China’s Response to the US: Tariffs, Rare Earths, and Chips

China’s response to the United States has taken shape across five fronts at once: matching tariffs and then negotiating them down, punishing American companies through sanctions and antitrust probes, tightening its grip on rare earths while racing to build its own semiconductors, pressuring Taiwan with sustained military activity, and courting the rest of the world through BRICS, the Belt and Road, and a slow push away from the dollar. Two big deals with the Trump administration — the Kuala Lumpur Joint Arrangement in October 2025 and the Beijing summit in May 2026 — have kept the relationship from breaking, but Beijing has kept every retaliatory tool in reach.

The Tariff Fight and Two Truces

The current round of the trade war began on February 1, 2025, when President Trump ordered a 10 percent tariff on Chinese goods, doubled it to 20 percent on March 3, and pushed extra duties to 145 percent by April 9.¹ China matched the escalation. Average Chinese tariffs on U.S. exports peaked at 147.6 percent in mid-April 2025, with a blanket 84 percent retaliatory tariff on all U.S. imports taking effect on April 10. By that point, China’s retaliatory tariffs covered 100 percent of American goods, up from roughly 58 percent in the earlier phase of the trade war.²

The first pullback came on May 12, 2025, after talks in Geneva. The U.S. cut extra tariffs on Chinese imports to 30 percent, and China lowered duties on American goods from 125 percent to 10 percent under a 90-day truce, which was extended for another 90 days in August 2025.¹

The Kuala Lumpur Joint Arrangement

On October 30, 2025, Trump and Xi Jinping met in the Republic of Korea and reached the Kuala Lumpur Joint Arrangement. China committed to suspending tariffs on a broad range of U.S. agricultural products through the end of 2026, buying American soybeans, sorghum, and logs, extending its market-based tariff exclusion process, and addressing retaliatory actions against American semiconductor companies. It also agreed to postpone and effectively eliminate its coercive export controls on rare earths and critical minerals.³

China’s Ministry of Commerce described the outcome as “hard won” and struck in the spirit of “equality, respect and mutual benefit.” MOFCOM said the U.S. removed its 10 percent fentanyl-related tariffs on Chinese goods and suspended 24 percent reciprocal tariffs for one year, with China making “corresponding adjustments” to its own countermeasures. Both governments agreed to suspend certain export control expansions and a Section 301 investigation into China’s maritime and shipbuilding industries for one year.⁴

The Beijing Summit and the Board of Trade

Trump visited Beijing on May 14–15, 2026, the first visit by a U.S. president to China since 2017, with a delegation that included Elon Musk, Tim Cook, Larry Fink, Boeing’s Kelly Ortberg, and Nvidia’s Jensen Huang.⁵ Beijing’s readout described a shared commitment to a “constructive China-U.S. relationship of strategic stability” meant to guide the relationship for at least three years.⁶

Concrete commercial commitments followed. China approved an initial purchase of 200 Boeing aircraft, pledged at least $17 billion per year in U.S. agricultural purchases for 2026, 2027, and 2028, restored market access for U.S. beef, and resumed imports of American poultry. The two leaders also chartered a U.S.-China Board of Trade for non-sensitive goods and a U.S.-China Board of Investment as a forum for investment discussions.⁵ As of June 2026 the Board of Trade is still being set up, with USTR soliciting public comment on which non-sensitive products should get tariff reductions and how often the Board should convene.⁷

The summit left real gaps. Efforts to arrange a meeting between U.S. Defense Secretary Pete Hegseth and Chinese Defense Minister Dong Jun did not succeed, nuclear arms control and AI governance were absent from the readouts, and a pending $14 billion arms sale to Taiwan remained unresolved.⁸

What the Trade Numbers Actually Show

Total U.S.-China goods trade fell to an estimated $414.7 billion in 2025. U.S. goods exports to China dropped 25.8 percent to $106.3 billion, imports from China fell 29.7 percent to $308.4 billion, and the bilateral goods deficit shrank 31.6 percent to $202.1 billion.⁹

