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.
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.
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.
What has China said?
On Thursday, China's commerce ministry said it was ready to retaliate against the new tariffs.
"China will not sit idly by and let its legitimate rights and interests be harmed, and will certainly take all necessary measures to resolutely defend its legitimate rights and interests," it said in a statement.
The ministry also pointed to a ruling by the World Trade Organization (WTO) that found that Washington had not fully complied with a 2014 ruling against its anti-subsidy tariffs on Chinese products, including solar panels and wind towers.
China's commerce ministry said the WTO ruling "proves that the US side has violated WTO rules" and "repeatedly abused trade remedy measures".
"[This] has seriously damaged the fair and just nature of the international trade environment, and weakened the stability of the multilateral trading system."
The WTO has also ruled against China's trade practices. In January, the organisation said China must lower its tariffs on broiler chickens imported from the US.
Who are the potential losers?
If imposed as described, the tariffs could lead to higher costs for consumers, while retaliation would hit key sectors of the US economy including agriculture and aerospace, analysts say.
China was the third largest market for US exports in 2016 and among the biggest buyers of American soybeans, corn, pork and aircraft.
On Thursday, shares of plane-maker Boeing sank more than 5%. Representatives of states such as Kansas, which has a large farming base, have been among the most critical of the administration's approach.
Several business groups said they agree that there is a problem, but are worried about the administration's strategy.
"American business wants to see solutions to these problems, not just sanctions such as unilateral tariffs that may do more harm than good," said John Frisbie, president of the US-China Business Council, which represents firms that do business in China.
US officials acknowledged the possibility of retaliation but say China has more to lose from the relationship.
The US imports billions more goods from China each year than it exports, creating a deficit of about $375bn last year that Mr Trump has railed against.
The president said Thursday he has asked China to cut that deficit by $100bn "immediately".
Is there wider support in America for the plan?
Many analysts dismiss worries about the trade deficit, noting that the exchange benefits both sides.
However, there is growing bipartisan concern in America about China's state-led economy and worry that China is seeking technology that could be deployed for military purposes.
Congress is debating legislation that would boost the government's power to review foreign business deals, citing the threat posed by state-backed acquisition of US firms.
Some politicians remain critical of the administration's approach, saying Mr Trump's bluster aggravates the situation and alienates allies who could help address the problem.
"I get a kind of stomp-your-feet approach makes some people feel good, but in the integrated economy we already have, it's more complex," Senator Maria Cantwell, a Democrat from Washington, said at a Senate Finance Committee hearing on Thursday.
What else has Trump done on trade?
Mr Trump has embraced "America First" rhetoric - including criticism of China - that blames other countries for the loss of American jobs and plays well with parts of his base.
As a candidate, I pledged that if elected I would use every lawful tool to combat unfair trade, protect American workers, and defend our national security. Today, we took another critical step to fulfill that commitment. https://t.co/7NBI0Dibmx pic.twitter.com/nmzqos3BUA— Donald J. Trump (@realDonaldTrump) March 22, 2018
His administration has publicised cases brought for dumping goods in the US below cost, but the end result of some of his actions remain in flux.
For example, in March, he signed controversial orders imposing heavy tariffs on steel and aluminium - but said some countries such as Canada and Mexico would be spared. The EU and other countries are also in line for exemptions.
He is also renegotiating the North American Free Trade Agreement (Nafta) with Canada and Mexico.
Could we see a trade war?
China has previously said there would be no winner from any trade war.
It has also urged both sides to remain calm and hinted at making reforms "beyond expectations" to satisfy the US.
Mr Trump has previously tweeted "trade wars are good, and easy to win." But US Treasury Secretary Steven Mnuchin recently said the president "was not trying to start a trade war".
Frank Lavin, chief executive of Export Now and a former US ambassador to Singapore, said China typically takes some kind of action, but avoids escalating the problem.
But David Kuo, chief executive of the Motley Fool in Singapore, said it is not clear yet how this will play out in the long run.
"Some are hoping that this is just an opening gambit by the US. But it is a dangerous one to play," he said.