Why Trump’s Sanctions on Russia Might Matter More for China

President Donald Trump aimed a fresh round of non-tariff sanctions toward Russia late Wednesday. They will have serious side effects. (Getty Images)

Key Points

• The U.S. imposed sanctions on Russian oil producers Rosneft and Lukoil, potentially affecting China, which relies on Russia for one-fifth of its crude imports.
• U.S. officials are meeting with their Chinese counterparts. Treasury Secretary Scott Bessent says that “everything is on the table” in trade talks.
• China has devalued its yuan against the euro to offset U.S. tariffs, but analysts say it isn’t immune to further trade-war escalation.

Wayne Gretzky, perhaps the greatest ice hockey player of all time, says much of his success was based on advice from his father, who told him to “skate to where the puck is going, not where it’s been.”

Investors looking for insight on U.S. trade talks with China would be well served to focus on where the negotiations are headed, as opposed to how markets might be interpreting them right now.

President Donald Trump’s decision to impose sanctions on two Russian oil producers, while floating the idea of curbs on U.S. software exports and tariffs that would amount to an embargo on trade, suggests the puck is heading somewhere he isn’t happy about. We could be seeing an effort to change its direction.

The blacklisting of the Russian oil companies Rosneft and Lukoil, which account for around half of the country’s exports, is ostensibly tied to the president’s efforts to broker a peace agreement in Russia’s war with Ukraine.

The larger impact, however, is likely to be felt in China, which relies on Russia for around a fifth of its overall crude imports. “The key question is whether these sanctions are enough to deter buyers of Russian oil, specifically China and India,” said Warren Patterson, head of commodities strategy at ING.

Choking off supplies as Beijing looks to meet its target for economic growth over the final months of the year could prove crucial in establishing U.S. leverage in the on-again/off-again negotiations between Washington and Beijing, although it could also amount to a provocation that would hinder efforts to reduce tensions on trade.

The U.S. needs leverage because China controls most of the world’s production of rare-earth minerals, which are crucial to the U.S. tech industry. While President Donald Trump is moving quickly to secure access to rare earths—he signed on to an $8.5 billion partnership with Australia this week, and the government is investing in rare-earths mining—those efforts won’t bear fruit quickly.

And the clock is ticking toward the end of the month, when Trump may meet with Chinese President Xi Jinping at the APEC summit in South Korea. Treasury Secretary Scott Bessent, along with U.S. Trade Representative Jamieson Greer, is slated to meet with China Vice Premier Le Lifeng in Malaysia on Friday.

Late Wednesday, Bessent told reporters in Washington that “everything is on the table” in the current round of talks, but insisted that broader export controls on things like software or aircraft engines “will likely be in coordination with our G-7 allies.”

That suggestion is another hint that talks aren’t moving in the direction that Trump would like, given his long dislike for multilateral negotiations and his insistence that his relationship with Xi would be the key catalyst in reaching an agreement.

Seema Shah, chief global strategist at Principal Asset Management, thinks the path toward any U.S.-China deal will be long and bumpy. Trade friction is likely to become part of the economic landscape, she argues.

“Further escalation remains possible, and even post-resolution, tariffs and non-tariff measures (such as export controls and investment restrictions) are poised to remain a key geopolitical lever, especially as the U.S. and China continue their strategic rivalry in AI and technology,” she said.

China, meanwhile, has been subtly reworking its global export engine through a sharp devaluation of its yuan against the euro, which has helped it offset the impact of tariffs on U.S.-bound goods.

“Global trade flows are proving highly adaptable to U.S. tariffs, bending and twisting to minimize their impact, both on U.S. inflation and Chinese exports,” said Julian Evans-Pritchard, head of China economics at Capital Economics.

But he warned that investors would be “unwise to assume that China has developed lasting immunity” to levies from Washington, saying a trade- war escalation could have a deeper and broader effect on China’s economy than the U.S.’s existing tariffs and export restrictions.

The same might be said for the U.S., where investments in artificial intelligence have “kept the economy out of a recession,” according to James Egelhof, chief U.S. economist at BNP Paribas. Beijing restricting access to key Chinese markets, or closing the taps on rare-earth elements, would reverse that rather swiftly.

The trade-war puck is heading toward an unfamiliar corner of the global arena, and one in which China has developed a surprising edge. Trump, who earlier this week suggested that tariffs were “more powerful” than China’s rare-earth dominance, might be skating in the wrong direction.

Write to Martin Baccardax at martin.baccardax@barrons.com