By Eric Vandenbroeck and co-workers

How the Trade War Is Helping Beijing Prepare for Long-Term Competition

In the wake of Donald Trump’s victory in the U.S. presidential election in 2024, Chinese policymakers and intellectual elites feared the worst for relations between China and the United States. The bitterness and trauma of the first Trump administration’s trade war lingered in Beijing. And with an already sluggish economy and glaring vulnerabilities from trade interdependence, China’s leaders braced for what experts privately called an “unprecedented storm” that could doom bilateral relations.

Six months into Trump’s second term, however, the outlook in Beijing has improved markedly. The storm came and went—and left Chinese policymakers feeling that they have far more power and leverage over the United States on trade than they had previously imagined. And for now, at least, Beijing views the trade-deficit-obsessed Trump as a more pragmatic and adaptable partner to work with than the China hawks that called the shots during Trump’s first term.

China’s leaders now believe they can broker a trade deal with Trump to reduce tensions. They are eager to host a summit between Trump and Chinese leader Xi Jinping this fall to establish a more positive tone for the relationship between Washington and Beijing. The newfound optimism does not mean that Beijing thinks it has found a permanent solution to U.S.-Chinese relations, however; the overwhelming feeling in elite circles in China remains that the two countries are entangled in long-term strategic competition. But China’s leaders want to use their trade leverage to craft a deal that will buy them time to mitigate their political and security vulnerabilities. In dealing with a second Trump administration, China’s leaders believe they may have found an opportunity to achieve their goals without a war with the United States.

 

The Tables Have Turned

When Trump was inaugurated for a second time on January 20, 2025, Beijing expected that he would resume bilateral relations where he had left them four years earlier. That meant revamped efforts by his administration to address the trade imbalance between the United States and China, likely through aggressive punitive tariffs. Beijing also braced itself for U.S. criticism of China’s political regime, including its treatment of minority groups and dissidents, and worried about enhanced U.S. support for Taiwan.

Early signs confirmed these suspicions. In February and March, Trump imposed two rounds of ten percent tariffs on Chinese exports because of concerns about fentanyl coming into the United States from China. When China responded to Trump’s broader “Liberation Day” tariffs in April with countermeasures including reciprocal tariffs and export restrictions, the United States placed an additional 125 percent tariff on Chinese exports to the United States. Combined with existing levies, by mid-April, the U.S. tariff rate for goods from China had reached nearly 150 percent—a major escalation that didn’t seem to offer any way out.

But then the situation took an interesting turn. Many observers believed that China had taken a major risk by pushing back on Trump and that China’s economy would not be able to withstand a trade war. But once reciprocal tariffs were in place, Beijing was surprised to see that it was Washington that was more eager to de-escalate trade tensions. The United States and China signed an agreement in Geneva on May 12 to reduce tariff rates, and Trump and Xi had a follow-up phone call on June 5. Although the agreement did not eliminate tariffs, the first round of trade escalation was over. China’s leaders felt, to their surprise, that they were in a very strong position on trade with the United States.

 

“So What?”

Many policymakers in Beijing concluded from the events in April and May that the United States’ ability to tolerate a trade shock is weaker than China’s, which made Washington desperate to find a solution. The supply shock that the United States faces from higher tariffs is more difficult to absorb than the “demand shock” on China. This is not only because U.S. consumers immediately feel a supply shortage but also because China’s political system makes it easier for Beijing to manipulate domestic public opinion and limit blowback. Chinese leaders were pleased to discover that Trump changed his tune when tariffs affected the stock market, the bond market, the retail industry, and consumers. The U.S. reaction to Trump’s tariffs revealed to Beijing new pressure points that China could potentially exploit.

China’s leaders also learned how dependent the United States is on rare-earth elements and magnets, the supply of which is almost entirely in Beijing’s hands. China halted exports of key rare earths on April 4, which threatened the ability of the United States to procure the metals it needs to manufacture cars, airplanes, and other products. At the May meeting in Geneva, China agreed to remove the restrictions on rare-earth exports it had imposed in response to “Liberation Day”; yet after accusing Washington of violating the agreement by placing new restrictions on Chinese companies, including prohibiting U.S. companies from using AI chips made by the technology company Huawei, China delayed following through with its commitment.

