China's President Xi Jinping talks during a bilateral meeting with President Donald Trump, in Buenos Aires, ArgentinaTrump G20 Summit, Buenos Aires, Argentina - 01 Dec 2018

The chess game that is the escalating trade dispute between the U.S. and China continues this week.

All eyes will turn to the Asian giant after the U.S. escalated trade tensions by following through with its threat to raise tariffs on another $200 billion worth of Chinese imports, including handbags, to 25 percent from 10 percent.

China has in the past retaliated immediately by placing its own levies on U.S. imports, but on this occasion it appears to be biding its time, still not revealing its next hand three days later.

This comes despite pledging on Friday that it would fight back, with the Ministry of Commerce stating that China “expresses deep regret over the development and will have to take necessary countermeasures.”

One factor that may be holding it back is that it has less firing power than the U.S. as it receives fewer American imports, while it would also want to tread carefully for economic reasons, not wanting to do anything to harm growth. That means it may be mulling alternative approaches.

Andrew Hunter, a senior U.S. economist at economics consultancy Capital Economics, said: “Even though China has already levied tariffs on nearly all U.S. imports, it still has scope to retaliate against the latest hike in U.S. tariffs via more direct action; instructing Chinese firms to stop buying U.S. goods.”

They may even want to continue talks before deciding upon their next move, as White House economic adviser Larry Kudlow told Fox News Sunday that Chinese officials have extended the offer for Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer to travel to China for yet more negotiations.

Whatever it decides, any move by China would no doubt further ratchet up tensions and egg on the U.S. to carry out its next threat of slapping 25 percent levies on the remaining Chinese imports that have yet to be targeted, on which President Trump has already asked officials to start the paperwork.

This would add up to $325 billion in other goods and would likely include footwear and apparel. While a date has not been set, the process could take several weeks and might involve Congressional hearings with those impacted.

It would also hit market sentiment, with traders watching the drama like hawks for signs that a full-blown trade war is about to erupt.

Despite all of last week’s drama, the Dow Jones Industrial Average closed up 114 points, or 0.4 percent, on Friday to 25,942.37, marking a turnaround from earlier in the day when it was down by more than 350 points.

This was largely driven by an afternoon tweet by President Trump, which stated that the relationship between him and China’s President Xi Jinping “remains a very strong one,” and conversations between the two sides will continue.

Chinese officials also stressed that despite the breakdown in talks, relations between the two superpowers remains congenial. However, no talks are currently scheduled and there were indications they might not resume until June.

“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!” Trump added, which investors interpreted as a positive sign that the situation may not erupt into a full-blown trade war.

It was certainly more encouraging than the series of five tweets he fired off that morning.

In those, President Trump said while talks with China continue in a very congenial manner — “there is absolutely no need to rush — as tariffs are now being paid to the United States by China of 25 [percent] on $250 billion worth of goods and products. These massive payments go directly to the Treasury of the U.S.”

Experts stressed, however, that it is actually U.S. companies that will have to pay these higher tariffs. The increase means, for example, that retailers of synthetic material handbags, which already face tariffs of about 30 percent, now have to grapple with levies of 45 percent.

Even the White House’s Kudlow admitted Sunday that it’s the consumer that will have to foot the bill. When a reporter told him that it’s not China that will pay and instead American importers and companies will pass the cost onto the consumer, he responded “fair enough.”

“In fact, both sides will pay. Both sides will pay in these things,” he added.

The accessories industry had been hoping for a last-minute reprieve, with Trump dining with China’s vice president Liu He Thursday night as part of trade negotiations.

But apparently U.S. negotiators didn’t get what they wanted out of the discussions as the government plowed ahead with higher tariffs and China is poised to retaliate.

Handbag retailers have been on something of a rollercoaster ride. Tariffs were due to rise to 25 percent in January, but Trump put those plans on ice as part of a 90-day truce with China that was later extended.

With positive signals coming from the talks, the industry thought that the situation would be resolved. But that all changed two weekends ago when China allegedly backtracked on a number of concessions it had previously made, angering the U.S. and putting tariffs firmly back on the table.

While the administration has been largely tight-lipped on the details of what led to the setback, Reuters reported that China made an about-turn on a number of commitments in areas including theft of U.S. intellectual property and trade secrets, forced technology transfers and currency manipulation.

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