The U.S. and China have signaled hardening positions as they prepare for high-stakes talks in Washington to try and avoid an escalation in a year-old trade war that has cast a long shadow over financial markets and the global economy.

China's top trade envoy, Vice Premier Liu He, is due to land in the U.S. capital on Thursday afternoon and go immediately into discussions with President Donald Trump's top negotiator, Robert Lighthizer. U.S. tariffs on some $200 billion in Chinese goods are set to increase to 25 percent just hours later, in a move that economists and businesses say risks being the most economically consequential of all of Trump's tariff moves so far.

But the mood on both sides going into the talks appears to be hardening, with Lighthizer calling members of Congress ahead of the discussions to warn that a deal this week is unlikely, according to people familiar with the conversations. While Trump on Wednesday insisted that Liu was coming to make a deal and dubbed him a “good man,” he also roiled Asian markets again by saying China “broke the deal” by backsliding on prior commitments, leading him to order higher tariffs.

China has disputed Trump's characterization that the country reneged. But it has also sent its own signals that a deal could take time.

Unlike in some of his previous visits to Washington, Liu is not traveling with the designation “special envoy” of Xi Jinping, according to people briefed on his trip. Chinese officials' public statements have also hardened in recent days, with Beijing vowing to retaliate against Trump's tariff increase and rejecting the idea that it has reneged on any commitments made during the months of tough negotiations that have led to this week's showdown.

“China is credible and honors its word, and that has never changed,” Commerce Ministry Spokesman Gao Feng told reporters on Thursday.

The Ministry of Commerce also announced it would soon publish details of new retaliatory tariffs.

The souring mood caused global stocks to slump again. Losses in U.S. stocks accelerated, with the S&P 500 headed for the worst week of the year. Some analysts believe a collapse in talks would trigger a major selloff in risk assets.

Republican Senator Marco Rubio in a tweet on Thursday praised Trump's tough response. “After agreeing to a number of important reforms, #Chinabacktracked on almost all of them & put the rest into the annex using vague language,” Rubio said.

At a meeting on Tuesday, Trump and his trade team discussed the next steps in the dispute and who should meet with Liu while he's in Washington, people familiar with the internal deliberations said. The meeting became contentious when Treasury Secretary Steven Mnuchin made his case for putting trust in Liu that China would come back with a satisfactory offer to close the deal, they said.

Liu has been treated to public Oval Office sit-downs with Trump every time he has traveled to the U.S. for trade talks in recent months. But the president and his advisers concluded that he should meet with Liu only if the two sides make progress in the talks, and that the decision would be made on short notice, the people said.

The meeting also left Lighthizer—a longtime China hawk who has advocated raising pressure on Beijing further—in firmer command of the negotiations, with Mnuchin likely to play a smaller role this round, said one person briefed on the situation.

A Treasury spokesman disputed accounts of Mnuchin having a smaller role in the negotiations going forward or that he faced any criticism within the administration this week, saying that Trump's trade team remains unified.

Mnuchin and Lighthizer are both expected to have a working dinner on Thursday with Liu, according to a person familiar with the planning.

Increasing the Tariff Pressure

Lighthizer has, in recent days, been calling members of Congress, telling them to brace for no deal and confirming that the decision to increase tariffs on the $200 billion tranche of products from China is firm, one person briefed on the deliberations said. That is in part because, even as Liu's visit to Washington this week has been shortened, the agenda has grown more complicated.

Trump's decision to raise tariffs came after China reneged on its prior commitment to enshrine a wide range of concessions in Chinese law, according to U.S. officials.

China's refusal to commit the deal's changes to law made it impossible for a final agreement to be reached this week, people briefed on the negotiations said. They noted that apart from the most recent rift in the talks, there are other major outstanding issues that still have to be resolved, such as the removal of the existing tariffs between the two nations.

Both sides still want a deal but can't get over the last few disputes, China's state-run Global Times wrote in a editorial on Thursday, adding that China and the United States seem ready to shift to the “fighting while talking” mode from the previous truce agreed in December. Liu is scheduled to be Washington for two days of talks with U.S. officials, though some people familiar with Liu's plans said it could extend into the weekend.

“We hope that the U.S. can work together with China and meet each other halfway on the basis of mutual respect and equality,” Foreign Ministry spokesman Geng Shuang said Thursday in Beijing.

What Bloomberg economists say:

“It's difficult to make a high-confidence call. We think it's likely the latest developments reflect an unusually messy and public final stage to negotiations. We can't rule out the possibility something more serious has gone awry.”  —Tom Orlik, chief economist

At a rally in Florida on Wednesday, Trump said there was “nothing wrong with taking in $100 billion a year” in tariffs on Chinese imports, in the absence of a trade deal. “They come in tomorrow, and whatever happens, don't worry about it. It will work out. It always does,” he said. While Trump insists that China bears the cost of those tariffs, most economists say it is U.S. consumers and companies that are footing the bill.

The tougher line from Trump has drawn praise from China hawks inside and outside the administration. “Welcome to Thunderdome—the long economic war waged on America by the CCP has now been joined by President Trump,” said Steve Bannon, Trump's former chief strategist.

Data released on Thursday offered Trump a chance to claim his tariff war is yielding the desired result. The U.S. trade deficit with China decreased to the narrowest in almost three years as imports slowed and exports advanced.

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