Trump says the United States has already lost its trade war with China

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The market reaction comes on the heels of China's overnight announcement that it would impose tariffs on 106 types of American imports, including whiskey, soybeans, cars and chemical products - amounting to $50 billion in USA products annually.

As a response to USA tariffs, China has announced that it will apply tariffs on a range of United States imports of up to 25% which is set to affect $3 billion worth of U.S. goods.

The clash reflects the tension between Trump's promises to narrow a USA trade deficit with China that stood at $375.2 billion a year ago and the ruling Communist Party's development ambitions.

"China has taken out big guns to answer Trump's tariff, the trade war is here", Naseem Aslam, chief market analyst at Think Markets said. Canada, which exports more steel and aluminum to the US than any other country, threatened to retaliate even as it was in the middle of renegotiating the 24-year-old North American Free Trade Agreement with Mexico and the U.S.

MSCI's all-country world index of stock performance in 47 countries traded little changed after tumbling about 1 percent.

Boeing and Caterpillar led a slide in big US manufacturers and technology companies that bore the brunt of the U.S. Earlier this week, China imposed US$3 billion worth of tariffs on 128 U.S. products in retaliation for earlier USA duties on steel and aluminium.

The tit-for-tat action comes hours after Washington detailed about 1,300 Chinese products it meant to hit with tariffs - also set at 25%.

Tech shares mostly climbed, with biotechnology companies such as Amgen, Biogen, Celgene and Gilead Sciences all gaining more than two percent. Trump will want to emerge as the "winner" in this trade war before the mid-term elections.

Stock markets in Europe fell, with investors taken aback by the speed of China's response. Germany's 10-year yield dipped one basis point to 0.49%, the lowest in 12 weeks.

Even so, "They sent a very clear signal that China is going to respond quickly and in time to any USA trade action", said Edward Alden, a trade expert at the Council on Foreign Relations. "The industrials index's (.SPLRCI) 1.8 percent slide was the most among the 11 major S&P sectors".

Q: What reasons do Washington and Beijing have for avoiding a trade war?

The temperature is rising between the United States and China but the simmering confrontation has not yet boiled over into a trade war, since the tit-for-tat countermeasures so far have been confined to a few specific products.

After a big early loss, USA crude dipped 14 cents to $63.37 a barrel in NY while Brent crude, used to price global oils, fell 9 cents to $68.03 a barrel in London. The Dow ended up 1.65%, while the S&P 500 gained 1.26% and the Nasdaq 1.04%. Heating oil lost 2 cents to $1.98 a gallon. That's on top of duties announced last month, meaning that some forms of those products will face a 50 per cent fee to reach the USA, further boosting prices for some products. The US solar industry said the tariffs would cause 23,000 installers, engineers and project managers to lose their jobs.

Bond prices turned lower.

Deere & Co. fell 4.3 percent and Caterpillar dropped nearly 3 percent.

The swing in risk sentiment sucked some strength out of the dollar and put the pep back into bonds, with yields on United States 10-year Treasury debt down two basis points at 2.76 per cent.

The dollar index fell 0.07 percent, with the euro up 0.09 percent at $1.228.

In commodity markets, gold jumped 0.7 per cent to US$1,342 an ounce, recovering some of Tuesday's losses.