Beijing is holding back on a response to the recent U.S. announcements about punitive trade moves, but the situation may escalate if no mutually beneficial solution is found, a former diplomat said on Thursday.
President Donald Trump last week said that the U.S. will be imposing heavy duties on steel and aluminium imports, a sweeping move against all countries, but one that is seen to be targeted primarily at China.
This was even though Chinese economic adviser Liu He was in Washington last week to hold talks on trade.
"When Liu He, the senior economic adviser to President Xi Jinping, came to the United States, he asked the Trump administration to do two things — one, negotiate with them and two, tell them what the United States actually wants," Susan Shirk, former deputy assistant secretary of state during the Clinton administration, told CNBC.
"But the Trump administration opted instead to punish China in a way that is going to be damaging not just to China but to the United States consumer and to many of our other friends like Canada who are our trading partners," said Shirk, who was involved in U.S. policy toward China, Taiwan, Hong Kong and Mongolia.
On Thursday, Chinese Foreign Minister Wang Yi said that China would make a necessary response in the event of a trade war with the United States but said such a war would only harm all sides.
"So I think the Chinese are scrambling to hope that reason prevails in Washington," she added.
If not, China will retaliate "for sure," she told CNBC.
"At first, probably quite modest retaliation, but if the Trump administration continues in this direction without trying to find some mutually beneficial solution to all the complexities in our economic relationship, things will escalate for sure," Shirk added.
Speaking on the sidelines of an annual meeting of China's parliament, Wang said China had no intention of displacing the United States and that the two countries did not have to be rivals but should strive to be partners.
Trump said Wednesday that he has asked China to develop a plan to reduce the current trade deficit between the two countries by $1 billion.
The trade deficit with China surged 16.7 percent to $36 billion in January, its highest level since September 2015, suggesting that Trump's "America First" policies have not yet had a material impact on the deficit.
Meanwhile, the United States' total trade deficit increased to a more than nine-year high during the first month of 2018.
— Reuters and CNBC's Thomas Franck contributed to this story.