The Donald Trump administration headed into its meeting with Chinese leader Xi Jinping in October 2025 with confidence, claiming that it has the leverage to put pressure on China, as the US is the country with the largest trade deficit in the bilateral relationship. This is what Adam S. Posen, president of the "Peterson Institute", writes for Foreign Affairs.
"As US Treasury Secretary Scott Besant said: "What do we lose if the Chinese impose tariffs on us? We export to them 1/5 of what they export to us, so it's a losing position for them". But it soon became clear that this was a miscalculation. Trade wars are easily lost when countries depend on an exporter for hard-to-substitute resources and at the same time perceive trade as a zero-sum game. China has escalation superiority over the United States, which means that at any level of threat, the Chinese government has the ability to inflict greater damage on the United States than vice versa. For example, to ease Beijing’s restrictions on rare earths, of which China controls 80-90% of production, the United States has made concessions on tariffs, technology controls, and visa policy in various negotiations.
But Washington’s inability to immediately sever its economic ties with China, let alone win concessions through the threat of tariffs, does not mean that it should abandon economic diplomacy. For centuries, smaller powers in the world economy, faced with the escalating superiority of more powerful adversaries, have managed their relations with them through negotiation, avoiding confrontation. Indeed, until recently, that is how China—and almost all other countries—perceived its economic relationship with the United States, sometimes to the chagrin of American officials.
Economic relations are not an all-or-nothing affair; there is room for both resistance and cooperation, even if one side would clearly lose in an open conflict. Despite the deep distrust and strategic rivalry between the two countries, the U.S.-China economic relationship should not be viewed as a zero-sum game. The benefits of trade and diversification for both economies remain significant, and China’s escalation advantage would not shield it from economic damage if it were forced into a tit-for-tat confrontation with Washington. Indeed, Beijing, comfortable with the status quo, has little interest in such an escalation.
At the upcoming meeting between Xi and President Donald Trump, the U.S. administration should take a different approach to economic relations, seeking to increase imports of key strategic goods as well as to increase foreign direct investment from China. Of course, this should be only part of a broader economic strategy. Cooperation with allies will be necessary to encourage lasting changes in China’s trade behavior and, in the longer term, to diversify its sources of supply. Long-term strategic success will also require a deeper analysis of Xi’s strategic goals and China’s vulnerabilities. But this meeting — and the next ones — gives Washington valuable time to address the country’s pressing needs.
Stockpiling
Although the Trump and Biden administrations have warned for a decade about the threat posed by Chinese imports and investment, the U.S. government has failed to achieve meaningful divestment of even the most sensitive industries from China. The reduction in direct U.S. imports from China has simply led to more stretched and less transparent supply chains. China continues to be a source of rare earth elements, specialized magnets, and low-quality semiconductors used in cars and home appliances even when intermediate stages of production are already taking place elsewhere. In the critical pharmaceutical sector, for example, the U.S. can import many generic drugs from India, but India relies on China for the raw materials and components needed to make them.
That’s what makes industrial decoupling so difficult: strong economic forces have built these trade ties, and breaking them is slow and costly. Washington’s top priority for now should be building up short-term stocks of strategic goods whose ultimate source is China. Ideally, the United States could immediately source them elsewhere, but the Trump administration, like the Biden administration before it, has made little progress on this issue. Both have tried but failed to incentivize the creation of alternative sources through greater access to the American market or other compensation. At their worst, both administrations have tried — in some misguided attempt to create spontaneous American production through shortages — to to force American businesses to abandon Chinese raw materials and components through tariffs and restrictions.
Meanwhile, American officials have wasted previous high-level meetings and negotiations trying to persuade Beijing to increase Chinese imports of various non-strategic goods — precisely those that China values least. Current and former officials may justify these efforts as an indirect move to increase China’s dependence on American goods and gain leverage in future negotiations. But exporting American airliners and soybeans neither reduces immediate security vulnerabilities nor improves the United States’ macroeconomic fundamentals. Indeed, to the extent that such an emphasis on promoting exports allows China to pit the United States against its allies — for example, by incentivizing bilateral government deals to increase sales of Boeing or Airbus aircraft — This weakens Washington’s ability to build a united front against economic coercion.
