ready to wait until next year’s U.S. elections and has canceled agricultural purchases from U.S. farmers who are often Trump voters.

However, other analysts are not so sure that the U.S. consumer has suffered yet. “One analysis has shown that the tariffs (excluding the latest round) raised $72 billion, equivalent to one of the largest tax increases in recent history”, Putri Pascually, managing director or PAAMCO Prisma noted. “However, US consumers have not seen an increase in prices - so who is bearing the tariff?”, he asked. “China is giving US taxpayers a tax cut via the weakening of the yuan, which makes Chinese goods cheaper and thus offsets the tariffs,” he said. And “uncertainty from the trade war also, paradoxically, makes the US dollar stronger which makes the Chinese imports cheaper”.

The Chinese yuan has fallen by more than 10% against the U.S. dollar in the past year to its lowest level in a decade as the trade war has escalated.

Trump has usually placed great store in the rise of the U.S. stock market, believing it reflects the strength of the U.S. economy under his presidency, so perhaps he will call a truce rather than risk a falling stock market or a recession going into the 2020 elections.

But analysts are becoming increasingly skeptical that the Trump administration can negotiate a trade with China anytime soon. Goldman economist David Mericle said Goldman no longer expects the US and China to agree on a deal to end their trade war before the November 2020 presidential election as policy makers from the world’s largest economies are taking a harder line. Goldman’s “base case is now that no deal will be reached before the 2020 election,” he said in a note. “The balance of risks has shifted enough to make a third 25 basis point rate cut in October the most likely outcome, for a total of 75 basis points of cuts including the July cut.”

While the macroeconomic impacts may be limited, the potential risks to commodity markets and the global technology supply chain remain significant, J.P. Morgan analysts argued in a note. “If the additional tariffs on Chinese imports takes effect, the economic implications are significant for China, with the potential to drag down China’s GDP by as much as 0.3% through direct and indirect impacts,” J.P. Morgan’s Haibin Zhu wrote.

The National Retail Federation, the Footwear Distributors and Retailers of America, and the American Apparel & Footwear Association all warned that Trump’s threat to impose 10% tariffs on the remaining $300 billion of Chinese imports from Sept. 1 will hurt consumer purchases, raise prices further and dampen hiring.

Farmers have already been badly hit this season. In retaliation for the U.S. import tariffs, Chinese companies have stopped buying U.S. agricultural products, China’s Commerce Ministry said on Tuesday, a blow to U.S. farmers who have already seen their exports decimated by the more than year-old trade war.

American Farm Bureau Federation President Zippy Duvall called the latest announcement from China “a body blow to thousands of farmers and ranchers who are already struggling to get by.” Tariffs imposed by China on U.S. soybean exports have cut exports of the most valuable U.S. crop and forced Trump’s administration to compensate farmers for two years with combined spending of as much as $28 billion. China imported $9.1 billion of U.S. farm produce in 2018 - mainly soybeans, dairy, sorghum and pork - down from $19.5 billion in 2017, according to the American Farm Bureau.

“The relevant debate for investors now is whether the Fed can offset the negative feedback loop in corporate confidence,” Morgan Stanley strategist, Michael Zezas said. “Our economists don’t think investors should depend on it. More tariffs should drag on corporate confidence, capex, and global growth in the near term. Incoming purchasing managers indicator (PMI) data suggest that corporate sentiment remained weak in July and that weakness in manufacturing activity has extended likely into 3Q19.”

Read: China trade fight seen dragging on through 2020 in threat to economy, Trump reelection