By Nandita Bose and Andrea Shalal
WASHINGTON (Reuters) - U.S. President Donald Trump on Wednesday said his tough stance on China's economic and trade policies would ultimately benefit the American economy, even as Beijing signaled it could strike back by curbing sales of chemicals known as rare earths that are used in everything from iPhones to military equipment.
The U.S.-China trade war escalated sharply in recent days after Washington on Monday branded Beijing a currency manipulator for the first time since 1994, and said it would impose 10% tariffs on the remaining $300 billion in Chinese imports, starting on Sept. 1.
The moves have jolted financial markets and fueled concerns about a global recession.
U.S. Treasury yields slumped on Wednesday, with 30-year yields nearing record lows, on growing fears of a global downturn and bets the Federal Reserve would have to cut interest rates further to counter growing recession risks.
Trump told reporters at the White House that the market reaction had been anticipated, but he remained confident in the strength of the U.S. economy.
"Ultimately, it's going to go much higher than it ever would have gone, because China was like an anchor on us. China was killing us with unfair trade deals," he said.
White House officials say they still expect Chinese negotiators to come to Washington in September for talks, and that the latest tariffs could still be averted if the world's two largest economies make progress on a trade agreement.
But hopes for a deal are dimming and domestic pressure is growing for Trump to cut a deal with Beijing.
Goldman Sachs (NYSE:GS) on Tuesday said it no longer expects the United States and China to reach agreement before the November 2020 presidential election given the "harder line" being pursued by both sides.
IMPACT TO U.S. ECONOMY
Gary Locke, who served as U.S. ambassador to China from 2011 to 2014, said it was in Washington's own interest to dial back tensions and work toward some kind of modest deal with Beijing.
"The Federal Reserve and others have estimated the tariffs already in place will cost the average American household a $1,000 increase in prices," he said. "And increased prices will make U.S. companies less competitive here and abroad."
Fred Bergsten, a former senior U.S. Treasury official, said bearish financial markets and weakening U.S. economic indicators could prompt Trump to delay the Sept. 1 tariffs.
"The economy is a big part of his reelection strategy, so he has to hesitate before he does things that could weaken it," Bergsten, now a senior fellow at the Peterson Institute for International Economics, told Reuters.
"If even he is acknowledging that it's only 'ultimately' that we gain, then I think there's a chance that he'll dial it back."
U.S. businesses and consumers paid $6 billion in tariffs in June, a 74 percent rise from the same period a year ago, a coalition of U.S. trade groups said Wednesday, warning a new round of tariffs would exacerbate job losses and dent demand.
Jo-Ann Stores, an Ohio-based arts and craft retailer, said tariffs introduced in September 2018 were already cutting into profit margins and raising the risk of layoffs.
"It's an enormous financial burden," said Wade Miquelon, CEO of Jo-Ann Stores, who previously served as chief financial officer of Walgreens (O:WBA).
BEIJING'S NEXT MOVE?
Financial markets have calmed somewhat amid signs that China would not allow the yuan to weaken much further after letting it slip below 7 per dollar for the first time in over a decade.
But China still has some levers left to pull.
The Chinese rare earths association on Wednesday said it would support countermeasures in the escalating trade dispute with the United States and accused Washington of using "trade bullying behavior" to suppress China's development.
The Association of China Rare Earth Industry issued a statement after a special working meeting on Monday to discuss the "guidance" given by Chinese President Xi Jinping during his visit to a rare earth plant in Jiangxi in May.
Xi's visit stoked fears China would use its dominance over production of rare earths, a group of 17 chemical elements prized for their use in consumer electronics and military equipment, in the escalating trade war, although no restrictions on supplies have so far been announced.
HUAWEI RULES EXPECTED
Tensions could spike further after the release of an interim U.S. rule for a ban on federal purchases of telecommunications equipment from five Chinese companies, including Huawei Technologies Co Ltd, the world’s largest telecommunications network gear maker.
The ban was part of a defense law passed last year and is part of a broad U.S. push against Huawei, the world’s largest telecommunications network gear maker. Washington has accused the company of espionage and stealing intellectual property.
Huawei has repeatedly denied it is controlled by the Chinese government, military or intelligence services. It has sued the U.S. government over the restrictions in the defense law.
Trump had assured Xi that some of restrictions on Huawei would be relaxed, but U.S. companies have complained that they have received few answers about the situation so far.
The U.S. government has urged its allies not to use Huawei equipment, which it says China could exploit for spying. The response from allies has been mixed.