The Trump administration should take a different approach at the upcoming meeting. At the Trump-Xi summit in October 2025, the US and Beijing reached an agreement to temporarily reduce tariffs in exchange for a partial easing of restrictions on exports of critical materials from China. In doing so, the administration effectively abandoned its strategic goals as soon as it became clear that the show of strength was hiding weakness. And with the agreement set to expire in November, Washington may be tempted to simply extend its terms. Instead, the Trump administration should seek a more ambitious agreement that includes multi-year, large-scale contracts to purchase critical goods whose production is currently heavily concentrated in China or whose key components are manufactured there for supply chains located elsewhere. The United States could use government guarantees and even outright purchases to build up a strategic reserve until alternative domestic or reliable allied sources become available. In return, it should allow China to import more of some desirable technologies in which the United States still has an advantage.
Such an agreement is both more achievable and more sustainable than many of its opponents might think. Even during the Cold War, in the 1970s and 1980s, the Soviet Union and the United States concluded a series of grain deals that allowed the Soviets to import American wheat, corn, and soybeans. Despite the constant temptation to exploit the Soviet Union’s dependence — for example, President Jimmy Carter imposed an embargo on trade with the Soviet Union in 1979 after the Soviet invasion of Afghanistan — the deals were renewed and expanded by Presidents Ronald Reagan and George H. W. Bush.
China, of course, can walk away from such agreements at any time. It has already conditioned exports of rare earths and related products in a way that discourages resale and stockpiling — precisely to maintain the influence it has built up. The direct monetary value of China's rare earth exports is small and in itself is not a sufficient incentive to walk away from that influence.
Yetthe threat that China will permanently cut off its supplies, while real, is exaggerated. For its part, Beijing has an interest in increasing its exports to compensate for chronically weak domestic demand and its industrial overcapacity. Moreover, the widespread use of export bans is costly, provokes retaliation, and ultimately encourages the development of hostile alternative systems. Washington should understand these risks better than anyone: the US’s excessive use of financial sanctions has encouraged a shift away from the dollar to China-led payment systems over the past five years. More likely, a lucrative trade offer from the United States would encourage China to export more freely.
Historically, even rivals that were approaching war successfully stockpiled and continued to trade. Before World War II, Japan did everything it could to import energy resources, rubber, and other critical supplies, and even in 1941, when Washington banned trade with Tokyo, up to 40% of its military supplies came from the United States. Meanwhile, Germany and the Soviet Union traded military technology and petroleum products during their respective invasions of Poland in 1939. Trade between France and Germany remained largely stable in the decade before World War I.
The same incentives that have shaped the behavior of strategic rivals throughout modern history apply to China and the United States today. So the Trump administration and its more vocal critics should recognize that greater flexibility in U.S. export controls — coupled with opening up opportunities for U.S. investment in the broader trade relationship — is worth pursuing because of the benefits of more reliable access to Chinese goods for which Washington currently has no alternative. That means simply acknowledging reality, rather than either giving up or insisting on using a tool that won’t work. The sensible course of action for the U.S. government is to import and stockpile as many goods from China as possible while it can. This should not hinder the creation of domestic or reliable allied sources any more than cutting off U.S. access to Chinese supplies has so far encouraged such production.
Investing in Success
Since ancient times, potential enemies have used a form of hostage exchange in which nobles or members of royal families were sent to live — and be exposed to risk — in the capital of the opposing country. This was not an absolute guarantee against conflict, but it acted as a deterrent against attacks and delayed ill-advised escalation. Some hostages even proved to be useful messengers, improving mutual understanding through public diplomacy, intelligence, or both.
The modern economic form of hostage exchange is foreign direct investment (FDI). Leading companies establish a presence in rival countries, transferring technology and management practices across borders. Like ancient nobles, this presence has symbolic value, since companies are often closely connected to elites in their own countries, and their investments are at risk.
But modern bilateral flows of foreign direct investment also bring considerably more economic benefits than the exchange of individual nobles once did. Statistically, FDI is associated with the creation of jobs with wages above the average for the local economy, increased local spending on research and development, and reduced supply volatility through geographic diversification. This type of exchange was a key component of successive economic agreements between the United States and Europe, Japan, and South Korea, as the latter countries saw relative increases in their industrial competitiveness relative to American industry from the 1960s to the early 21st century. FDI reduced the incidence of punitive tariffs and export restrictions both by directly reducing the need for them and by creating political groups with an economic interest in integration.
