China is considering delaying a trip by its top trade negotiators to Washington this week, according to people familiar with the matter, after US President Donald Trump threatened the country with steeper tariffs over the pace of trade talks.

Trump on Sunday raised pressure on Beijing to strike a trade deal by announcing he would increase tariffs on $200 billion of Chinese imports to 25 per cent from 10 per cent on Friday. He also floated the possibility of extending a new 25 per cent duty on another $325 billion in imports that aren’t now covered.

“Risks of a full blown trade war are escalating,” said Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte. in Singapore. “Trump’s threat may backfire as China will not want to negotiate with a gun pointing at their heads.”

China’s yuan plunged the most in more than three years and its equity markets were roiled as markets unwound bets on a resolution to a trade war that’s weighed on global commerce and forced companies to rethink supply chains. The Aussie dollar fell while the yen climbed.

Lengthy Talks

Chinese Vice Premier Liu He was scheduled to arrive in Washington on Wednesday with a delegation of about 100 people for what had been shaping up to be possibly the final round of negotiations. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin visited Beijing last week for talks they described as productive.

The US had been targeting May 10 to announce a deal, that would be finalized and signed by Trump and Chinese President Xi Jinping later at an official summit, people familiar with the negotiations said last week.

The two sides have been locked in intense negotiations since last year for an agreement to address US concerns over China’s trade surplus, alleged theft of intellectual property and forced technology transfers. Trump and Xi agreed to a tariff truce on December 1 to allow their senior negotiators time to come up with an agreement.

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars....

— Donald J. Trump (@realDonaldTrump) May 5, 2019

The truce helped soothe investors concerns about a further escalation in a trade war between the world’s two largest economies, which imposed tariffs on about $360 billion of each other’s good last year. Trump’s latest tweets on the tariff increase marked an abrupt reversal in stance for the White House after both sides had been saying for weeks that negotiations were going well.

‘A Warning’

That shift reflects growing U.S. frustration with China’s backpedaling on some of its earlier commitments, including on the crucial matter of technology transfer, two people familiar with the situation said. That’s emboldened trade hawks within the Trump administration to push for a harder line, including the raising of tariffs, the people said.

The Wall Street Journal earlier reported that China was mulling a cancellation of the next round of talks after Trump’s tweet.

White House economic adviser Larry Kudlow said on Fox News that the president was “issuing a warning.” While “great progress” has been made in the talks, structural and enforcement issues remained, 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.

Buckle Up

Major US stock indexes had been trading at or near record highs, in part on optimism that the U.S. and China would soon put their bruising trade war in the rear-view mirror.

“This has all the makings of a complete disaster that could lead the stock market to crater,” Chris Rupkey, chief financial economist at MUFG Union Bank in New York, said in a note Sunday to clients. “Buckle up your seat belt, investors.”

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

Based on calculations by Bloomberg Economics, tariffs at the current level add up to a 0.5 percentage-point drag on China’s gross domestic product growth this year. An increase to 25 per cent tariffs on $200 billion in Chinese exports from 10 per cent would raise the drag to 0.9 per centage point. Tariffs on all of China’s exports to the U.S. would increase the burden to 1.5 point.

What Our Economists Say

“Without more information, it’s difficult to know how to interpret Trump’s tweets. It’s possible talks are breaking down, with China offering insufficient concessions, and an increase in tariffs a genuine prospect. More likely, in our view, is that this renewed threat is an attempt to extract a few more minor concessions in the final days of talks. Either way, Trump’s tweet has added uncertainty to the final stage of the negotiation.”