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.
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."