President Trump’s announcement on Thursday about trade and investment interventions against China were a little less hawkish than expected, and the Chinese response was at the dovish end of the spectrum of possible retaliatory actions. If we have seen the first shots in a global trade war, then there are many rounds of escalation still to come, probably taking years to play out. 

Nevertheless, markets are — justifiably — taking this long-term risk far more seriously than other geopolitical problems in recent years. Investors need to judge the probability of a full-scale global trade war and the economic damage from such an outcome. Asset prices will be volatile as assessments of these two variables change. 

This column will discuss the second of these variables — the scale of the economic damage from a large increase in tariffs in the global economy.