By David Lawder and Ben Blanchard
WASHINGTON/BEIJING (Reuters) - Worries that the United States and China were digging in for a longer, costlier trade war weighed on financial markets on Monday as Beijing accused Washington of harboring "extravagant expectations" for a deal to end their dispute.
Investors added up the costs of higher tariffs on Chinese and U.S. goods as well as the effects of severe U.S. restrictions on China's Huawei Technologies for the U.S. technology sector, sharply driving down shares of suppliers Qualcomm, Micron Technology and Broadcom Inc.
Apple Inc shares fell 3.3 percent, hurt by a warning from HSBC that higher tariffs on Chinese goods would force the tech company to raise prices, with "dire consequences" on demand for its products.
Morgan Stanley analysts warned that a collapse of the trade talks and a lasting breakdown with higher tariffs on all U.S.-China trade would push the global economy toward recession.
In a note to clients, they said such a scenario would prompt the U.S. Federal Reserve to slash interest rates back to zero by the spring of 2020, but lags in policy transmission "would mean that we might not be able to avert the tightening of financial conditions and a full-blown recession."
Negotiations between the United States and China have soured dramatically since early May, when Chinese officials sought major changes to the text of a proposed deal that the Trump administration says had been largely agreed.
A subsequent round of talks ended with no movement as U.S. President Donald Trump increased tariffs to 25 percent from 10 percent on $200 billion worth of Chinese imports and threatened to impose duties on all remaining Chinese goods sold in the United States.
China imposed a retaliatory tariff increase and the Trump administration followed up on Thursday by adding telecom equipment giant Huawei to a trade blacklist that restricts its ability to purchase American components and software and do business with other U.S. companies.
No new talks have been scheduled, and a sterner tone from Beijing suggested that negotiations were unlikely to resume soon and raised questions about a possible meeting between Trump and Chinese President Xi Jinping next month at a G20 Summit in Japan.
In an interview with Fox News Channel recorded last week and aired on Sunday night, Trump said the United States and China "had a very strong deal, we had a good deal, and they changed it. And I said 'that's OK, we're going to tariff their products.'"
U.S. officials had previously said that China had given ground on some core "structural" issues, including U.S. demands for improving intellectual property protections, ending forced technology transfers and increased access to China's markets. Curbing state subsidies has proven a more difficult issue.
In Beijing, Chinese Foreign Ministry spokesman Lu Kang denied on Monday that China had agreed to anything.
"We don't know what this agreement is the United States is talking about. Perhaps the United States has an agreement they all along had extravagant expectations for, but it's certainly not a so-called agreement that China agreed to," he told a daily news briefing.
The reason the last round of China-U.S. talks did not reach an agreement is because the United States tried "to achieve unreasonable interests through extreme pressure", Lu said. "From the start this wouldn't work."
HUAWEI CUT OFF
The U.S. restrictions on Huawei began to bite hard on Monday. Alphabet Inc's Google suspended business requiring the transfer of hardware, software and technical services to premier Chinese technology firm, except those publicly available via open source licensing, a source familiar with the matter told Reuters on Sunday.
Shares in European chipmakers Infineon Technologies, AMS and STMicroelectronics fell sharply on Monday amid worries the Huawei suppliers may suspend shipments to the Chinese firm.
The official China Daily newspaper said in an editorial that the U.S. government had "revealed all its ugliness" in the restrictions on Huawei.
"It seems as if the U.S. takes it for granted that it has the absolute say over everything in its dealings with the rest of the world, which has to take whatever the U.S. dishes out no matter how arbitrary and despotic that is," China Daily said.
"But China will not take it and neither will Huawei."
Adding to U.S.-China tensions, the U.S. military said one of its warships sailed near the disputed Scarborough Shoal claimed by China in the South China Sea on Sunday, the latest in a series of "freedom of navigation operations" to anger Beijing.
(Reporting by David Lawder and Ben Blanchard; Writing by Tony Munroe; Editing by Robert Birsel, Mark Heinrich and Susan Thomas)