US, China talks raise optimism on eve of new trade tariffs

The Federal Reserve has warned that escalation poses a serious economic risk.

These are the first formal discussions with China since June on the spiraling and multifaceted trade war between the world's two largest economies.

Meanwhile, U.S. and Mexican officials this week are expected to wrap up weeks of discussions on the rewrite of the North American Free Trade Agreement that could pave the way for Canada to rejoin the talks and move to a final agreement.

President Donald Trump has pushed aggressive trade actions to lower the US trade deficit that he equates with stealing from Americans. But U.S. trading partners have retaliated aggressively, which is hurting American farmers, manufacturers and consumers.

U.S. businesses have become increasingly concerned about the tariffs that are raising prices for manufacturers and could hurt the economy, although the prospect of a negotiated solution buoyed Wall Street this week.

However, Federal Reserve officials warned that "an escalation in international trade disputes was a potentially consequential downside risk for real activity," according to the minutes of the July 31-August 1 policy meeting.

A large-scale and prolonged dispute likely would adversely impact business sentiment, investment spending and employment, the officials warned, and boost prices, which would "reduce the purchasing power of US households."

Even as the talks begin, another $16 billion in Chinese goods will face new U.S. tariffs starting Thursday at 12:01 a.m. (0401 GMT), completing the first round of $50 billion in products targeted in the dispute over what U.S. officials say is the rampant theft of American technology.

China has said it will react immediately with tariffs on the same amount of U.S. goods, targeting iconic products like Harley motorcycles, bourbon and orange juice, among hundreds of others.

And still pending are the possibility for new duties on another $200 billion in Chinese goods, which are the subject of public hearings this week, as well as Trump's proposed 25 percent taxes on all auto imports to protect the U.S. industry.

But Commerce Secretary Wilbur Ross said China will not be able to continue to retaliate at the same pace as the United States.

"Naturally they'll retaliate a little bit. But at the end of the day, we have many more bullets than they do. They know it," Ross said on CNBC. "We have a much stronger economy than they have, they know that too."

Trump, who has threatened to target all $500 billion in goods the US imports from China, has made that same point, noting that Beijing cannot continue to retaliate in kind since it imports less than $200 billion a year in American goods.

US business impact

U.S. Treasury's David Malpass, undersecretary for international affairs, is leading two days of talks with China's Vice Commerce Minister Wang Shouwen, and Chinese Vice Finance Minister Liao Min.

The talks are due to continue Thursday morning, but the Treasury has not specified what topics are being discussed.

Trump said earlier this week that he was not expecting much from the talks.

"We are a country that has been ripped off by anybody and we are not going to be ripped off anymore," Trump said at a campaign rally in West Virginia on Tuesday.

"It has to be a two-way street. We only have one-way streets not only with China but everybody."

Thousands of large and small companies and industry groups have urged the Trump administration to reconsider the tariffs which some say could put them out of business.

But so far the Trump administration has largely been deaf to the complaints, as only a handful of product lines have been shielded from the punitive duties.

The administration already was forced to announce a $12 billion aid program for farmers hurt by the trade wars, as US agricultural products, like soybeans, were an easy target for China and others.

NAFTA rewrite

Efforts to revise NAFTA seem a bit more hopeful, after U.S. Trade Representative Robert Lighthizer told Trump last week he hoped to get a breakthrough on the issues with Mexico.

Mexico's Economy Minister Ildefonso Guajardo said on Wednesday they could be finalized "in the next two hours or next two days," according to press reports.