Trump trade tactics sabotaging the economy and markets, Stephen Roach warns

Wall Street could be making a costly mistake.

According to economist and Yale University senior fellow Stephen Roach, the markets are underestimating the impact from the trade war with China.

"The market just thinks this is typical Donald Trump bluster, and based on his performance on a lot of other issues," he said Wednesday on CNBC's "Trading Nation." "But we’re in a situation where we’ve initiated tariffs."

In March, the U.S. struck first by imposing global levies on steel and aluminum imports. China retaliated by placing tariffs on $3 billion of U.S. imports. By July, President Trump was taking additional steps to institute hundreds of billions of dollars worth of tariffs on additional Chinese products.

"The U.S., I think, will definitely feel the impact of these tariffs it’s placing on China. Consumers will be hurt as supply chain shift the higher cost to producers," Roach said. "We certainly have strong growth in the quarter that ended. But I would be reluctant to extrapolate that in the future, and our markets are not prepared."

Roach, who was Morgan Stanley Asia chairman for five years and is considered a leading authority on China, believes the U.S. will be unable to avoid damage.

"The idea that we’re in a position of strength is very myopic, very backward looking and misses the fundamental headwinds that loom out there," he noted.

Even if Trump dials back his tariff policy, Roach contended businesses are already getting hurt from the uncertainty stemming from the trade issue.

"If we are waiting for [Chinese President] Xi Jinping, to capitulate, then the situation is going to go from bad to worse," Roach said.

But Peter Navarro, director of the Office of Trade and Manufacturing Policy, told CNBC on Thursday that the trade tensions could have a positive impact on the U.S. economy.

"This is a trade dispute. If we can get that right, it will have strong, positive implications for the American economy and global economy because what China is doing is upsetting the global economy," he said on "Squawk Box." "My point is it's much less disruptive than the headlines would suggest."

But Roach isn't backing down from his trade warning.

"The more I hear Peter Navarro claim it's not a problem, the more convinced I am it is a problem," Roach said in response.

The White House did not immediately respond to a request for comment on Roach's remarks.

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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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