President Donald Trump ramped up pressure on China to finalize atrade deal during talks in Washington this week by threatening tomore than double tariffs on US$200 billion of the Asian nation'ssales to the world's largest economy and impose new importtaxes.

China is considering canceling a planned Washington trip thisweek by the country's top trade negotiator, the Wall Street Journalreported. Beijing was surprised by Trump's move, the Journalreported citing a person it didn't identify, and doesn't want tonegotiate under threat.

U.S. stock futures tumbled on Trump's escalation threat, withS&P 500 index futures sinking as much as 1.8 percent. The yuanplunged 0.8 percent, the most since August.

In an abrupt shift from the White House, after both sides hadindicated negotiations were going well, Trump issued a pair oftweets on Sunday saying he's not satisfied with the pace ofprogress and that the duties would increase Friday.

Trump also raised the possibility of imposing a 25 percenttariff on another $325 billion in imports from China not currentlycovered. Such a move would be hugely disruptive for the U.S.economy, as it would hit products such as smartphones and computersthat have been left off lists so far.

Despite the happy talk over progress from Trump and others inrecent days, the United States has become frustrated with China'sbackpedaling on some of its earlier commitments, including on thecrucial matter of technology transfer, two people familiar with thesituation said. That's emboldened trade hawks within the Trumpadministration to push for a harder line, including the raising oftariffs, the people said.

Twice Delayed

Trump has already twice delayed increasing tariffs on $200billion in goods to 25 percent from 10 percent, after agreeing to aDec. 1 truce with Chinese President Xi Jinping to give theirnegotiators time to work out a comprehensive agreement.

“The Trade Deal with China continues, but too slowly, as theyattempt to renegotiate,” Trump said in his tweet. “No!”

People familiar with the talks had indicated that theadministration expected to announce a deal on Friday after talksthis week in Washington. But according to the people, Trump andpeople close to him have been irritated with the pace of progressin recent days and by leaks they viewed as intended to embarrassthe president.

Although he's eager to finish a deal, Trump faces politicalpressure ahead of his 2020 re-election bid to satisfy China hawks,while also resolving the tensions between the world's two largesteconomies and ending the tit-for-tat tariffs that have hurt manyagricultural constituencies and cast a shadow over commoditymarkets.

“Right now, the hawks on both sides are winning,” said SteveBannon, former White House chief strategist whose anti-China group,Committee on the Present Danger, has been pushing Trump to furtherraise tariffs on Chinese imports. “The president just told us thatthe Chinese are trying to retrade the deal.”

That sentiment comes from hawks “who don't think China shouldsubmit to American terms,” such as Vice President Wang Qishan, saidBannon, who's known to be close to U.S. Trade Representative RobertLighthizer and White House trade adviser Peter Navarro.

After Trump's tweets, White House economic adviser Larry Kudlowsaid on Fox News that the president is “issuing a warning.” While“great progress” has been made in the talks, structural andenforcement issues remain, he said.

“We hope they'll come around with this deal, but if they don't,the president is saying 'Guess what, the tariffs will remain,”'Kudlow said.

It's a risk to try and put pressure on Beijing to get a betterdeal, said Scott Kennedy, a China expert at the Center forStrategic and International Studies. “His display of pique mayyield a few more concessions, but it could backfire, with Beijingdigging in its heels and calling the president's bluff,” Kennedysaid.

Buckle Up

It wasn't immediately clear how China would respond, butSunday's developments could unleash a sharp reaction after marketswere “lulled to sleep” on the expectation that a trade deal wasimminent, said Chris Rupkey, chief financial economist at MUFGUnion Bank in New York.

Major U.S. stock indexes are trading at or near record highs, inpart on optimism that the U.S. and China would soon put theirbruising trade war in the rear-view mirror.

“This has all the makings of a complete disaster that could leadthe stock market to crater,” Rupkey said in a note Sunday toclients. “Buckle up your seat belt, investors.”

A flurry of U.S. trade associations, which have been fightingTrump's tariffs as taxes on consumers and companies—not onChina—quickly mobilized Sunday to oppose the president's latestthreat as the wrong approach to getting a better deal withChina.

“If the administration follows through on this threat, Americanconsumers will face higher prices and U.S. jobs will be lost,”David French, senior vice president for government relations forthe National Retail Federation, said in a statement.

Concluding a deal will hinge on resolving the stickiest issuesin their trade dispute. Some of the main issues remaining includean enforcement mechanism to police the agreement and a decisionover whether tariffs will be removed or stay in place, according tothe people, who spoke on the condition of anonymity.

Chinese President Xi Jinping's top trade envoy, Liu He, wasscheduled to return to Washington on Wednesday for what wasexpected to be a closing round of trade talks. Trump's acting chiefof staff Mick Mulvaney and Treasury Secretary Steven Mnuchin lastweek began publicly ramping up pressure on China to reach a deal,warning it could still walk away from the months-longnegotiations.

Trump and the Chinese president will decide after thenegotiations this week whether they'll meet to sign off on a pact,White House spokeswoman Sarah Huckabee Sanders said Thursday,adding that the U.S. sees such a meeting as likely.

Drag on Growth

Trump imposed duties of 25 percent on an initial $50 billion ofChinese goods last year and then 10 percent on an additional $200billion in products in September. Those duties were set to rise to25 percent on Jan. 1 and then again on March 1, but Trump delayedthat as talks continued. China has imposed tariffs on $110 billionof U.S. exports in retaliation.

Based on calculations by Bloomberg Economics, tariffs at thecurrent level add up to a 0.5 percentage-point drag on China'sgross domestic product growth this year. An increase to 25 percenttariffs on $200 billion in Chinese exports from 10 percent wouldraise the drag to 0.9 percentage point. Tariffs on all of China'sexports to the U.S. would increase the burden to 1.5 point.

What Bloomberg Economists Say

“Without more information, it's difficult to know how tointerpret Trump's tweets. It's possible talks are breaking down,with China offering insufficient concessions, and an increase intariffs a genuine prospect. More likely, in our view, is that thisrenewed threat is an attempt to extract a few more minorconcessions in the final days of talks. Either way,Trump's tweet has added uncertainty to the final stage of thenegotiation and will focus market attention on Liu He's D.C.visit.”  —Tom Orlik, chief economist, BloombergEconomics

Trump also said on Sunday that tariffs paid by China “arepartially responsible for our great economic results,” althougheconomic studies have shown it's the companies that import Chinesegoods and U.S. consumers, not China itself, that are paying thebulk of the additional costs.

The conflict has already contributed to a slump in global trade,dented business confidence, and forced companies to upend theirsupply chains. The International Monetary Fund cut its globaloutlook last month to the slowest pace since the financial crisis,warning that an escalation in tariffs could push growth evenlower.

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