Much of that decline is rerouting, not decoupling. The Federal Reserve Bank of New York found that as U.S. deficits with China in high-tech goods like laptops, tablets, and networking equipment fell by roughly $70 billion, the U.S. deficit with ASEAN in those same categories rose by $80 billion. Discrepancies between U.S.-reported imports from China and China-reported exports to the U.S. widened by $25 billion in 2025 alone, pointing to under-reporting or transshipment through third countries.¹⁰

Sanctions, Entity Lists, and Antitrust Probes

Beyond tariffs, China has assembled a broad kit for economic retaliation. The Unreliable Entity List, formally established in September 2020, lets MOFCOM impose trade restrictions, investment bans, personnel entry prohibitions, and fines on foreign entities judged to have harmed China’s national security or development interests.¹¹

The list was first used in February 2023 against Lockheed Martin and Raytheon Missiles & Defense. Both were banned from import or export business with China and from new investments there, their senior managers were denied visas and had work permits revoked, and each was fined at twice the value of its arms sales to Taiwan. In October 2025, China added Dedrone by Axon and TechInsights Inc., citing military-technical cooperation with Taiwan and help to foreign governments in suppressing Chinese enterprises.¹²

In December 2025, China’s Ministry of Foreign Affairs imposed countermeasures under the Anti-Foreign Sanctions Law on 20 U.S. military-related companies and 10 senior executives in response to U.S. arms sales to Taiwan. Targets included Northrop Grumman, L3Harris Maritime Services, Boeing in St. Louis, Red Cat Holdings, and Epirus, along with Anduril Industries founder Palmer Luckey and CEOs of several smaller defense firms. Measures included asset freezes within China and entry bans covering Hong Kong and Macao.¹³

Antitrust has become another retaliatory channel. In December 2024, China’s State Administration for Market Regulation opened an investigation into Nvidia over its 2020 acquisition of Israeli networking firm Mellanox; by September 2025 regulators had issued a preliminary finding that Nvidia violated anti-monopoly laws, with no final ruling yet announced.¹⁴ In February 2025, SAMR revived a dormant investigation into Google, focused on Android’s dominance and alleged harm to Chinese smartphone makers, with Intel also reportedly under consideration for a formal probe.¹⁵ In September 2025, China launched two additional semiconductor-sector probes: an anti-dumping investigation into certain U.S.-sourced chips and an anti-discrimination review of American restrictions on China’s chip industry.

A newer round came on June 22, 2026, after the Pentagon’s June 8 update to its Section 1260H list of Chinese military companies expanded that list to 188 entities and, for the first time, added major Chinese technology firms including Alibaba, Baidu, BYD, NIO, Tencent, CATL, and SMIC. Several targeted companies rejected the designation and said they would pursue legal or administrative challenges.¹⁶ MOFCOM placed 10 U.S. entities on its export control list, banning shipments of China-origin dual-use items to firms including MP Materials, USA Rare Earth, Aveox, Ball Aerospace, Oshkosh Defense, and Teal Drones. Separately, China’s Finance Ministry excluded 46 U.S. companies, mostly defense contractors, from Chinese government procurement.¹⁷ Analysts called the practical impact largely symbolic, since most targets are defense firms that do not typically do business in China.¹⁸

Rare Earths as Leverage

China controls an estimated 80 to 90 percent of global mining or refining capacity for rare earth elements, which feed defense platforms including F-35 fighter jets, nuclear submarines, Tomahawk missiles, and radar systems. Although the Kuala Lumpur Joint Arrangement included a commitment to roll back coercive export controls, Beijing has continued to use restrictions selectively. The June 2026 actions against MP Materials and USA Rare Earth barred Chinese firms from supplying them with dual-use rare earth products, and extended the ban to third countries supplying those U.S. firms with any China-origin dual-use items. Both companies said they had already largely cut off dependence on Chinese supplies. MP Materials received $400 million in Pentagon funding, and USA Rare Earth announced a $2.8 billion deal in April 2026 to acquire a mine in Brazil.¹⁹

