By Eric Vandenbroeck and co-workers

The U.S.-China Policy

The landmark meeting between U.S. President Donald Trump and Chinese leader Xi Jinping in October brought a respite to the trade war and led to some reciprocal deals. But it did not suggest any breakthrough in addressing the problems that have fueled tensions between the two countries in recent years. Instead, the meeting confirmed the curious direction of U.S.-China policy in Trump’s second term. The president has not only broken with the policy of the Biden administration but also seems to have forsaken the strategic direction of his own first term.

For much of this century, U.S. policy toward China rested on a calculated bet that the country’s integration into the global trading system would drive its political and economic liberalization—in alignment with U.S. interests. That bet did not pay off. China developed not into an economic partner but into a disruptive competitor bent on shaping the global order in its favor. Washington waited too long to counter Beijing, which allowed it to grow strong enough to edge out American industry in many areas.

Under the first Trump administration and then the Biden administration, the United States finally built a coherent strategy to confront China’s growing economic power—one grounded in painful lessons from the past. But the second Trump administration is reversing that progress and offering a transactional, contradictory approach to replace it. The White House is imposing sweeping tariffs based on fiscal rather than strategic goals, alienating allies, weakening American innovation, placing national security on the bargaining table, and eroding the U.S. dollar’s preeminence.

Trump’s surprising pivot regarding China will not help make America great or put America first. It will only set Washington back relative to its chief rival. A better policy would double down on the United States’ core strengths, not actively undermine them.

Shipping containers in Shenzhen, China, October 2025

 

Rude Awakening

In 1995, China accounted for less than five percent of global manufacturing output. By 2010, that number had jumped to around a quarter, and today it stands at nearly a third. Those gains came on the back of the evaporation of manufacturing jobs elsewhere. China’s share of U.S. imports climbed from eight percent in 2000 to 22 percent by 2018, all while American factory towns were hollowed out. Geopolitics compounded the domestic toll of economic dislocation: China was both a rising economic powerhouse and a strategic rival to the United States.

Instead of embracing liberalizing reform (as so many in the West assumed was inevitable), the Chinese Communist Party tightened its grip, strengthened state capitalism, and maintained significant controls on foreign inflows of investment, trade, and information. Its massive trade imbalances were the result not of market forces but of a dense web of nonmarket interventions—industrial subsidies, discriminatory rules, currency management, intellectual property theft, forced technology transfers, and cyber-intrusions—which imposed immense costs on U.S. workers and businesses.

It took a while for Washington to push back. Given the greater than threefold surge in Chinese imports between 2001 and 2008, the Bush administration could have invoked Section 421 of the Trade Act of 1974—the “China safeguard,” negotiated specifically to protect U.S. industries from threats or disruptions caused by increased imports of Chinese goods—but it never did. The Obama administration used the safeguard once, on tires, but declined to apply it in sectors such as auto parts and solar panels, where state-supported Chinese manufacturers were undercutting Western innovators. U.S. policy neither protected American workers, companies, and technologies nor promoted investments to compensate for China’s nonmarket interventions and level the playing field. Private-sector financing could not match the forbearance or patience of Chinese state financing in sectors that required tremendous capital.

Beijing also kept its currency artificially weak. Between 2001 and 2012, China’s foreign exchange reserves soared from $212 billion to $3.3 trillion, and in 2007 its current account surplus swelled to more than ten percent of GDP, which contributed to the United States’ lopsided deficit and the 2008 global financial crisis. Only in the wake of the crisis did the Obama administration finally negotiate a corrective: a 16 percent appreciation of the Chinese currency against the dollar and a reduction of China’s current account surplus to two percent of GDP.

In recent years, China has also begun to challenge the dollar-based order—that is, the U.S. dollar’s centrality in the global trading system—after being a major beneficiary of that order for several decades. What began as an effort to internationalize the renminbi morphed into a de-dollarization campaign, which picked up speed after Russia invaded Ukraine in 2022 and the ensuing Western sanctions. Those sanctions underscored the leverage conferred by the dollar’s dominance.

U.S. officials began to more firmly revise their approach to China by the mid-2010s. The first Trump administration marked a sharp break from the previous course. In 2018, it imposed tariffs on nearly half of U.S. imports from China. Although this sweeping approach led to higher prices on many products and greater imports from third countries, it started to loosen the codependence of the two economies. The pandemic accelerated this decoupling.

The Biden administration built on that foundation. Rather than imposing duties across the board, it raised tariffs steeply on select Chinese imports in sectors vital to national security, clean energy, and technological leadership, in which China appeared determined to dominate global supply, and removed tariffs on inputs imported from other countries. The administration combined these defensive measures with offensive investment incentives for the domestic production of semiconductors, batteries, and clean energy technologies, secured through legislation. For the first time in decades, Washington married trade protection with industrial renewal and supply chain diversification.

