The trade clash between US President Donald Trump and China's government is escalating, with Beijing pledging to "counterattack with great strength" if Trump follows through on threats to impose tariffs on an additional US$100 billion ($138b) in Chinese goods.

Trump made his out-of-the-blue move when China threatened to retaliate for the first round of tariffs planned by the United States. But for someone who has long fashioned himself as a master negotiator, Trump left it unclear whether he was bluffing or willing to risk a long trade dispute between the world's two biggest economies, with steep consequences for consumers, businesses and an already shaken stock market.

They aren't going to bully him into backing down.

"They aren't going to bully him into backing down," said Stephen Moore, a former Trump campaign adviser who is now a visiting fellow at the Heritage Foundation.

He said the Chinese "are going to have to make concessions — period".

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The White House sent mixed signals yesterday as financial markets slid from investor concern about a significant trade fight.

Treasury Secretary Steven Mnuchin told CNBC he was "cautiously optimistic" that the US and China could reach an agreement before any tariffs go into place. But, he added, "there is the potential of a trade war".

White House economic adviser Larry Kudlow told reporters the US was "not in a trade war", adding, "China is the problem. Blame China, not Trump."

Trump's latest proposal intensified what was already shaping up to be the biggest trade battle for more than a half century.

The US bought more than US$500b in goods from China last year and now is planning or considering penalties on some US$150b of those imports. The US sold about US$130b in goods to China in 2017 and faces a potentially devastating hit to its market there if China responds in kind.

Global financial markets have fallen sharply as the world's two biggest economies squared off — the Dow Jones industrial average sank 572 points yesterday.

President Donald Trump has left it unclear whether he is bluffing or willing to risk a long trade dispute between the world's two biggest economies. Picture / AP
President Donald Trump has left it unclear whether he is bluffing or willing to risk a long trade dispute between the world's two biggest economies. Picture / AP

Trump told advisers on Friday he was unhappy with China's decision to tax US$50b in American products, including soybeans and small aircraft, in response to a US move this week to impose tariffs on US$50b in Chinese goods.

Rather than waiting weeks for the US tariffs to be implemented, Trump backed a plan by Robert Lighthizer, his trade representative, and was encouraged by Peter Navarro, a top White House trade adviser, to seek the enhanced tariffs.

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China said negotiations were impossible under the circumstances. But Trump officials said the President and his team remained in contact with President Xi Jinping and expressed hope to him of resolving the dispute through talks.

In Beijing, a Commerce Ministry spokesman said China does not want a trade war — but is not afraid to fight one.

"If the US side announces the list of products for US$100 billion in tariffs, the Chinese side has fully prepared and will without hesitation counterattack with great strength," spokesman Gao Feng said. He gave no indication what measures Beijing might take.

Trump has also pushed for a crackdown on China's theft of US intellectual property, and he criticised the World Trade Organization, an arbiter of trade disputes, in a tweet for allegedly favouring China.

Trump asserted the WTO gives the Asian superpower "tremendous perks and advantages, especially over the U.S."

US officials have played down the threat of a broader trade dispute, saying a negotiated outcome is still possible. But economists warn that the tit-for-tat bears the hallmarks of a classic trade rift that could keep growing. Worry is intensifying among Republicans, who traditionally have favoured liberalised trade.

The US bought more than US$500b in goods from China last year and now is planning or considering penalties on some US$150b of those imports. Picture / AP
The US bought more than US$500b in goods from China last year and now is planning or considering penalties on some US$150b of those imports. Picture / AP

"The administration needs to be thinking about the unintended consequences and what are those ripple effects, those domino effects, and what are the retaliatory actions that are likely to be taken," said South Dakota Senator John Thune, the Senate's No. 3 Republican, in an interview with KDLT-TV in Sioux Falls.

The standoff began last month when the US imposed tariffs on imported steel and aluminum. China countered by announcing penalties on US$3b worth of US products. The next day, the United States proposed the US$50b in duties on Chinese imports. Beijing responded within hours with a threat of further tariffs of its own.

Further escalation could be in the offing. The US Treasury is working on plans to restrict Chinese technology investments in the United States. And there's talk that the US could also put limits on visas for Chinese who want to visit or study in the country.

Donald Trump told advisers he was unhappy with China's decision to tax US$50 billion in American products, including soybeans. Picture / AP
Donald Trump told advisers he was unhappy with China's decision to tax US$50 billion in American products, including soybeans. Picture / AP

Kudlow told reporters the US may provide a list of suggestions to China "as to what we would like to have come out of this," and those issues were under discussion.

"Negotiations are better than tariffs," Kudlow said. "A solution in the next three months would be better than anything. I think that's eminently doable." He added: "But Trump is not just using tariffs as a negotiating card. He said that to me."

For Trump, the dispute runs the risk of blunting the economic benefits of his tax overhaul, which is at the center of congressional Republicans' case for voters to keep them in power in the 2018 elections. China's retaliation so far has targeted Midwest farmers, including growers of soybeans, corn and wheat. That could specifically harm core Trump supporters.

"With respect to the Trump Administration, its political success will rise and fall with the economy," Kudlow said. "And the economy is doing rather well now and I expect it to do even better."

- AP