Beijing has moved beyond rare earths to include products used in batteries, solar power, and advanced manufacturing, keeping leverage through its licensing regime even during diplomatic thaws. G-7 leaders agreed in June 2026 to reduce dependence on any single non-G-7 supplier for rare earths and permanent magnets to below 60 percent by 2030.¹⁹

The Semiconductor Self-Sufficiency Push

U.S. export controls on advanced semiconductors, first imposed under the Biden administration in October 2022 and tightened repeatedly through 2025, have driven a national campaign in China to close the gap. In April 2025, Xi Jinping used a Politburo study session to mandate a nationwide mobilization for an “independent and controllable” AI ecosystem. The government’s semiconductor investment “Big Fund” launched a third phase in 2024 worth 340 billion yuan, or roughly $47 billion, on top of two earlier phases of comparable size.²⁰

Results are mixed but substantive. Huawei, the firm most directly targeted, has emerged as China’s domestic chip champion, controlling roughly 70 percent of SMIC’s advanced chip-manufacturing capacity. Its Pura 70 smartphone uses 33 China-sourced components, and the company is transitioning its PC hardware away from Intel and Qualcomm processors.²¹ In January 2025, AI lab DeepSeek released its R1 open-source model, which matched leading American models while reportedly using fewer computing resources. Alibaba unveiled a CPU based on the open-source RISC-V architecture in February 2025 to sidestep U.S. intellectual-property restrictions.²⁰

Huawei’s rotating chairman Xu Zhijun said the company is “thankful” for U.S. pressure, claiming it “supercharged” China’s semiconductor industry.²² In May 2026, Huawei unveiled what it calls “LogicFolding,” a chip design architecture the company says can bypass the absence of extreme ultraviolet lithography by folding and stacking logic circuits, claiming a 55 percent increase in transistor density and projecting chips with 1.4-nanometer-equivalent density by 2031 using existing lithography. SMIC shares rose 7.6 percent on the announcement, though skeptics cited China’s history of overstated semiconductor claims and the practical limits of manufacturing without EUV.²³

Huawei founder Ren Zhengfei reportedly told Xi Jinping in February 2025 that he is leading a network of more than 2,000 Chinese companies working toward at least 70 percent self-sufficiency across the semiconductor value chain by 2028.²⁴ Even so, Nvidia remains dominant in the Chinese market, selling over one million H20 chips there in 2024 under export restrictions.²⁰ Investigations in mid-2024 identified eight distinct chip-smuggling networks with individual transaction values above $100 million.

Military Pressure Around Taiwan and the Region

China’s military response to U.S. actions, especially arms sales to Taiwan, has been the most physically visible piece of the relationship. At the May 2026 summit, Xi warned Trump that Taiwan is the “most important outstanding issue” between the two nations and could become a “very dangerous situation” if mishandled.²⁵

In April 2025, the PLA conducted “Strait Thunder-2025A,” a two-day exercise involving 135 aircraft sorties, 38 naval vessels, and live-fire rocket drills from the mainland, including 16 simulated strikes against targets resembling energy infrastructure in Kaohsiung.²⁶ The largest exercises came in late December 2025, 11 days after the U.S. initiated an $11.1 billion arms package for Taiwan. In “Justice Mission 2025,” the PLA Eastern Theatre Command conducted 10 hours of live-fire drills, deployed 71 aircraft and 24 naval and coast guard vessels, fired 27 rockets into waters north and south of Taiwan, simulated a blockade of Keelung and Kaohsiung, and made the first deployment of a Type 075 amphibious assault ship.²⁷

Activity extends well beyond the Taiwan Strait. In 2025, the PLA conducted 163 recorded operations in the South China Sea, including 55 live-fire exercises, and more than doubled its Coast Guard presence at Scarborough Shoal compared to 2024. Near Japan’s Senkaku Islands, a Chinese Coast Guard helicopter entered Japanese territorial airspace for the first time in May 2025, and in December, jets from the carrier Liaoning locked radars on Japanese fighters near Okinawa. Chinese and Russian bombers conducted a joint patrol toward Tokyo in December 2025, the first joint flight in that direction. Early in 2025 a three-ship task group also conducted unannounced live-fire drills in the Tasman Sea and circumnavigated Australia.²⁶ Through April 2026, the pattern continued with 169 aerial incursions into Taiwan’s air defense identification zone, repeated Coast Guard intrusions near Kinmen and Pratas islands, and naval deployments east of the Luzon Strait timed to the multinational Balikatan 2026 exercises.²⁸

