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WRAPUP 12-Trump says talks with China will continue as trade war escalates

Jeff Mason and Humeyra Pamuk

(Recasts with new Trump tweet, updates markets)

* U.S. tariff increase on Chinese goods takes effect

* China to retaliate, does not immediately give details

* U.S., Chinese officials end second day of negotiations

* Trump calls discussions constructive

WASHINGTON, May 10 (Reuters) - U.S. President Donald Trump said on Friday trade talks with China would continue even after Washington moved to increase tariffs on Chinese imports, avoiding the worst-case scenario of a complete breakdown in negotiations.

Trump's remarks, which were made in a tweet, followed the end of talks in Washington between U.S. Trade Representative Robert Lighthizer, U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He.

"Over the course of the past two days, the United States and China have held candid and constructive conversations on the status of the trade relationship between both countries," Trump said, praising his relationship with Chinese President Xi Jinping and saying the negotiations would carry on.

"In the meantime, the United States has imposed Tariffs on China, which may or may not be removed depending on what happens with respect to future negotiations!" the U.S. president said.

U.S. stock indexes, which opened sharply lower on Friday, reversed course and were in mostly positive territory in late afternoon trading in New York. Yields on U.S. government debt also drifted higher after the end of the talks.

Earlier on Friday, the United States increased its tariffs on $200 billion in Chinese goods to 25% from 10%, rattling financial markets already worried the 10-month trade war between the world's two largest economies could spiral out of control. China is expected to retaliate.

Trump defended the tariff hike earlier on Friday and said he was in "absolutely no rush" to finalize a deal, adding that the U.S. economy would gain more from the levies than any agreement.

Despite Trump's insistence that China will absorb the cost of the tariffs, U.S. businesses will pay them and likely pass them on to consumers. Consumer spending accounts for more than two-thirds of U.S. economic activity.

It may take three or four months for American shoppers to feel the pinch, but retailers will have little choice but to raise prices to cover the rising cost of imports before too long, economists and industry consultants say.

Trump, who has adopted protectionist policies as part of his "America First" agenda and railed against China for trade practices he labels unfair, has accused Beijing of reneging on commitments it made during months of negotiations.

Following the U.S. tariff hike, China's Commerce Ministry said it would take countermeasures but did not elaborate.

China responded to Trump's tariffs last year with levies on a range of goods including soybeans and pork.

(Reporting by David Lawder, Jeff Mason, Susan Heavey, Humeyra Pamuk and Tim Aeppel in Washington, Tim Aeppel in New York, Yawen Chen, Michael Martina, Ryan Woo, Ben Blanchard and Kevin Yao in Beijing, Xihao Jiang in Shanghai, Philip Blenkinsop in Brussels and Kanishka Singh in Bengaluru; Writing by Paul Simao; Editing by Simon Webb, Bill Trott and Rosalba O'Brien)