In the past year, this threat has not materialized, partly because the new administration was focused on dealing with domestic priorities and also because Trump had surrounded himself with officials who did not share his protectionist viewpoint.

In recent weeks, this situation has changed. Trump has seen off his secretary of state, his chief economic adviser, and his national security adviser, all of whom he has replaced with hawks and protectionists. The stage is now set for a more aggressive approach in both defense and trade policies.

Trump’s narrative is that the US has been cheated by all other countries with which it trades and that it’s now time to stop this. Top of the list is China, accused of stealing intellectual property, manipulating its currency, imposing harsh licensing and technology transfer conditions on foreign investors, protecting key industries with trade restrictions, and mounting cyberattacks on US corporations to steal their secrets.

No doubt Trump sees this as a golden opportunity to use his skills as a tough business negotiator to secure an epoch-making deal with China after a year in which he has largely failed to put his campaign promises into practice, with the exception of tax reform.

The first salvo in this battle was the imposition of an additional 25-percent duty on steel and an additional 10-percent on aluminum imports from all countries, apart from its NAFTA partners, Canada and Mexico, starting on March 23. While the US is now considering exemptions for some of its trading partners, China is clearly not one of them. The US’s main intention is to stop what it sees as China flooding the world with cheap steel.

The second stage was the announcement on Thursday of further tariffs on a wide range of imports from China, coupled with restrictions on technology transfer. The tariffs are to be imposed on US$50 billion or US$60 billion (depending on whether you believe the White House spokesperson or the US president) of Chinese goods. The list is being drawn up by the US Trade Representative’s office over the next two weeks, after that there will be a discussion period before implementation. Trump probably hopes that this threat will bring China swiftly to the negotiating table. While this is not impossible, it is more likely that China will respond with protectionist measures of its own, combined with a complaint to the World Trade Organization and some relatively minor concessions, such as improved market access for some US products that China needs.

This process has already started. China’s announcement on Friday of tariffs on US$3 billion of imports from the US is a relatively limited reaction to the steel and aluminum tariffs. The Chinese government will wait to see the actual measures to be taken by the US on other imports after the discussion period is up, or at least until the list is published, before announcing further retaliation, which is likely to be far more severe.

Not surprisingly, stock markets have taken these events badly. The Hang Seng Index has fallen sharply, along with the Nikkei and the Shanghai indexes. Market sentiment is not always based on reason, but this time it is. If this battle develops into a full-scale trade war, it will damage both corporate profits and the wider economy in the US and China, which of course includes Hong Kong. Tariffs raise consumer prices, squeezing family budgets and reducing private consumption, which is a major chunk of national income in all countries. They also raise costs and lower profit margins for manufacturers of products that use imported raw materials and components.

Hong Kong is vulnerable in several ways. Here are some of them:

Although ports on the mainland have developed enormously in recent decades (Shanghai’s is now twice the size of Hong Kong’s), Hong Kong remains an important entrepot between the mainland and its trading partners. Many jobs in Hong Kong depend on this trade, including cargo handling at the world’s fifth-largest container port.

Hong Kong is a major center for global supply chain management, a business that will be harmed if world trade contracts, as it will if a major trade war develops.

Hong Kong’s tourism industry will also suffer collateral damage if consumers on the Chinese mainland, in the US and countries such as Japan that are likely to be caught in the crossfire rein in their budgets.

To the extent that the US considers Hong Kong to be a proxy for China (even though it is a separate customs territory from the mainland, as stated in the Basic Law of the Hong Kong SAR), tariffs applied to the country will almost certainly be applied to Hong Kong, directly harming Hong Kong’s own exports of items in the listed categories. This is already happening with steel and aluminum products.

We do not yet have enough information to forecast the impact on Hong Kong in quantitative terms. Much will depend on the interactions between the US and Chinese governments in the months to come. If, after these opening salvos, the two sides meet and do a deal, then the harm will be limited. Unfortunately, this looks unlikely, given Trump’s unrealistic expectations of millions of jobs returning to the US, which they won’t. The outlook for Hong Kong is bleak.