Iran and the Middle East

U.S.-led military operations against Iran that began on February 28, 2026, opened a second front for Chinese diplomacy. Beijing condemned the operations while avoiding direct entanglement. The Foreign Ministry called the killing of Iranian Supreme Leader Ali Khamenei a “grave violation of Iran’s sovereignty” and a return to the “law of the jungle,” and joined Russia in requesting an emergency UN Security Council session.²⁹³⁰

On March 4, 2026, China announced it would send a special envoy to the Middle East and called for the protection of shipping through the Strait of Hormuz. China and Pakistan later presented a five-point peace plan aimed at securing a ceasefire and reopening the strait, and Foreign Minister Wang Yi met Pakistan’s deputy prime minister in Beijing on March 31, 2026, to coordinate the effort.³¹ Analysts described China’s role as “facilitation rather than enforcement,” and Chinese analysts themselves pushed back against expectations that Beijing would act as a regional security guarantor.³²

The interests behind the position are direct. China is the world’s largest crude oil importer and buys roughly 80 percent of Iran’s oil exports, giving it a stake in Gulf shipping stability.³¹ The government evacuated more than 3,000 Chinese citizens from Iran by early March and confirmed at least one Chinese national was killed in Tehran.²⁹ At the May 2026 summit, Trump and Xi agreed that Iran cannot possess a nuclear weapon, that the Strait of Hormuz should be reopened, and that no entity should be allowed to charge tolls for passage.⁵

Belt and Road, BRICS, and De-Dollarization

The wider Chinese response is to reshape the environment around the United States rather than confront it head-on. The Belt and Road Initiative remains the centerpiece. By 2023, China had engaged 151 countries in BRI agreements covering infrastructure, energy, and digital technology.³³ The initiative now includes a Digital Silk Road exporting Chinese technology standards, AI, and surveillance infrastructure, and a Health Silk Road promoting Beijing’s vision for global health governance.³⁴

On the financial side, de-dollarization is progressing but slowly. Chinese firms now settle about 30 percent of their trade in renminbi, but the currency accounts for fewer than 5 percent of global transactions. China’s Cross-Border Interbank Payment System, an alternative to SWIFT, reported 1,791 participant banks from 126 countries at the end of 2025, with daily turnover of about $105 billion, though most connected banks are of Chinese origin. The digital yuan has 225 million individual wallets and has facilitated over 3.3 billion transactions domestically, but international platforms remain small: the mBridge clearing system has only four participants and processes roughly four payments per day.³⁵

China and Russia are expected to press their de-dollarization agenda at the September 2026 BRICS summit in New Delhi. Working against them is the growth of dollar-pegged stablecoins, a $317 billion market that is 99 percent dollar-denominated and holds two-thirds of its balances in emerging markets, exactly the countries Beijing is trying to bring into its financial orbit.³⁵

The WTO Route Is Effectively Blocked

China has pursued multiple World Trade Organization complaints against U.S. tariff actions, but the practical significance is limited given the WTO’s paralyzed appellate body. Case DS543, filed in April 2018, challenged Section 301 tariffs. A WTO panel ruled in September 2020 that the U.S. duties were inconsistent with GATT obligations and rejected the U.S. defense that they were “necessary to protect public morals.” The United States appealed on October 26, 2020, effectively shelving the ruling because the appellate body cannot function without judges, a vacancy the U.S. has declined to fill.³⁶ China filed new WTO complaints in February 2025 against the initial 10 percent tariff increase, and again in April 2025 against escalations to 50 percent, with MOFCOM calling the measures a violation of WTO rules and “unilateral bullying.”³⁷ Former WTO officials have said there is realistically “no possibility of succeeding” in the current enforcement environment.³⁸

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