This strategy also recognized that maintaining the U.S. lead over China would require coordination with allies. Both the Trump and the Biden administrations applied restrictions on select semiconductor exports to China; the Biden administration also enlisted Japan and the Netherlands to jointly implement export controls on semiconductor manufacturing equipment. Washington understood that it could not grapple with Chinese practices on its own. By 2024, bipartisan support had coalesced around a strategy of selective protection and controls, strategic investment, and allied cooperation to counter the national security and economic risks of dependence on China.

 

Walk It Back

Trump returned to office in 2025 after a campaign that repeated his familiar rhetoric about China. But his second administration has not simply picked up where it left off. Instead, it has been reversing U.S. strategy on almost every front.

Take, for instance, Trump’s use of tariffs. The administration’s tariff policy is driven by fiscal arithmetic rather than strategic calculus. It is imposing steep rates on all trade partners—not just China—to raise between $300 billion and $400 billion in annual revenue to offset the shortfall produced by new tax cuts. These tariffs, designed to fill budget gaps, in fact amount to a tax on American manufacturers and consumers. The majority of U.S. imports are industrial inputs, so U.S. manufacturers will face higher input costs than their foreign competitors as a result of the tariffs. General Motors and Ford are projecting several billion dollars in additional tariff costs this year, even after winning some initial relief.

In addition, at the very moment when Washington needs allies and partners more than ever, these sweeping unilateral tariffs are alienating U.S. partners. The administration has imposed duties on close allies with whom it has a trade surplus, such as Australia and the United Kingdom. Between the Trump administration’s focus on maximizing revenues and China’s retaliatory power, tariffs on some friendly countries are now higher than those on China. Following the understanding reached between Trump and Xi in their recent meeting, tariffs on India and Vietnam exceed those on China, and Switzerland’s and Brazil’s rates are only slightly lower. Even Canada, a North American ally that joined Washington in setting 100 percent tariffs on Chinese auto imports in 2024, is facing high tariffs on many goods as a result of petty irritants, such as an ad about tariffs aired by the government of Ontario. Imports from China now face a smaller penalty, relative to imports from elsewhere, than they did before Trump began his second term—a puzzling reversal. While Beijing is bolstering production networks and investing in infrastructure in countries in Southeast Asia, Washington is penalizing those countries with punitive tariffs. It is hardly surprising, then, that many U.S. allies and partners are considering trade arrangements that would exclude the United States.

Alongside raising costs and alienating allies, current policy is weakening the American innovation ecosystem. The administration has slashed funding for federal and university research and severely restricted visas for foreign scientists and technologists. The administration’s termination of incentives for innovation and investment in clean energy is a strategic setback in the race to dominate advanced AI, in which low-cost energy from multiple sources will be crucial to powering the expansion of AI data centers. Similarly, domestic investment incentives for electric vehicles, batteries, and alternative energy were designed to give U.S. auto companies a better chance to compete with China’s surging EV producers. But the administration has suspended many of those incentives, jeopardizing key business investments and the high-paying jobs they were poised to create in factory towns. Ceding dominance of the EV industry to China also means ceding ground on advancements in autonomous vehicles and drones, as well as in battery technology, which is critical for grid storage and electronics.

The Biden administration understood the important role that government could play in spurring innovation in the private sector. Under the bipartisan CHIPS and Science Act, signed into law in August 2022, the United States was on track to restore domestic manufacturing of advanced semiconductors—with its global share of production projected to reach nearly 30 percent by 2032, up from zero in 2022—and had attracted the world’s leading advanced semiconductor manufacturer, TSMC, to fabricate chips in the United States. But the Trump administration has converted final CHIPS grants that provided for “upside sharing”—that is, when companies receiving $150 million or more in federal funding shared a portion of their profits with the U.S. government when returns materially exceeded projections—into a government equity stake that no longer requires companies to meet advanced manufacturing benchmarks. This move is uncomfortably reminiscent of China’s state capitalism, not to mention the attendant risks of cronyism.

The second Trump administration also appears to be backing away from a settled bipartisan strategy of implementing technology export controls at a time when advanced AI accelerators are one of the core advantages sustaining the U.S. lead in the AI race. The first Trump administration initiated the use of semiconductor export controls on some Chinese entities, and the Biden administration expanded these in collaboration with foreign partners. So it came as a surprise when the Trump administration rescinded some restrictions in July after Beijing threatened to curtail rare-earth magnet supplies. Beijing has systematically strengthened its own export controls since the first Trump administration. Partly as a result, the second Trump administration has seemed willing to negotiate over certain key U.S. controls. In an August press conference, the president confirmed a deal under which American producers could obtain licenses to export chips to China by sharing 15 percent of the revenues with the government—another triumph of fiscal considerations over strategy.

