The US plans to impose tariffs on up to $60bn (£42.5bn) in Chinese imports and limit the country's investment in the US in retaliation for years of alleged intellectual property theft.
Trump announces tariffs on $60bn in Chinese imports
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The White House said the actions were necessary to counter unfair competition from China's state-led economy.
It said years of talks had failed to produce change. China said it was ready to retaliate with "necessary measures".
Beijing also said it would "fight to the end" in any trade war with the US.
US stock markets closed lower on Thursday, as investors responded to the announcement.
The Dow Jones ended the day at 23,957.89, a fall of 2.9% or 724.42 points - making it the fifth biggest points fall ever.
The S&P 500 shed 2.5% or 68.24 points to 2,643.69, and the tech-heavy Nasdaq lost 2.4% or 178.61 points to finish at 7,166.68.
Signing a memo related to the sanctions, Mr Trump said the US and China were negotiating and he was looking for "reciprocal" trade terms for American companies.
He said the tariffs might be imposed on up to $60bn in Chinese goods - boosting the number from the roughly $50bn figure White House officials cited on Thursday morning during a briefing.
What is behind the tariffs?
The tariffs follow an investigation of Chinese policies ordered by Mr Trump in August.
The White House said the review found a range of "unfair" practices in China, including restrictions on foreign ownership that pressured foreign companies into transferring technology.
The review also found evidence that China imposes unfair terms on US companies; steers investments in the US to strategic industries; and conducts and supports cyber attacks.
The White House said it has a list of more than 1,000 products that could be targeted by tariffs of 25%. Businesses will have the opportunity to comment before the final list goes into effect.
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The US is also exploring ways to limit Chinese investment in the US and will seek to bring complaints about unfair licensing terms to the World Trade Organization, officials said.
America's top trade negotiator, Robert Lighthizer, said protecting US technology was critical to America's economic future.