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The Limits of a U.S.-China Deal

In his first few weeks back in the Oval Office, U.S. President Donald Trump has taken a split-screen approach to his dealings with China, leaving U.S. financial markets, multinational firms, and Chinese leaders in limbo. Trump has already imposed a ten percent tariff hike on imports from China and threatened another increase. These moves will raise the U.S. weighted average tariff rate on Chinese goods by 20 percentage points over the course of just two months, much more than the 12 percent rise during his first term’s U.S.-Chinese trade war. Yet he has also pointedly touted his strong relationship with Chinese President Xi Jinping; issued a highly unusual executive order granting the Chinese-owned company ByteDance a reprieve from a law that would effectively ban its popular app, TikTok; and repeatedly dangled a possible new trade deal with Beijing.

In early 2020, during Trump’s first term, China and the United States struck a so-called Phase One trade deal requiring China to increase its imports from the United States dramatically. The deal turned out to be a flop, in part because the disruptions the pandemic wrought on China’s economy and global trade—and President Joe Biden’s heightened focus on “de-risking”—led both sides to quietly abandon what had already been unrealistic targets. Trump’s first month, however, has prompted speculation that he is actively seeking a new trade deal with China, or even a fundamental reconsideration of Washington’s adversarial relationship with Beijing.

For Trump, running parallel approaches now—exploring cooperation while ramping up tariffs—is not necessarily incoherent. Tariffs can generate leverage to gain more attractive offers from Beijing. And Xi, for his part, has sent Trump relatively warm signals, including informal offers to purchase more U.S. goods. The fact that China refrained from a full retaliation against Trump’s tariff—raising its own tariffs on just a limited set of U.S. goods—preserves a pathway to a potential deal.

Hypothetically, a major trade deal could benefit both the United States and China. But the truth is that both countries’ efforts to reduce their mutual trade dependence long predated the 2020 pandemic and substantially undergirded the Phase One deal’s failure. So long as that commitment remains in place, if a new trade deal comes together, it is likely to be mostly cosmetic. A strong political consensus in favor of de-risking in both China and the United States suggests that it will remain in place, steadily shrinking commercial opportunities between the two countries.

### **CONTINENTAL DRIFT**

De-risking, today, is often described as a Western goal. But China has been intentionally pursuing such a strategy for over a decade. A central focus of the Made in China 2025 initiative, which Beijing launched in 2015, was to reduce China’s reliance on foreign products; in practice, the initiative focused on limiting the Chinese economy’s dependence on U.S. technologies and inputs in areas such as semiconductors, biotechnology, and aerospace engineering. Since the 2018–19 U.S.-Chinese trade war, China has also shifted a significant portion of its agricultural imports from the United States to Brazil to limit its vulnerability to U.S. trade restrictions and reward a more friendly country.

Some of Beijing’s efforts to reduce its reliance on U.S. inputs were probably reactions to the United States’ own implementation of stricter export controls. During his first term, Trump tightened controls on U.S. tech exports, most notably by cutting off Chinese telecom giant Huawei’s access to U.S. semiconductor technology. Beijing viewed that move, which hampered Huawei’s massive effort to dominate 5G mobile networks worldwide, as even more damaging to China’s geopolitical aspirations than Trump’s aggressive tariff hikes on Chinese goods had been. China’s leadership responded to the blow mainly by increasing its determination to develop domestic alternatives to U.S. semiconductors and other so-called bottleneck technologies.

The Phase One deal gave both countries an off-ramp from tariff escalation. But Beijing and Washington continued their decoupling efforts. Diversifying U.S. supply chains was a central part of Biden’s strategy toward China, and it constituted one of the most consistent through lines between the Trump and Biden administrations. Republicans and Democrats may use different terminology—the Biden administration focused on de-risking while incoming U.S. Trade Representative Jamieson Greer speaks of “strategic decoupling”—but the intent is broadly the same.

> China has pursued “de-risking” for over a decade.

The use of export controls by both China and the United States only intensified after Trump left office in early 2021. In October 2022, the Biden administration imposed a sweeping set of restrictions on the export of advanced semiconductor and AI tech to China, strengthening these controls further in 2023 and again in 2024. From mid-2023**,** Beijing began to respond more aggressively with its own parallel measures, leveraging its dominance in critical minerals. After steadily building its understanding of key chokepoints, this past December, China banned all exports of antimony, gallium, and germanium to U.S. buyers—minerals crucial for semiconductors, solar battery cells, and numerous defense applications.

This decoupling pattern has been exacerbated by growing concerns about the diffusion of AI and sensitive data into commercial products. Just before Biden left office, in January, his administration used a Trump-era executive order to restrict imports of Chinese autos and auto parts that contain certain technologies that collect data or connect to communications networks, alongside a draft rule that had a similar focus on drones and drone components. Trump’s America First Trade Policy executive order, which he signed the day he assumed the presidency in January, calls for the secretary of commerce to consider expanding such controls to other products.

