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WRAPUP 2-Trump 'happy' to keep tariffs on Chinese goods; Beijing prepares retaliation

David Lawder and Makini Brice

retaliation@ (Adds Biden campaign tweet, market close, Chinese statement)

* Sources say China backtracked on draft agreement -Reuters

* U.S. says tariff hikes go live at 12:01 a.m. on Friday

* China vows unspecified retaliation against higher U.S. duties

* Two days of talks resume in Washington on Thursday

WASHINGTON, May 8 (Reuters) - U.S. President Donald Trump said on Wednesday he would be happy to keep tariffs on Chinese imports as the two countries prepare for new talks to try to rescue a faltering trade deal amid a sharp increase in U.S. duties.

The U.S. Trade Representative's office announced that tariffs on $200 billion worth of Chinese goods would increase to 25 percent from 10 percent at 12:01 a.m. ET (0401) GMT on Friday, right in the middle of two days of meetings between Chinese Vice Premier Liu He and Trump's top trade officials in Washington.

Beijing announced it would retaliate if tariffs rise.

"The Chinese side deeply regrets that if the U.S. tariff measures are implemented, China will have to take necessary countermeasures," China's Commerce Ministry said on its website, without elaborating.

The world's two largest economies have been embroiled in a tit-for-tat tariff war since July 2018 over U.S. demands that the Asian powerhouse adopt policy changes that would, among other things, better protect American intellectual property and make China's market more accessible to U.S. companies.

Expectations were recently riding high that a deal could be reached but a deep rift over the language of the proposed agreement opened up last weekend.

Reuters, citing U.S. government and private-sector sources, reported on Wednesday that China had backtracked on almost all aspects of a draft trade agreement, threatening to blow up the negotiations and prompting Trump to order the tariff increase.

Trump, who has embraced largely protectionist policies as part of his "America First" agenda, warned China on Wednesday that it was mistaken if it hoped to delay a trade deal until a Democrat controlled the White House.

"The reason for the China pullback & attempted renegotiation of the Trade Deal is the sincere HOPE that they will be able to 'negotiate' with Joe Biden or one of the very weak Democrats," Trump, a Republican, tweeted on Wednesday.

"Guess what, that's not going to happen! China has just informed us that they (Vice-Premier) are now coming to the U.S. to make a deal. We'll see, but I am very happy with over $100 Billion a year in Tariffs filling U.S. coffers," he added.

In response, Biden's deputy campaign manager Kate Bedingfield on Twitter criticized Trump, saying U.S. farmers, small business owners and consumers are the ones hit by the tariff battle.

Speaking to reporters, White House Press Secretary Sarah Sanders separately said the Trump administration has received an "indication" that China wants an agreement.

U.S. stock indexes rebounded slightly from this week's earlier losses after her comments, but the S&P 500 and the Nasdaq closed in negative territory amid caution over trade and some disappointing earnings.

SWEEPING CHANGES

The United States is demanding Beijing make sweeping changes to its trade and regulatory practices, including protecting U.S. intellectual property from theft and forced transfers to Chinese firms, curbs on Chinese government subsidies and increased American access to China's markets.

Trump also has sought massive hikes in Chinese purchases of U.S. farm, energy and manufactured products to shrink a gaping U.S. trade deficit with China.

Sources familiar with the talks said China's latest demands for changes to a 150-page document that had been drafted over several months would make it hard to avoid the U.S. tariff hike on Friday. That increase would affect Chinese imports from computer modems and routers to vacuum cleaners, furniture, lighting and building materials.

Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington, said the talks were at a delicate stage and much depended on what sort of proposal Liu is bringing to Washington.

"I think the Trump administration is quite serious about imposing tariffs," Kennedy said. "I don't think Liu He would have agreed to come if he was just going to give the U.S. a lecture."

(Reporting by Makini Brice and David Lawder; Writing by Chris Prentice Editing by Chizu Nomiyama, Paul Simao and Lisa Shumaker)