- China can't afford not to deal with the latest Trump tariffs, says Safanad's John Rutledge.
- He expects the Chinese to "come back hard."
- Things like capital goods, technology and agriculture are vulnerable, he says.
We have "absolutely not" seen the end of the trade dispute between the United States and China, said John Rutledge, a former advisor to President George W. Bush.
On Friday, China responded to President Donald Trump's new tariffs on Chinese imports by proposing a list of 128 U.S. products as potential retaliation targets. The U.S. goods, including wine, fruit and steel pipes, had an import value of $3 billion in 2017.
Rutledge, who has advised government leaders in China, said it comes down to the fact that two individuals are making decisions — Trump and Chinese President Xi Jinping — rather than a group. Groups tend tend to think rationally, he noted
However, not only is there uncertainty surrounding Trump, Xi has basically been named "emperor of China" with his recent re-election as president and the removal of term limits on the office, Rutledge said Friday on "Power Lunch."
That means Xi is "in a very politically vulnerable spot where he has to show testosterone to his local audience. And so, they're going to come back hard," said Rutledge, who was one of the principal architects of the Reagan economic plan.
Trump targeted China on Thursday, when he signed an executive memo that slapped tariffs on up to $60 billion in Chinese imports.
The new measures are meant to penalize China for trade practices that the Trump administration says involve stealing U.S. companies' intellectual property.
Rutledge, now chief investment officer at Safanad and a CNBC economics contributor, said China's initial response was seemingly moderate because it doesn't know what other actions Trump is going to take.
"We don't see a very firm response here because they're not sure what they're dealing with but they cannot afford to not deal with it, he said.
Things like capital goods, technology and agriculture are vulnerable, he noted.
"There's big, big dollars there and we don't know when it all stops."
— CNBC's Kevin Breuninger contributed to this report.