Investors were hopeful of a breakthrough in talks between the US and China as negotiators worked to prevent an escalation in tit-for-tat tariffs that threaten a full-scale trade war between the world’s two largest economies.

Amid rising concerns that President Donald Trump would unilaterally raise tariffs from 10% to 25% on $200bn (£153bn) of Chinese goods on Friday, Beijing scrambled to assure Washington that it was sincere in wanting to reach a deal.

President Xi Jinping sent a message to Trump that he would talk to his US counterpart ahead of the deadline of 0500 GMT, which Trump has said could also trigger tariffs on a further $325bn of goods, covering almost the total volume of Chinese imports to the US. A full-blown trade war between Washington and Beijing would send shockwaves through the global economy – investors registered their concern by posting steep declines in stock markets this week.

Trump said on Thursday he had received a “beautiful letter” from Xi as negotiations on a trade deal between the two countries continued in Washington.

“He just wrote me a beautiful letter. I’ve just received it and I’ll probably speak to him by phone,” said Trump. Later he quoted Xi as saying in the letter: “Let’s work together, let’s see if we can get something done.” The US president added he believed a deal could be done this week, but accused China of sabotaging recent talks by seeking a renegotiation.

“We’re getting very close to a deal then they started to renegotiate the deal. We can’t have that. We can’t have that,” said Trump.

It is understood a day of talks with China’s vice-premier, Liu He, had made progress, but it was unclear whether the two sides were close to reaching an agreement.

Q&A What is the China-US trade war about? Show Hide The roots of the dispute come from US president Donald Trump’s “America first” project to protect the US’ position as the world’s leading economy, while encouraging businesses to hire more workers in the US and to manufacture their products there. Trump complains of a large trade deficit with China, which he views as a symbol of the US’s decline as a manufacturing powerhouse. Chinese imports to the US totalled $539.5bn last year, while $120.3bn was sold the other way – leaving a trade deficit of $419.2bn. The president has accused Beijing of “unfair” trade policies, including allowing the theft of US companies’ intellectual property. The threat of import tariffs on Chinese goods is being used as leverage in talks where Trump is seeking changes to Beijing’s trade policy. Tariffs have been imposed by Washington on some Chinese goods sold in the US for about a year. They came on top of broader tariffs used by Trump that have hit China and other trading partners such as the EU, Canada and Mexico, on goods including steel and aluminium. In May 2019 the US president further ratcheted up existing import tariffs of 10% on $200bn (£153bn) of Chinese goods sold in the US to 25%, hitting everything on a long list of products. Trump has previously warned that 25% tariffs could be slapped on a further $325bn of goods – which would mean all Chinese imports being covered by tariffs. However, talks in November 2019 aimed at easing tensions were welcomed as the beginning of a thaw in the trade war between the two nations. Richard Partington and Jasper Jolly

The FTSE 100 index of blue chip companies closed down almost 1%, while Germany’s Dax index shed 1.2% and France’s CAC 40 lost 1.5%. Hong Kong’s main benchmark fell 2.4% and the Shanghai composite index lost 1.5%. The blue-chip Dow Jones index was down 0.6% on Thursday afternoon.

Analysts said the modest losses were an indication that investors expected the two sides to reach a deal, though the volatile path of trade negotiations meant an escalation was possible before one could be signed.

Earlier in the day, the US trade representative’s office filed the paperwork in preparation for a tariff hike, giving Trump the authority to increase tariffs from 10% to 25% on $200bn of goods including food, chemicals and building materials.

The move followed a breakdown in talks last weekend when the US trade representative, Robert Lighthizer, and the treasury secretary, Steven Mnuchin, accused China of going back on commitments previously made in talks.

Officials close to the talks said they got an inkling of China’s second thoughts about prior commitments during talks last week in Beijing, but that the backsliding became even more apparent in exchanges over the weekend. Neither side has provided details of specific issues involved, although the clashes are thought to include differences over intellectual property theft and requiring US companies operating in China to share technology with Chinese counterparts.

The US is keen to open up Chinese markets to US businesses and protect them from being forced to hand over technology and go into partnership with Chinese firms. Lighthizer has also stressed Beijing must agree to a transparent dispute resolution regime.

But Trump has appeared more concerned with trying to bring down the US’s huge trade deficit with China. Unfortunately for the White House, his tactics so far have depressed trade with China but failed to halt Washington’s growing trade deficit with the rest of the world.

Figures show the US trade deficit – the difference between US exports and imports – hitting a record $621bn in 2018, with China accounting for $419.2bn of that.

Marianne Schneider-Petsinger, a trade analyst at the thinktank Chatham House, said: “The Chinese response so far has been quite measured, knowing that Trump is playing to a domestic audience and with his re-election looming needs a strong US economy.

“Even with this latest escalation, both sides have a strong interest in striking a deal,” she said.

Some Chinese commentators said Beijing was ready for a fight with the US.

“China is not afraid of conflict,” said the Global Times, a newspaper published by the ruling Communist party’s People’s Daily, which is known for its nationalist tone. It said Beijing had measures in place to minimise losses for its companies.

“Mentally and materially, China is much better prepared than its US counterpart,” the newspaper said.

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However, factories in Chinese coastal regions have suffered declines of up to 40% in sales to the US, increasing the pressure on Xi to find a way to sign a deal.

In April, Chinese exports to the US plunged 13% compared with a year ago, and are down 9.7% since the start of 2019. Total Chinese exports fell 2.7% in April. Imports of American goods tumbled 26%.

