Trade war: China broke the deal, says Trump

US President Donald Trump declared that China’s leaders broke the deal he was negotiating with them on trade, ratcheting up his rhetoric ahead of fresh negotiations that were already clouded by imminent tariff increases and China's threats of retaliation.

“They broke the deal!” Trump said at a campaign rally Wednesday night in Panama City Beach, Florida, leading him to raise tariffs. The President noted that top Chinese trade negotiator Liu He was travelling to Washington for further talks. “Good man,” Trump said, “but they broke the deal.”

Also read:US accuses China of backtracking on trade commitments

The US has said it would raise tariffs on $200 billion of Chinese goods to 25 per cent from 10 per cent on Friday after alleging China reneged on provisions of a draft trade deal the White House considered settled. The Chinese government has said it will retaliate, escalating the trade war between the two countries.

Trump said there is nothing wrong with taking in $100 billion a year in tariffs on Chinese imports, in the absence of a trade deal.

“They come in tomorrow and whatever happens, don’t worry about it. It will work out. It always does,” he said. Although Trump often claims China is paying the tariffs, most economists say American companies and consumers are bearing most if not all of the cost.

Trump has a long history of attacking China at campaign rallies, although he has adopted a more diplomatic approach and even courted Xi Jinping and senior Chinese officials in official meetings. He has also threatened to label China a currency manipulator, but still has not done so.

A Chinese delegation headed by Liu, a Communist Party Politburo member and Vice Premier, was scheduled to arrive on Thursday in Washington for two days of talks with US officials.

Pivotal round

Both sides were trying to shape perceptions ahead of what could be a pivotal round of the negotiations. On Wednesday, Trump said that the Chinese indicated they wanted to make a deal in Washington. Hours later, China’s Ministry of Commerce warned it would strike back with necessary countermeasures if the US raises tariffs.

Also read: How US-China talks could play out

The escalation threat has roiled financial markets, reviving concerns that a trade war could undermine a pick-up in the global economy in the second half of the year. The International Monetary Fund cut its 2019 global outlook last month to the slowest pace since the financial crisis, citing trade tensions as a risk to growth.

Despite the tough rhetoric, its likely the two nations will eventually cut a deal, said Welles Orr, a senior trade adviser at law firm Miller & Chevalier who served as a senior trade official under George HW Bush.

Intense negotiations

Officials have been locked in intense negotiations for about five months, making progress on issues ranging from Chinese purchases of American goods to enforcement of any agreement. They still face significant gaps including over whether to remove tariffs.

“Both sides are so hungry to get this thing done,” Orr said in an interview. “The incentive is strong for the US, because they’ve made such good headway. On the other hand, the Chinese want to show they can be serious negotiators and deliver on their commitments.”

“There is an 80 per cent chance the US and China will eventually reach a deal,” Jamie Dimon, CEO, JP Morgan Chase & Co, said on Wednesday. “Now we have this whole kind of little bump in the road,” Dimon said in an interview with Bloomberg Television . “Sometimes his tweets don’t pan out to be as bad. I don’t think they’ll get the deal done by Friday.”

Goldman Sachs economists echoed that view. “While the sides will probably eventually agree to a deal, there is only a 10 per cent probability of an agreement by Friday,” the firm said in a research note authored by economist Alec Phillips. Goldman puts the likelihood of the US following through on its tariff threat on Friday at 60per cent.

Also read:Lagarde warns US-China trade tensions pose risk to world economy

The Trump administration this week accused Beijing of backpedaling on commitments it made during the negotiations. In the past week, Chinese officials told their US counterparts they would not agree to a deal that required revisions of Chinese law, as they had previously promised in to do, according to people familiar with the matter.

Some analysts believe a collapse in talks could trigger a major sell-off in risk assets. “The imposition of new tariffs and a complete breakdown in negotiations would probably cause a drop of 10 per cent to 15 per cent in US stocks from their highs, and a 15 per cent to 20 per cent plunge in Chinese equities,” Mark Haefele, Chief Investment Officer, UBS Global Wealth Management, said in a note this week.

“It remains our base case that the US and China will ultimately reach a deal, but with the deadline for the imposition of new tariffs now very short, the path to that deal could well be bumpier than it once looked,” said Haefele.

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