China Battles Against Trump's Tariff Threat as Liu to Visit U.S.

(Bloomberg) -- China's top trade negotiator Liu He will travel to the U.S. this week for high-stakes talks as prospects dimmed for maintaining a fragile truce after President Donald Trump threatened to raise tariffs on Chinese goods starting Friday.

Vice Premier Liu will meet with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, on May 9 and 10, according to a statement Tuesday on the Chinese Ministry of Commerce website. At the same time, China is preparing retaliatory tariffs on U.S. imports should Trump carry out his threat, according to people familiar on the matter.

U.S. equities extended declines as investors weighed setbacks in negotiations that both sides had indicated in recent weeks were headed in the right direction. The S&P 500 Index dropped 1.5 percent at 11:01 a.m. in New York. The dollar gained and Treasury yields were mostly steady.

The latest twist sets up Thursday as a crucial moment in the yearlong trade war with potentially huge ramifications for companies, markets, consumers and politicians in both nations. In light of the U.S. ultimatum, attention will turn to whether Liu offers enough concessions to stave off higher tariffs or whether China plays hardball with retaliatory measures.

“The fact that China sends a delegation to the U.S. shows it is still willing to solve the dispute by negotiations regardless of what the U.S. is saying,” said Lu Xiang at the state-run Chinese Academy of Social Sciences in Beijing. “If the Trump administration follows through with the tariffs threats on Friday, I think it means the talks fall apart. We then need to be prepared for worse than worst.”

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China would make its retaliatory tariffs effective one minute after the U.S., if the decision to add an extra 25 percent in duties on $200 billion of Chinese imports comes into force, the people said, who asked not to be named as the matter isn't public. The State Council and Commerce Ministry didn't respond to requests for comment on the tariff plans.

The trade talks were cast into doubt after Trump's surprise announcement over Twitter on Sunday that he planned to raise the tariff increase from the current 10 percent because talks were moving too slowly. The president said he may also impose duties “shortly” on $325 billion of Chinese goods that aren't currently covered, a move that would hit virtually all imports from the Asian nation.

The Trump administration plans to increase duties on Chinese imports at 12:01 a.m. on May 10, Lighthizer said Monday. “We felt we were on track to get somewhere. Over the course of last week we have seen an erosion of commitments by China. That in our view is unacceptable,” he said, adding that significant issues remain unresolved, including whether tariffs will remain in place.

China was “well prepared for other potential outcomes” of its trade talks with the U.S., “including a temporary breakdown in talks,” the Global Times newspaper said in an editorial Tuesday. The door wasn't closed to talks even if the U.S. raises tariffs, the newspaper said.

Lighthizer and Mnuchin told reporters on Monday that the Chinese backsliding became apparent during their visit to Beijing last week, but that they had been reassured by their Chinese interlocutors that everything would turn out.

That changed over the weekend when China sent through a new draft of an agreement that included them pulling back on language in the text on a number of issues, which had the “potential to change the deal very dramatically,” Mnuchin said. At that stage about 90 percent of the pact had been finalized, he said, and the Chinese wanted to reopen areas that had already been negotiated.

“We are not willing to go back on documents that have been negotiated in the past,” he said.

According to two people familiar with the U.S.'s position, China backtracked on committing to legal changes that American officials saw as key to selling the deal domestically as the biggest concession any U.S. administration has ever gotten from China.

Such perceived foot-dragging has emboldened the trade hawks who advise Trump to keep the pressure on China.

“Whatever emerges won't be a trade deal,” Steve Bannon, former White House chief strategist who has been pushing Trump to further raise tariffs on Chinese imports, wrote in a op-ed in the Washington Post. “It will be a temporary truce in a years-long economic and strategic war with China.”

--With assistance from Jenny Leonard, Saleha Mohsin, Jennifer Jacobs, Edward Dufner, Benjamin Purvis, Miao Han and Kevin Hamlin.

To contact the reporters on this story: Jenny Leonard in Washington at jleonard67@bloomberg.net;Steven Yang in Beijing at kyang74@bloomberg.net;Shawn Donnan in Washington at sdonnan@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, ;Malcolm Scott at mscott23@bloomberg.net, Jeffrey Black

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