WHEN Donald Trump declared on March 22nd that he planned to impose a 25% tariff on $50bn a year of imports from China, the prospect of a trade war between the world’s two largest economies briefly spooked stock markets. China's Shanghai composite index, which includes the shares of many companies that would be hurt by the levies, fell by 3%. In America, the S&P 500 and Dow Jones Industrial average dropped by 2.5% and 2.9% respectively. However, it did not take long for investors to get used to the threat. For nearly three months following the announcement, China's three major stock exchanges—whose collective market capitalisation exceeds $10trn—traded in a fairly narrow range.

Today that looks complacent. On June 19th Mr Trump said he would slap a 10% tariff on an additional $200bn worth of Chinese goods. The new policy, which followed an announcement by the White House on June 15th that it would push forward with the original tariffs announced in March, sent markets plummeting. Stock exchanges fell around the world, from Tokyo to London to New York. Unsurprisingly, the losses were most acute in China, where the Hang Seng share index closed down 3% and exchanges in Shanghai and Shenzhen fell by 4% and 5%.

Leaders in America and China now face a standoff that is likely to leave both sides worse off. The Trump administration, which has in recent days referred to China as a “predatory economic government”, reckons that it has the upper hand. In 2017 China exported over $500bn worth of goods to America, nearly four times as much as the $130bn it imported from there. Mr Trump and his advisers believe they can use this $375bn Chinese trade surplus as leverage in trade negotiations. Officials in China, meanwhile, who have called Mr Trump’s tariffs an act of “blackmail”, could retaliate in other ways. Many American-based multinational companies have invested heavily in China, and depend on it for their supply chains. The Chinese government could easily disrupt their operations, or restrict the sale of goods on which American firms depend. It could also try to drive up interest rates on the United States’ government debt by selling part of its stash of Treasury bonds. Unless the two governments can find a way to back down while saving face, yesterday’s sell-off could pale in comparison with the financial carnage to come.