By Bob Davis and Lingling Wei 

President Donald Trump's escalation of trade threats against China reflects his belief that Washington increasingly has the upper hand in the dispute, administration officials said, adding he is prepared to withstand pressure from U.S. businesses that might suffer from the conflict.

Mr. Trump caught Chinese officials off guard with his announcement Monday evening about potential new tariffs. Should China retaliate against U.S. trade policies, the White House said, the U.S. would apply tariffs of 10% on as much as $400 billion in Chinese imports. China had earlier threatened to retaliate against the U.S.'s initial round of 25% tariffs on $50 billion on imports announced last week. The bulk of those tariffs go into effect July 6.

News of the new tariffs and the prospect of a trade war roiled global markets Tuesday. The Dow Jones Industrial Average fell 1.1% and the Shanghai Composite Index dropped 3.8% to its lowest level since mid-2016. Indexes in major exporters Germany and France slid more than 1%. Commodities prices also took a hit, with soybean prices dropping 2.2% to their lowest level in more than two years.

The White House's tough stance represents the ascendancy, for now, of trade hawks in the administration, particularly White House senior trade adviser Peter Navarro and U.S. trade representative Robert Lighthizer. Both officials argue China represents a fundamental threat to the U.S. that needs to be countered, even at the cost of pain to the U.S. economy.

"It's clear that China has much more to lose" than the U.S. from a trade fight, said Mr. Navarro.

Mr. Lighthizer said additional tariffs wouldn't be imposed until the U.S. picked the products, and received industry comment, a process that will take months and leaves open the possibility of additional negotiations. But so far there is no indication that such talks are on the horizon, and the Trump administration is signaling that it is increasingly confident of achieving goals through a dramatically more confrontational approach to China.

Although Chinese government officials pledged to fight back forcefully, they didn't give any details of what they might do, as they have in the past. Beijing has threatened to match the initial U.S. tariffs dollar-for-dollar and impose them on the same day as the U.S. acts.

Next up from the administration is a plan to halt Chinese investment in U.S. technology, due to be released by the Treasury Department by June 30. Under the plan, which is still being developed, the U.S. would use a law designed to address national emergencies to block Beijing from acquiring what the White House calls "industrially significant technology." Export controls on such technologies would also be tightened, say administration officials.

Mr. Trump has backed away from threats before, and sided with advisers who take a less confrontational attitude toward China, including Treasury Secretary Steven Mnuchin. In April, Mr. Trump threatened a dramatic increase in tariffs on Chinese goods, but didn't follow through. Instead, he approved negotiations Mr. Mnuchin led to get China to buy more U.S. goods and make changes to its tariffs and other trade barriers. That lead to a temporary reprieve in the tensions as the two sides sought to negotiate a truce.

The White House has since judged those efforts a failure, especially after Mr. Mnuchin and Mr. Trump were criticized by cable TV hosts and some lawmakers of being weak on China. During a June trade mission to China by Commerce Secretary Wilbur Ross, Beijing offered to buy nearly $70 billion in U.S. farm, manufacturing and energy products if the Trump administration abandoned tariff threats. Mr. Trump rejected that offer as another empty promise.

"The other side may have underestimated" if they thought the White House could be swayed by pledges of purchases, said Mr. Navarro. "That was a miscalculation."

The hard-liners in the Trump administration increasingly believe Beijing is vulnerable on trade because China exports far more merchandise to the U.S. -- $505.5 billion last year -- than the U.S. sends to China. In 2017, the U.S. exported goods worth $129.9 billion to China. Mr. Navarro said the U.S. goal is "enforceable, accountable, systematic change" in Chinese economic and trading practices.

Although global trade now accounts for less than one-third of China's gross domestic product, compared with nearly two-thirds in 2006, strong exports were a big reason why China's growth exceeded the government's target last year. A sharp slump in exports in the coming months, economists say, could threaten growth just as investments in Chinese factories and other fixed assets are slowing to multiyear lows, while Chinese household consumption is starting to weaken.

U.S. officials also note another vulnerability of their Chinese counterparts: While China imports less than the U.S., its economic growth is more dependent on what it does import, especially on the machinery and technology.

China has plenty of weapons it can employ to respond to the confrontational U.S. trade policies, including stepped-up regulations of American companies operating in China and stirred-up nationalist resentment.

In recent years, China has banned group travel to the Philippines, Japan and South Korea, during disputes with those nations, depriving them of revenue, according to officials in those countries. Beijing also has organized consumer boycotts and selectively increased inspections by regulators, say foreign companies in China.

At a closed-door meeting with a group of Chinese and U.S. economists and government advisers in late March, Lou Jiwei, China's former finance minister who now heads the country's national pension fund, said China won't be bullied into doing what the U.S. wanted the way Japan did in its trade dispute with the U.S. in the late 1980s and early 1990s.

China isn't the U.S.'s "mistress," Mr. Lou told the group, according to people familiar with the meeting. "China and the U.S. are like a married couple," he said.

The White House says it is protecting U.S. technology, which Mr. Navarro and others describe as America's "crown jewels," from Chinese predation. Beijing obtains U.S. technology by stealing it, the White House alleges, and by forcing U.S. companies in China to transfer technology to Chinese firms.

Tariffs are the first line of defense. Administration officials say the new tariffs will change incentives for foreign firms and prompt them to move manufacturing operations from China. Even if they relocate elsewhere in Asia rather than the U.S., that's a plus, the officials argue, because it will hinder China's ability to acquire advanced technology.

Josh Kallmer, senior vice president at the Information Technology Industry Council, a trade association of high-technology firms, says the administration's plans would hurt U.S. companies by driving up costs and making them uncompetitive.

The Trump administration's threatened tariffs "are not just counterproductive, they are irresponsible," he said. "You can't just pick up a factory and move it to Vietnam. It takes years to move physical operations. It takes months to renegotiate contracts. It's not a practical solution."

Administration officials counter that U.S. firms adapt more quickly than they acknowledge. They also argue that reducing Chinese influence over U.S. companies is worth the short-term pain. If U.S. companies are eventually able to operate in China without fear of government pressure, "this economy will be stronger, the global economy will be stronger," said Mr. Navarro.

On trade issues, U.S. big business has little sway among hardliners in the White House, who believe American corporations have been too quick to outsource jobs. Recognizing that, corporate lobbyists are working with consumer and farm groups, which are influential in coming midterm congressional races.

Additional tariffs on Chinese goods are bound to hit consumer products, they say, which could spark a backlash. Beijing has threatened to focus retaliatory tariffs on U.S. farm goods, hoping to produce a similar reaction.

Write to Bob Davis at bob.davis@wsj.com and Lingling Wei at lingling.wei@wsj.com

(END) Dow Jones Newswires

June 19, 2018 19:53 ET (23:53 GMT)

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