Beijing, meanwhile, has long harbored its own worries about the United States’ ability to access its data. In recent years, China has instituted some of the world’s most restrictive laws and regulations limiting the cross-border sharing of data. Major U.S. tech and tech-adjacent firms, such as Apple and Tesla, face an increasingly challenging environment for operating AI-enabled systems in China. A similarly adversarial, tit-for-tat dynamic has recently spread to biotechnology, a realm once seen as ripe for U.S.-Chinese cooperation. On January 15, Biden rolled out new export controls on U.S. biotech laboratory equipment focused on China; in February, China sanctioned leading U.S. biotech equipment firm Illumina after it ceased selling its highest-end products to Chinese firms thanks to U.S. export controls. U.S. legislators are likely to ramp up their efforts to pass the Biosecure Act, which aims to broadly reduce U.S. biotech companies’ reliance on Chinese firms for pharmaceutical ingredients, gene sequencing, and clinical trials.

### REALITY CHECK

A new trade deal between Trump and Xi would disrupt this predictable rhythm. In exchange for relief from U.S. tariffs and possible concessions on export controls, Beijing would almost certainly need to recommit to—or even exceed—the Phase One deal’s targets for purchasing goods from the United States. Recently, Trump has also suggested he may seek to encourage Chinese firms to build factories in the United States.

In theory, promoting more Chinese investment into the United States would be consistent with Trump’s goal to boost the U.S. manufacturing sector. Chinese auto suppliers appear eager to invest in production in the United States. And Beijing is well aware that Japan’s investment into the U.S. economy helped defuse the two countries’ 1980s trade tensions. If Chinese companies are faced with the real threat of losing access to the U.S. market, localizing some production to America is likely to be attractive.

But the already tricky politics of Chinese investment in the United States puts big obstacles in the way of investments on the scale of Japan’s. On February 21, Trump signed a memorandum accusing investors backed by the Chinese government of targeting the “crown jewels” of the U.S. economy and directing the Treasury Department to more strictly limit Chinese investments, as well as U.S. investments into China. American political leaders had already spent years demonizing Chinese investments, leading some U.S. local governments and voters, particularly in red states, to balk at major Chinese projects: in 2023, for instance, voters in rural Michigan recalled and replaced local officials who had supported a $2.36 billion investment by a Chinese battery maker, and Trump himself criticized the investment during his 2024 presidential campaign. If Trump actually sought to draw significant Chinese manufacturing investments, he would have to explain why these no longer pose a threat—and why Chinese firms should feel secure that Americans will welcome them.

Securing Chinese commitments to purchase U.S. goods—the core of the Phase One deal—seems somewhat more straightforward, but it would still pose a challenge. China’s demand for liquified natural gas, for instance—which the United States has in ample supply—is soaring; U.S. exports of liquefied natural gas to China are already set to grow rapidly in the coming years based on contracts signed during the last Trump administration.

> Delivering on an ambitious deal would require enormous political commitment.

A large deal on commercial aircraft could be announced. Most Chinese airline companies use Boeing planes, but China has not made a new Boeing order since 2017, the same year the country debuted its first indigenously designed and manufactured airliner, the Comac C919. China, however, will still have a large unmet demand for aircraft over the next two decades—a demand it will likely want Boeing, in part, to fill rather than hand Boeing’s European competitor, Airbus, a relatively captive market. A more ambitious focus for a deal is medical products: U.S. medical exports to China have been growing for the past several years, reaching nearly $15 billion in 2023.

But genuinely delivering on the terms of an ambitious deal would require enormous political commitment from both capitals to overcome the logic of de-risking. Beijing, for its part, would need to directly order China’s state-owned enterprises as well as its private firms to procure from the United States rather than domestic or other foreign competitors, reversing years of rhetoric from Xi about the virtue of self-reliance. Ultimately, Beijing’s continued reliance on a growth model that favors investment and exports instead of domestic consumption will crimp its enthusiasm for importing more U.S. goods.

China also likely has less space and willingness than it did in 2019 to make large new purchases from the United States that would diminish its imports from other key trading partners. China’s massive trade surpluses—which neared a record $1 trillion in 2024—are already generating tensions with European countries as well as India, South Africa, Turkey, and its own Asian neighbors. Thanks to its commodity exports, Brazil is one of the few countries that maintains a sizeable trade surplus with China, but even it is becoming concerned that Chinese manufactured goods pose a serious threat to its industrial base. If China were to shift significant amounts of agricultural purchases back to the United States, its relationship with Brazil could grow more fraught.