The ensuing confrontation further proved to China’s leaders the effectiveness of their leverage over the United States. Beijing’s reluctance to release more rare earths infuriated Washington, which responded with visa restrictions on Chinese students and export restrictions on jet engines. What China’s leaders learned from this response was that rare earths are so important to U.S. industry that Washington will go to extreme lengths to protect their supply. For many Chinese policymakers, rare earths are China’s first effective strategic chokepoint in the history of U.S.-Chinese relations.

Beijing also realized that its efforts over the past decade to boost economic resilience have paid off. Starting in 2018, China reduced its dependence on U.S. supply chains and diversified the sources of its imports and exports. By the end of 2024, in terms of total value, China traded more with the European Union and the Association of Southeast Asian Nations than with the United States. The extensive use of transshipment—funneling Chinese goods through other countries, often emerging economies—also cushions Chinese exports from some shocks of a bilateral trade war because it complicates attempts to impose direct sanctions on China. The Trump administration has been trying to crack down on transshipment in its ongoing trade negotiations, but any transshipment penalties will be nearly impossible to enforce unless Washington fully retreats from the world economy and stops trading with any country that has ties to China.

In policy dialogues in Beijing this summer, Chinese scholars and decisionmakers repeated a simple phrase that captured their newfound sense of empowerment: “So what?” “There is a trade war. So what?” “Trump might dial up the pressure on China. So what?” When discussing how China might react to Trump’s unpredictability even if there is a trade deal, Chinese decision-makers appeared fully confident in their ability to weather the storm. There is now a conviction that the United States’ ability to damage China’s economic interests through tariffs has declined, which offers Beijing more latitude in future trade negotiations.

 

Dealing With the Don

China’s policymakers now believe that the United States is unlikely to launch another round of major tariffs on China if doing so would hurt the United States significantly in the process. As a result, Beijing sees a path forward through regular and piecemeal trade negotiations, which suits its preferences. China’s leaders are happy to negotiate short-term fixes to the trade imbalance, especially if doing so avoids addressing the long-term structural issues in the Chinese economy that are harder to change, such as widespread government subsidies of local industry. Beijing, for instance, is willing to increase Chinese purchases of American products in exchange for the United States’ easing some export controls on high-tech products. Beijing is even willing to discuss voluntary export restrictions to hold back shipments of certain Chinese products, such as batteries, to the United States, which would help reduce the trade imbalance.

Beijing is also optimistic about a short-term deal because of the differences it perceives between the first and the second Trump administrations. Unlike during Trump’s first term, in which anti-China “new cold warriors” shaped policy, the second Trump administration has made little reference to ideology and mostly avoided criticizing the legitimacy of the Chinese Communist Party. In the past six months, Washington has also been restrained in its support of Taiwan: not only did Trump impose new 20 percent tariffs on Taiwan at the end of July, he also refused to allow Taiwanese President Lai Ching-te to use New York as a stopover during Lai’s scheduled international travel—departing from a long tradition in U.S.-Taiwanese relations. In other words, Trump’s focus on trade and his indifference to sensitive political issues is exactly what Beijing has long sought from U.S. leaders. It’s almost as if Chinese leaders finally got the “businessman” they expected to deal with when Trump was first elected in 2016.

In Trump’s first term, Beijing tried to manage the president by managing his team, including by setting up a backchannel for negotiations through Trump’s son-in-law Jared Kushner. This approach failed, partly because of conflicting priorities among members of the Trump administration. This time around, Beijing believes its best option is to manage Trump himself. Negotiating directly with the president, rather than working behind the scenes, appears to be the most likely way to shape Trump’s agenda. Trump has also more clearly set the priorities for his current administration than he did for the previous one. Trump’s team has been extremely loyal to his policy agenda: even Secretary of State Marco Rubio, who harshly criticized China’s human rights record and authoritarian political system when he was in the U.S. Senate, has been restrained in his criticisms of China while running the State Department.

