Financial markets around the world have fallen sharply amid growing fears that the US-China trade dispute could escalate into a full-scale currency war, with damaging consequences for the world economy.

Q&A What is the China-US trade war about? Show Hide The roots of the dispute come from US president Donald Trump’s “America first” project to protect the US’ position as the world’s leading economy, while encouraging businesses to hire more workers in the US and to manufacture their products there. Trump complains of a large trade deficit with China, which he views as a symbol of the US’s decline as a manufacturing powerhouse. Chinese imports to the US totalled $539.5bn last year, while $120.3bn was sold the other way – leaving a trade deficit of $419.2bn. The president has accused Beijing of “unfair” trade policies, including allowing the theft of US companies’ intellectual property. The threat of import tariffs on Chinese goods is being used as leverage in talks where Trump is seeking changes to Beijing’s trade policy. Tariffs have been imposed by Washington on some Chinese goods sold in the US for about a year. They came on top of broader tariffs used by Trump that have hit China and other trading partners such as the EU, Canada and Mexico, on goods including steel and aluminium. In May 2019 the US president further ratcheted up existing import tariffs of 10% on $200bn (£153bn) of Chinese goods sold in the US to 25%, hitting everything on a long list of products. Trump has previously warned that 25% tariffs could be slapped on a further $325bn of goods – which would mean all Chinese imports being covered by tariffs. However, talks in November 2019 aimed at easing tensions were welcomed as the beginning of a thaw in the trade war between the two nations. Richard Partington and Jasper Jolly

Stocks plunged on Wall Street as the Dow Jones Industrial Average sank by more than 766 points (2.9%) – its worst trading day of the year – and the S&P 500 and Nasdaq both fell 3% and 3.4% respectively amid fears that the trade war is intensifying.

London-listed shares on the FTSE 100 fell by about 180 points, almost 2.5%, following steep losses on Asian markets.

Asian markets were also weaker on Tuesday, with Australia’s ASX200 down 2%, the Hang Seng off 0.7%, and the Nikkei down 0.7% by the middle of the day.

Global markets take fright as Trump ramps up US-China trade war Read more

Donald Trump renewed his attack on China, arguing in a flurry of tweets that Beijing was using currency manipulation and unfair trading practices to undermine jobs and company profits in America.

“China is intent on continuing to receive the hundreds of billions of dollars they have been taking from the US with unfair trade practices and currency manipulation. So one-sided it should have been stopped many years ago!” he said.

The latest Twitter tirade from the White House came after China allowed its currency, the yuan, to devalue against the dollar on Monday against a background of increasing tension in the long-running trade dispute between the world’s two largest economies.

The International Monetary Fund has warned that global economic growth is slowing as Washington and Beijing raise the stakes in the standoff. The US Federal Reserve cut interest rates last week to bolster US economic growth as concern rises over the health of the global economy.

The People’s Bank of China (PBOC) let the yuan weaken below the sensitive seven-to-one dollar level for the first time since 2008, in a step that some experts said could be used to “weaponise” the Chinese currency in the trade dispute. A weaker yuan could help Beijing offset the impact of the US tariffs, as Chinese goods would become more competitive for overseas buyers.

Trump threatened last week to impose punitive import tariffs on $300bn (£246.9bn) of Chinese imports, in a move that would effectively slap tariffs on all exports to the US from China. Beijing on Friday threatened to retaliate without saying exactly how it would respond.

Economists said China allowing the yuan to devalue was a clear result of the threat made by Trump, although it also comes as Beijing increasingly allows the currency to move in line with market pressures.

Julian Evans-Pritchard of the consultancy Capital Economics said: “The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US.”

By linking the devaluation with Trump’s renewed tariff threat, “the PBOC has effectively weaponised the exchange rate,” he added.

The FTSE 100 closed down 2.5% at 7,223 points on Monday, as Germany’s Dax index fell by about 1.8% and France’s Cac40 fell by about 2.2%.

The losses extended a sell-off begun last week after Trump shocked investors with the threat of higher tariffs on $300bn of Chinese imports to the US. While the taxes are paid by US importers of Chinese goods to US customs, Trump argued on Twitter that China was paying for them.

Economists warn that US consumers are hit by rising prices of imported goods. Still, the president tweeted: “It is now even more obvious to everyone that Americans are not paying for the Tariffs – they are being paid for compliments of China, and the U.S. is taking in tens of Billions of Dollars!”

According to Reuters China’s central bank linked the yuan’s weakness to the fallout from the country’s trade war with the US.

The PBOC said: “Under the influence of factors including unilateralism, protectionist trade measures, and expectations of tariffs against China, the yuan has depreciated against the dollar today, breaking through 7 yuan per dollar.”

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China had previously refrained from devaluing the currency as talks with the US appeared to be progressing. However, analysts warned that the trade dispute was gradually spinning out of control.

Keith Wade and Craig Botham of the City investment firm Schroders, said: “China had wanted tariffs to be removed as part of any deal, so by doing the opposite Trump was effectively delivering a rebuke.

“The problem now is that both sides could get into a position where they cannot back down without losing face. Consequently, the prospect of a deal has diminished and the risks of escalation have risen.”