US-China Trade War: Tariffs, Trade Relationship and Strategy

Trade Tensions but Full-Decoupling Unlikely

The long-running U.S.-China trade war escalated under Trump I and continued under Biden. In Trump II, it has continued. However, a full economic decoupling still seems unlikely despite major tensions. The trade war includes tariffs, export controls, rare earth restrictions, semiconductor competition, and supply-chain dependence as the main pressure points.

• Trade tensions remain high: Trump’s tariffs on China largely stayed in place, and China retaliated with its own tariffs and rare-earth export controls.
• No full breakthrough: The May Trump-Xi summit extended a fragile truce but did not produce a comprehensive trade deal only a tempory truce.
• Economic interdependence persists: The U.S. and China are still deeply linked through trade, supply chains, investment, and global markets.
• Technology is central: AI, semiconductors, TikTok, and IP theft are major security and economic flashpoints.
• Critical minerals matter: China’s dominance in rare earths gives it leverage over global manufacturing and high-tech industries.

 This interdependence makes the relationship both more durable and more dangerous. Neither side can easily sever ties without inflicting serious damage on its own economy, yet both continue to treat the other as a strategic rival. That tension is most visible in technology.

Washington has tightened restrictions on the export of advanced chips and the tools needed to make them, arguing that the measures are necessary to protect national security and preserve America’s edge in artificial intelligence and defense systems. Beijing, meanwhile, has poured state resources into building a more self-reliant semiconductor industry, aiming to reduce its dependence on foreign suppliers. The result is not a clean break, but a slow and costly decoupling in selected sectors.

At the same time, China has been using its own leverage more aggressively. By limiting exports of critical minerals and rare earth elements, it has signalled that it can impose costs on Western manufacturers if the pressure campaign continues. These materials are essential for everything from smartphones to electric vehicles to missile guidance systems, giving Beijing an asymmetric advantage in a competition that extends far beyond tariffs.

Still, a total economic divorce remains improbable. American companies remain invested in the Chinese market, Chinese factories remain embedded in global supply chains, and consumers in both countries rely on the flow of goods that connects them. What is emerging instead is a more fragmented global economy: one in which trade continues, but under tighter controls, deeper suspicion, and a growing impulse to build parallel systems.

The future of the U.S.-China relationship will likely be defined less by dramatic breakthroughs than by managed confrontation. Each side will keep trying to gain bargaining leverage without triggering an outright rupture. That may prevent the worst-case scenario, but it also means the rivalry is likely to remain a central feature of the global economy for years to come.

China Denies Overcapacity Claims: New Spin Strategy

China’s commerce ministry issued a detailed rebuttal to claims that its industrial overcapacity is distorting global trade, arguing that weak domestic demand, subsidies, and trade surpluses are being misunderstood. The statement comes as the U.S. and EU consider or impose more trade curbs on Chinese imports, especially in sectors like green energy and textiles.

• China says “overcapacity” is being defined too broadly and that its industrial policies support innovation and market correction, not distortion.
• The U.S. is investigating China and other partners for excess industrial capacity, which could lead to new tariffs.
• The EU is also pressuring China over trade imbalances and is discussing measures to protect domestic industries.
• Experts say Beijing’s rebuttal is unlikely to change near-term U.S. or EU policy, as concerns about Chinese subsidies and export-driven overcapacity remain.

China’s response reflects a broader push to defend its export model at a time when Western governments are growing more cautious about dependence on Chinese manufacturing. Officials in Beijing argue that many of the sectors now drawing scrutiny — including electric vehicles, batteries, solar panels and steel — are not simply the result of government overreach, but of years of investment, scale and efficiency gains.

Still, critics contend that state support, cheap credit and industrial planning have encouraged production to outpace domestic demand, pushing Chinese firms to sell excess goods abroad at lower prices. That has intensified pressure on manufacturers in the U.S. and Europe, where policymakers say they are trying to avoid a repeat of earlier trade shocks caused by subsidized imports.

The dispute is likely to deepen as China continues to expand its high-tech manufacturing base while major economies move to shield strategic industries. In the short term, that could mean more investigations, higher tariffs and a further hardening of trade relations.

Chinese Trade Distortions: German Example

Germany’s trade deficit with China widened in the first half of 2026 as German exports to China fell sharply while imports from China continued to rise. China remains Germany’s top trading partner, but it has dropped to only the ninth-largest export market for German goods.

• German exports to China fell more than 12% year on year to just under €37 billion from January to June.
• German imports from China rose 9% to €91.8 billion, pushing the trade deficit to about €55 billion.
• China was Germany’s second-largest export market in 2021, but has since slipped to ninth.
• Weak German demand, Chinese focus on domestic supply chains, and growing Chinese competition are hurting German manufacturing.
• The U.S. remains Germany’s largest foreign market, though exports there also declined.

This shift has intensified pressure on Germany’s export-driven economy, especially in sectors such as automobiles, machinery, and chemicals. Business leaders warn that unless German firms adapt to China’s changing market conditions, they risk losing further ground to local competitors and state-backed Chinese manufacturers.

At the same time, policymakers in Berlin are debating how to reduce dependence on China without damaging trade ties. Some advocate for a more cautious “de-risking” strategy, while others argue that German industry still needs access to the Chinese market to remain globally competitive.

The widening gap underscores a broader challenge for Germany: balancing economic openness with strategic vulnerability in an increasingly fragmented global trade environment.