Getting face time with Trump is thus increasingly important for China. This is why Beijing is hoping for a leadership summit in the fall in China. In the view of Chinese leaders, for whom each foreign policy action carries important symbolic weight, it is Trump’s turn to visit China: Xi visited the United States in 2023, so the next presidential visit should be in China to show the equality of the relationship. Chinese leaders hope to use this meeting to appeal directly to Trump and probe his appetite for any kind of grand bargain that might reduce political tensions. For example, China hopes it can get the United States to concede on some of its policies supporting Taiwan, such as reducing U.S. arms sales or more firmly signaling U.S. commitment to oppose any Taiwanese attempt to unilaterally change the status quo in the Taiwan Strait. The goal of winning such concessions is not to immediately make it possible for China to take Taiwan by force, but to further shake Taiwanese confidence in the U.S. commitment to the island.

 

Prolonging the Process

Beijing’s sense of empowerment on trade, however, has not translated into overall optimism about China’s long-term relationship with the United States. Many Chinese leaders don’t believe a trade deal is Trump’s endgame, despite his focus on trade deficits. Instead, they see reaching a trade deal as the first step in the long process of reshaping U.S.-Chinese relations, with U.S. policymakers then free to focus on whatever the next source of friction might be.

China’s community of foreign policy scholars and decisionmakers fears such a shift in U.S. attention. The common anxiety is that positive trade signals from the United States are tactical and ephemeral, and therefore it is only a matter of time before Washington resumes hostility toward China and its political system. The Trump administration could renew its campaign to target Communist Party members and their families, which involved limiting access to visas to travel to the United States, or it could ramp up support for Taiwan through political, economic, military, and diplomatic assistance. Beijing also does not want the United States to increase efforts that, as Chinese foreign policy insiders often put it, attempt to “separate the Chinese Communist Party from the Chinese people,” which the party perceives as a fundamental attack on its rule, nor does it want the United States to reinvigorate a global anti-China coalition that could isolate Beijing. Unlike with trade issues, in which Beijing is approaching the table with confidence and sees room for dealmaking, a focus on politics will only push the bilateral relationship toward free fall. To Beijing, this is what happened in 2020 when Washington blamed China for the outbreak of the COVID-19 pandemic, which led to a series of increasingly bitter public recriminations from both sides and drove U.S.-Chinese relations to new lows.

Beijing’s confidence in trade negotiations combined with its worries about long-term tensions between the two countries may encourage China to deliberately prolong the trade negotiation process to keep the conversation going even after a first agreement to address trade imbalances, fentanyl sales, and the free flow of rare earths. Beijing feels it can withstand U.S. pressure as long as the main issue is trade, not politics. In addition, China is likely to specify rescission clauses in any potential deal to give it flexibility to respond to the Trump administration. If Trump changes his mind about focusing on trade, or if Washington targets China on political issues and takes hostile actions against Beijing on Taiwan, China is ready to flex its muscles by refusing to implement its side of the trade deal and to retaliate with its economic measures.

As Beijing looks toward the next stage of dealmaking, it remains on edge about which version of the Trump administration will emerge. Beijing wants face-to-face negotiations with Trump, focused on economic and trade issues, to tie his hands with a commitment to positive and friendly U.S.-Chinese relations for the next three years at least. But its plan could backfire. China’s inflated sense of empowerment on trade could leave its policymakers too comfortable, which could provoke a harsher U.S. response and send bilateral relations back into a tailspin of mutual distrust and hostility. In many ways, policymakers and analysts in Beijing believe an eventual downturn in relations is inevitable. And given Trump’s unpredictability, an initial trade deal may turn out to be a short-lived reprieve. No matter how strong China’s leaders feel their position is vis-à-vis the United States after six months of Trump’s second term, they feel there is no choice but to prepare for the likely possibility that much worse is yet to come.

 

 

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