An emboldened Beijing tested American resolve again in October by expanding its restrictions on rare-earth exports. In the deal that emerged from the bilateral meeting later that month, the United States committed to a one-year delay on extending its list of restricted entities to majority affiliates in return for a one-year delay on China’s rare-earth restrictions. This deal with Beijing crossed a decades-old red line maintained by U.S. administrations of both parties that national security technology controls are not on the table in trade negotiations. Moreover, if the president’s public musings give any indication of future policy, it may be only a matter of time before he decides to put Nvidia’s Blackwell chips on the negotiating table, which would be a serious own goal, ceding to China a key U.S. advantage in the AI race.

Finally, the second Trump administration is undermining confidence in the foundations of dollar dominance, just as China accelerates efforts to challenge it. Dollar dominance is not merely symbolic: it underpins global demand for U.S. Treasuries and enables the selective use of sanctions to advance national security goals. It also allows the United States to borrow in its own currency at lower rates and save an estimated $100 billion to $200 billion a year in interest, which translates to lower rates on mortgages and car loans for Americans.

These benefits reflect investor faith that the United States will remain highly creditworthy, inflation will be low, and the dollar will hold its value. Yet the administration’s fiscal and institutional carelessness has begun to test investor faith. It signed into law a $4 trillion expansion of federal debt, despite a U.S. credit downgrade that weakened the dollar and raised the yields on 30-year U.S. Treasuries to more than five percent.

The White House has mounted an unprecedented attack on the independence of the Federal Reserve—threatening to fire its chair, attempting to remove a Senate-confirmed governor without due process, and appointing a governor who remains on the president’s staff. Trump has called on the Fed to lower interest rates to reduce payments on the federal debt, even though investors would demand higher interest rates on long-term Treasuries if they expected the Federal Reserve to prioritize reducing debt payments over controlling inflation. Congress has been surprisingly acquiescent, considering that it originally delegated its own constitutional power over currency to the Federal Reserve and legislated a for-cause removal safeguard to protect the Fed from political interference.

These actions jeopardize confidence in U.S. creditworthiness and institutional independence—key pillars of the dollar’s global role. Although renminbi-denominated capital markets lack the liquidity and depth to replace the dollar outright, Beijing’s de-dollarization campaign could progressively erode the network benefits that sustain U.S. financial primacy. The fact that there is currently no single alternative to the dollar should be cold comfort at a time when foreign central banks are increasing the share of gold in their reserves to rival the share of U.S. Treasuries, and foreigners are hedging more of their exposure to dollar assets.  Americans will pay the price if the dollar loses its preeminence.

 

A Winning Strategy

Trump’s economic strategy toward China is effectively unwinding the progress made not just by the Biden administration but also by Trump’s first administration. Sweeping tariffs designed to maximize revenue are hurting American manufacturers and straining consumers. They are alienating U.S. allies and partners and fracturing the coalitions needed to sustain U.S. technological leadership. By weakening the country’s world-class innovation ecosystem, eliminating advanced manufacturing and clean energy investment incentives, and reversing technology export controls, current policy is undermining key U.S. industries. Fiscal profligacy and political meddling in monetary policy are eroding the foundations of dollar dominance. China stands to gain from all these measures.

The core objective of U.S. China economic policy should be to sustain American preeminence in vital sectors into the future. A winning strategy for Washington—one that is truly “America first”—would impose targeted tariffs on Chinese imports so that Beijing does not have a chokehold on any node of the supply chain in strategic sectors. At the same time, the United States should strive to attract, rather than attack, allies and partners, using preferential access; investment partnerships, including in critical minerals and rare earths; and regulatory alignment to place the United States at the center of the world’s leading technology ecosystem.

Maintaining U.S. tech leadership relative to China requires incentivizing private-sector investments in advanced manufacturing, clean energy, and rare earths. Supporting partnerships between universities, federal research, and businesses and attracting and developing the world’s best talent will spur greater innovation and sustain U.S. leadership in advanced AI and other industries. A smart U.S. economic strategy would also buttress, not bargain away, targeted export controls on advanced semiconductor technology to sustain the U.S. lead in frontier AI models for as long as possible.

Washington should also safeguard dollar dominance at a time when China is working with other countries to erode the dollar’s central role. The United States should maintain the dollar’s incumbency advantage by demonstrating its commitment to the international financial system, fiscal sustainability, and the institutional independence of the Federal Reserve.

The competition with China will hinge not on mimicking Beijing’s methods but on buttressing the core strengths of the United States. To sustain preeminence, Washington must reinforce its institutions, alliances, and incumbency advantages—not erode them.

 

 

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