‘No one wins’ from a trade war, Stephen Roach warns stocks are vulnerable

One of Wall Street's leading authorities on Asia sees a trade war against China as the biggest threat to U.S. markets.

Yale University senior fellow Stephen Roach cites the dilemma as a major reason why economic fundamentals aren't as good as Wall Street believes.

"It's a negative. No one wins from this. It won't create jobs. It'll raise prices, and it will have a potential impact on our export business," Roach said Monday on CNBC's "Trading Nation." "This is just a question of how far this goes and the nature of the retaliation from the Chinese and then our own retaliation from the retaliation and so forth."

Roach, who was chairman of Morgan Stanley Asia for five years, spoke before Chinese President Xi Jinping announced plans on Tuesday to open China's economy, including lowering tariffs on imported autos. Also Tuesday, the World Trade Organization said China filed a complaint challenging President Donald Trump's tariffs on imported steel and aluminum.

Roach contended that stocks are in a danger zone with or without a trade war.

"The market is vulnerable to being too complacent here, and I think when the volatility settles down, we'll be working our way lower," Roach said.

He warned last December that if the right steps weren't taken, a market shock could occur. Since then, the Dow has dipped into correction territory three times.

Roach isn't calling for a full-blown recession, but he predicts a showdown between the two countries could hurt the U.S. more than China.

"The U.S. needs China for three reasons. One, cheap goods for income-constrained American consumers. Two, China is our third-largest most rapidly growing export market," he said. "Three, China is the biggest foreign owner of U.S. Treasurys."

Roach's 2014 book "Unbalanced: The Codependency of America and China" depicted a fictional trade war unfolding between the U.S. and China. He notes the scenario has an "eerie resemblance" to what's happening now.

"We have a very unstable rhetorical framework coming out of Washington — on again and off again multiple times a day," Roach said. "This is one of those red-line issues for President Trump. He's been anti-China for most of his adult life. I think he would have a hard time backing down."

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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