The threat to raise taxes on virtually all of China's exports to the United States — made in a tweet on Sunday — comes days before the two sides are scheduled to meet for a new round of trade talks in Washington.
China said it was still planning to send a delegation to the White House but would not comment on whether President Xi Jinping's key adviser, Vice Premier Liu He, would still attend.
Tenuous trade truce
Trump has repeatedly slammed China for indulging in what he says are unfair trade practices, particularly with regards to access to its giant market, intellectual property and technology transfers. He has said that a big trade deficit with China shows the United States is being ripped off.
The talks are aimed at settling a dispute that has hurt Chinese exporters, damaged parts of the US economy, and slowed global growth since it began last July.
The United States fired the first big salvo back then, imposing 25% tariffs on $50 billion worth of Chinese exports from the aerospace, robotics and auto industries. China retaliated with its own tariffs on American goods worth $50 billion, including agricultural products and chemicals.
Around two months later, Trump hit Beijing with another set of tariffs, announcing a 10% duty on goods worth $200 billion. Beijing responded at the time with tariffs ranging from 5% to 10% on $60 billion worth of US exports.
Trump and Xi announced a truce in early December, agreeing not to further escalate tariffs. Trump delayed a plan to raise the existing tariffs from 10% to 25%.
Investors are nervous
The two sides have held several rounds of talks since then, with the latest meeting scheduled for Wednesday. But Trump's sudden threat has ratcheted up tensions again, and investors are worrying about what an all-out trade war would mean for businesses and the global economy.
Global markets reacted strongly on Monday. China's Shanghai Composite Index plunged by nearly 6% and Hong Kong's Hang Seng Index fell nearly 3%. The Stoxx Europe 600 index opened down 1.2%, while US stock futures pointed to a slump on Wall Street later.
Commodities were also jittery about the potential damage to growth. Oil prices fell Monday to their lowest level in a month, with US crude futures down over 1% to $61.30 a barrel. Brent crude, the international benchmark, fell 0.8% to $70.30.
"Markets are concentrating on the possible breakdown in US-Sino trade talks," said Jeffrey Halley, senior market analyst at Oanda.
Global growth at risk
It's not clear whether Trump's threat indicates a tougher US position in the talks or is simply a negotiating tactic.
China's foreign ministry said Monday that Washington had threatened higher tariffs "numerous" times in the past, adding that the countries should work towards a "mutually beneficial and win-win agreement."
Analysts say an escalation could hit growth both economies and drag down global growth.
"Escalation of the trade war could be the trigger for weaker global growth," said Tai Hui, chief market strategist for Asia at J.P. Morgan Asset Management. "We continue to be constructive on the US economy, but external shocks could derail such optimism."
If Trump carries out his threat to impose a 25% tariff on nearly all of China's exports to the United States, that could knock 0.3% off China's gross domestic product, according to Julian Evans-Pritchard, senior China economist at Capital Economics.
"There will be a direct hit to Chinese growth," he said, adding Beijing would likely respond with new measures to stimulate the economy.
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