Of course, the relationship between the United States and China is quite different from Washington’s relationship with its military allies. And many American companies that made significant foreign direct investment in China at the turn of this century have become frustrated with restrictions on their ability to repatriate profits, expand market share, or protect their intellectual property. As a result of these frustrations, as well as a more hostile security environment, two-way cross-border foreign direct investment flows between the United States and China have fallen by 90% since their peak in 2016.
But the underlying incentives and potential economic benefits remain. And the net benefits to the United States from Chinese FDI have increased in recent years as China’s technological capabilities in sectors such as batteries and electric vehicles have grown. So the Trump administration should focus on attracting Chinese foreign direct investment. The best way for Washington to leverage access to the U.S. market is to encourage foreign investment in the United States, rather than pushing for more exports. This would not be new. The Reagan and Bush administrations successfully attracted Japanese and German investment in the auto and chemical industries in the 1980s, and China has been using foreign direct investment from around the world to build its own industry in the first two decades of this century. More recently, the European Union has begun to use Chinese FDI to develop its own electric vehicle sector.
The recent public letter from U.S. Transportation Secretary Sean Duffy attacking Ford over its licensing agreement with Chinese battery maker CATL for a plant owned by the U.S. automaker in Michigan, as well as the broader congressional discontent with Chinese investment, overlook this opportunity. China has become more resilient and has boosted its growth by contracting out local production and transferring technology in the early 21st century. The United States has every reason to pursue this path to increased competitiveness. In a world of remote surveillance, cyberattacks, and reverse engineering, not to mention the unlicensed extraction of the latest advances in artificial intelligence, the additional risk of losing or compromising technology through the presence of Chinese corporations in the United States is minimal. Chinese FDI would actually bring net benefits in the form of jobs, research, and manufacturing know-how, improving U.S. national security.
It’s time for a deal
Last year’s summit was an unpleasant sobering experience for the Trump administration and China’s opponents in both parties, but it taught a useful lesson: neither bilateral trade threats nor China’s exclusion from the U.S. economy will give the United States an easy victory over Beijing. The United States needs time to reduce its dependence on China and, by extension, other concentrated sources of critical industrial resources, and to rebuild its alliances so that these alternatives become viable. Attempts by the Biden and Trump administrations to unilaterally disengage from China and pressure allies to provide alternatives have failed to achieve these goals. Fortunately, the Chinese leadership believes that time is on its side, now that Washington has abdicated its role as the leader and guarantor of the global economy. The summit should therefore be used to reassure and encourage China to bide its time through mutually beneficial trade relations.
The first step is for the United States to return to forms of economic diplomacy long used by countries that are used to not always getting their way. The United States has already created a new economic geography. Now it must act as every other lesser power has acted against it for the past 80 years: by seeking mutually beneficial deals, negotiating cautiously from a position of relative weakness, and consciously using remaining economic interdependence to build resilience.
History shows that even seemingly inevitable adversaries continue to trade, invest, and even cooperate. In the case of the United States and China, this pattern is likely to persist, perhaps even longer than in some previous periods of great-power rivalry, because of the favorable conditions created by the Pacific Ocean, nuclear deterrence, and the continued technological advantage of the United States in a number of sectors. China’s own economic and demographic problems make it even more likely that it will have an interest in preserving relative peace, including by continuing to export to and invest in the United States.
There is no guarantee that restoring a degree of economic interdependence will prevent China from someday cutting off U.S. access to critical goods or provoking military conflict. No purely bilateral approach will by itself create resilience for the United States—domestic efforts as well as actions by allies are needed. But large-scale imports from China, the exchange of valuable American goods to build critical stockpiles, and a kind of "economic hostage exchange" in the form of foreign direct investment will provide the necessary time and additional economic resources to strengthen American resilience.
The Trump administration must look beyond both its zero-sum game approach and the subsequent shift to an overly accommodating approach and a series of partial deals. Bilateral economic diplomacy begins when a government recognizes its interdependence with a potential adversary; it should not end there".
Source: news.bg