It will be especially hard to maintain discipline on a trade deal if tensions rise between China and the United States in the realm of foreign policy. Trump’s appointment of prominent China hawks such as National Security Adviser Mike Waltz and Secretary of State Marco Rubio to his foreign policy team—as well as the hard-line anti-China sentiment now dominating the U.S. Congress—means that the United States will almost certainly pursue strategic actions that China considers provocative, such as reiterating or expanding its diplomatic and military support for Taiwan. Such actions will pressure Beijing to make its own plays to show its populace that it is willing to stand up to Trump, such as informally boycotting certain U.S. goods or brands.

### **DEAL BREAKERS**

In addition to inking a phase two trade deal, some market analysts and Trump appointees have proposed that a so-called Mar-a-Lago accord could address currency policy and broader macroeconomic imbalances. Templates for such an accord already exist in the form of the Smithsonian Agreement and the Plaza Accord, multinational currency agreements executed by Presidents Richard Nixon and Ronald Reagan, respectively. In both cases, the United States used the threat of tariffs to successfully force trade partners—the G-10 countries in 1971 and France, Japan, the United Kingdom, and West Germany in 1985—to appreciate their currencies against the U.S. dollar, temporarily helping to reduce the U.S. current account deficit.

Trump is far more willing to wield the tariff threat than any of his predecessors. And some of his new counselors—including his treasury secretary, Scott Bessent, and his nominee to chair the Council of Economic Advisers, Stephen Miran—have already proposed creative techniques to use the tariff threat to rebalance the trading relationship with China, such as increasing tariffs on Chinese goods each month until Beijing further opens its markets to the United States.

But geopolitical and macroeconomic realities will make a fresh accord that matches the effect of the Smithsonian and Plaza agreements difficult to pull off. These earlier arrangements were made with U.S. allies who were dependent on the U.S. security umbrella, not a powerful rival such as China. Many policymakers in Beijing already view the Plaza Accord as a trap that resulted in Japan’s 1990 economic crash and subsequent decades of economic stagnation. And while the Smithsonian and Plaza accords did succeed in temporarily weakening the dollar, they did not lead to more permanent cooperation on macroeconomic policy.

It will be exceedingly difficult for Trump to convince Xi to undertake the enormous policy shifts that would meaningfully shrink China’s trade surplus. Not only would such policy adjustments fundamentally change China’s political economy, they would undermine Beijing’s geopolitical strategy, which increasingly depends on keeping China the world’s exporter to contain U.S. hegemony. As he did during Phase One, Xi might agree to limit any further depreciation of the renminbi, though this action would only limit China’s surpluses from growing.

### DIVIDE AND SUFFER

Trump’s increasing reliance on U.S. tech executives for his political decision-making is a wild card. Elon Musk’s Tesla has significant exposure to China: China accounts for over a third of its vehicle sales and is key to the company’s rollout of autonomous driving capabilities. Musk has both influence with Trump and a powerful incentive to maintain his access to China, and he could weigh in on the side of pragmatism. But because Tesla is also threatened by the rise of Chinese electric vehicles, Musk is unlikely to favor relaxing tariffs on key Chinese competitors.

Even if tech leaders convinced Trump to prioritize winning market access for their products in China, the pattern of de-risking between the United States and China will almost certainly continue during Trump’s second term. The underlying security, economic, and ideological imperatives that have driven the United States and China to reduce their reliance on each other for a decade remain in place. Xi shows no signs of shifting his fundamental emphasis on technological self-sufficiency, and Trump’s January 20 executive order elucidating his administration’s goal to balance trade also called on the Departments of Commerce and Treasury to assess whether the United States should expand its export controls and outbound investment restrictions. Key officials in the Trump administration and Congress are likely to push for further tech decoupling.

But both China and the United States should, in fact, carefully assess where de-risking has gone far enough. The approach comes with significant economic costs for both sides. It can exacerbate inflation in the United States (by restricting American companies’ access to China’s efficient manufacturing sector) and deflation in China (by reducing overseas demand for Chinese products). Reducing direct imports from China cannot bring down the overall U.S. trade deficit without accompanying macroeconomic policies such as fiscal consolidation. Unless the United States coordinates more closely with G-7 allies and other major commodity producers to jointly boost production outside of China, the United States will also struggle to meaningfully reverse its dependency on China for products vital to national security, such as critical minerals.

And despite its record trade surplus, so long as Beijing remains obsessed with de-risking the supply side of its economy and insufficiently attentive to boosting domestic demand, it can only make limited progress in reducing its vulnerability to U.S. tariffs, sanctions, and export controls. The bottom line is that no matter how much Xi or Trump say they want a deal, no substantial reconsideration of de-risking is likely to happen in the next four years.