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WRAPUP 5-U.S. escalates trade war amid negotiations, China says will hit back

(Adds comments from China c. bank, French finance minister, China businessman)

* U.S. tariff increase on $200 bln of Chinese goods takes effect

* China says will retaliate, does not immediately give details

* Two countries holding last-ditch trade talks in Washington

By David Lawder and Yawen Chen

WASHINGTON/BEIJING, May 10 (Reuters) - The United States escalated a tariff war with China on Friday by hiking levies on $200 billion worth of Chinese goods in the midst of last-ditch talks to rescue a trade deal.

But even as Beijing threatened retaliation, negotiators agreed to stay at the table in Washington for a second day, keeping alive hopes of an eventual agreement that would remove a major threat to the global economy.

U.S. President Donald Trump, who has adopted protectionist policies as part of his "America First" agenda, issued orders for the tariff increase, saying China "broke the deal" by reneging on earlier commitments made during months of negotiations.

China's Commerce Ministry said it would take countermeasures, without elaborating.

Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin talked for 90 minutes on Thursday and were expected to resume efforts on Friday to rescue a deal that could end a 10-month trade war between the world's two largest economies.

The Commerce Ministry said negotiations were continuing, and that it "hopes the United States can meet China halfway, make joint efforts, and resolve the issue through cooperation and consultation".

With negotiations in progress, U.S. Customs and Border Protection imposed the new 25% duty on more than 5,700 categories of products leaving China after 12:01 a.m. EDT (0401 GMT) on Friday.

Seaborne cargoes shipped from China before midnight were not subject to the new tax as long as they arrive in the United States prior to June 1. Those cargoes will be charged the original 10% rate.

The grace period was not applied to three previous rounds of tariffs imposed last year on Chinese goods, which had much longer notice periods of at least three weeks before the duties took effect.

"This delay might create an unofficial window during which the U.S. and China can continue to negotiate," investment bank Goldman Sachs wrote in a note, adding that it was a "somewhat positive sign" that talks were continuing.

Trump gave U.S. importers less than five days notice about his decision to increase the rate on the $200 billion category of goods, which now matches the rate on a prior $50 billion category of Chinese machinery and technology goods.

He has also threatened to impose new tariffs soon.

"NO GREATER THREAT TO GROWTH"

U.S. stock futures fell and Asian shares pared gains after Washington went ahead with the tariff hike, reflecting worries that a broader, more protracted trade war would inflict greater damage on the global economy. A major world index looked set for its worst week since December.

"There is no greater threat to world growth," French Finance Minister Bruno Le Maire said on Friday.

The added levy could reduce U.S. gross domestic product (GDP) by 0.3% and China's by 0.8% in 2020, consultancy Oxford Economics said.

"A quarter of our members have exports to the U.S. that were already affected by these ridiculous tariffs," said Mats Harborn, president of the European Union Chamber of Commerce in China.

"Pushing rates to 25% will prove extremely damaging to those companies, and the collateral damage will ripple around the globe. European companies are watching aghast as the U.S. and China play Russian roulette with the world economy."

RETALIATE HOW?

In April 2018, when Trump's tariffs were still largely just threats, China's Commerce Ministry responded to his escalatory tweets by declaring that the two sides could not conduct negotiations "under these conditions".

But more than a year later, Liu was in Washington trying to save the deal even as Trump warned that the U.S. would start "paperwork" on another $325 billion in Chinese imports, after raising tariffs on $250 billion of Chinese goods.

"I think the Chinese in the end will want to keep negotiations going. The question is: where do they go for retaliation?" said James Green, a senior adviser at McLarty Associates who until August was the top USTR official at the embassy in Beijing.

Green expected China to increase non-tariff barriers on U.S. companies, such as delaying regulatory approvals, as it couldn't hit the same amount of imported U.S. goods with higher tariffs.

The biggest Chinese sector affected by the latest tariff hike is a $20 billion-plus category of internet modems, routers and other data transmission devices, followed by about $12 billion worth of printed circuit boards used in a vast array of U.S.-made products.

Furniture, lighting products, auto parts, vacuum cleaners and building materials are also high on the list of products subject to higher duties.

Just hours after the U.S. move, which will add pressure on an already slowing Chinese economy, China's central bank said it was fully able to cope with any external uncertainty.

"Facing internal and external economic changes, our country's monetary policy has ample room (to respond) and our money policy tool-kit is rich," Sun Guofeng, head of monetary policy department at the People's Bank of China (PBOC), told reporters in Beijing.

On Monday, hours after Trump said he intended to raise tariffs, the PBOC cut the amount of reserves that some small and medium-sized banks need to hold, freeing up more funds for lending to cash-strapped firms.

WHO PAYS?

Fu Xubo, a 32-year-old sports equipment wholesaler in the eastern city of Yiwu, used to have several small U.S. clients. Since the trade war began, all of their orders have dried up.

"Regarding Mr. Trump's tariff policy, honestly, we just don't understand it," Fu said. "Since we have already joined the World Trade Organization, logically shouldn't tariffs have continued to decrease?"

Gary Shapiro, chief executive of the Consumer Technology Association, said the tariffs would be paid by American consumers and businesses, not China, as Trump has claimed.

"Our industry supports more than 18 million U.S. jobs – but raising tariffs will be disastrous," Shapiro said in a statement.

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.

Even without the trade war, China-U.S. relations have continued to deteriorate, with an uptick in tensions over the South China Sea, Taiwan, human rights and China's plan to re-create the old Silk Road, called the Belt and Road Initiative. (Reporting by David Lawder in Washington, and Yawen Chen, Michael Martina, Ryan Woo, Ben Blanchard and Kevin Yao in Beijing, and Xihao Jiang in Shanghai; Editing by Simon Cameron-Moore & Kim Coghill)

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