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Trump and Xi Are Playing Chicken On Trade. What Will Get Them to Blink.

Oct 13, 2025 15:38:00 -0400 by Reshma Kapadia | #Trade

Trade relations between the U.S. and China have gone through escalation and de-escalation before. (AFP / Getty Images)

Key Points

U.S. and Chinese officials are already trying to dial back the trade war rhetoric. The question now is what the off-ramp looks like—and how long it takes to reach it.

President Donald Trump on Monday, during a trip on Air Force One, responded to a question about whether his threat to slap 100% tariffs on goods from China were still planned: “Yeah, right now it is,” he said. “Let’s see what happens. For me, you know what Nov. 1 is? An eternity.”

Just three days ago, Trump made the threat, along with restrictions on critical software, after Beijing unveiled sweeping export controls on its critical minerals. Trump said the new tariffs, which will be added on top of existing ones, would kick in on Nov. 1.

But Trump’s comments on Monday fueled strategists’ views that the geopolitical rivals can’t stomach the fallout from three-digit tariffs and chokeholds on critical minerals for the U.S. and critical technology for China. The result: Investors are betting on another fragile detente, helping the market recover from losses on Friday after Trump’s threats and harsher-than- usual tone against China.

The S&P 500 rose 1.5% to 6651 Monday and the iShares MSCI China exchange-traded fund rose 3.1% to $63.28 as the rhetoric cooled somewhat over the weekend.

On Sunday, Trump posted on his social media account: “Don’t worry about China, it will all be fine!” And over the weekend, Beijing explained its move on export controls for rare earths, noting it wasn’t an escalation but in response to the U.S. restricting sales with subsidiaries of companies already on a U.S. entity list. China’s Ministry of Commerce stressed: “We don’t want a tariff war, but we aren’t afraid of one.”

Most strategists expect the cycle of escalation to detente seen earlier in the year to be repeated in coming weeks. But “this game of chicken” could irritate markets until tariff deadlines hit in early November, says Thierry Wizman, global FX and rates strategist at Macquarie, in a note to clients.

It also has implications for the Federal Reserve’s next move on interest rates when it meets at the end of October.

“If the prospect of a renewal of high tariffs still exists on Oct. 29, it won’t leave the FOMC at ease, especially with inflation in the U.S. still ‘sticky’. If anything, the prospect of higher tariffs may make the Fed more reluctant to cut, or more inclined to deliver another ‘hawkish’ cut,” he cautions.

The calendar offers opportunities for an off-ramp that could still bring Trump and Chinese leader Xi Jinping together for a meeting as they had planned on the sidelines of the Asia-Pacific Economic Cooperation summit at the end of the month in Korea.

On Monday, Treasury Secretary Scott Bessent said in a Fox Business interview he was optimistic the two sides would de-escalate and thinks China is open to discussion. “If they’re not, we have substantial levers on our side that we can pull, the equivalent and probably even more aggressive than they have pulled on the rare earths,” he said.

While China has found a way to stomach the existing tariffs of about 55% on its goods and its exports have risen during this period by selling more to the rest of the world even as it sells less to the U.S., the economy is still sputtering. Similarly, in the U.S. tariffs are already causing a good deal of pain for farmers as China has boycotted U.S. soybeans, and the economy is showing some signs of strain, with inflation persisting.

Trump’s 100% tariff threat goes into effect right after the APEC summit, about a week before China’s export controls start taking effect, and not long before the Nov. 10 deadline when the pause on 145% tariffs on China expires.

One of the first opportunities to de-escalate could come this week as Chinese officials come to Washington, D.C., for the International Monetary Fund’s and World Bank’s annual meetings.

If the two sides meet and it goes well, that would increase the chances that Trump will still meet with Xi on the sidelines of the (APEC) leaders’ summit later this month,” write Beacon Policy Advisors analysts in a note to clients. “The U.S. will likely be hesitant to roll back these [entity list] rules, but it may become necessary as part of the effort to de-escalate,” they write.

Analysts had described China’s new rare earth export controls as a move to gain leverage ahead of a Trump-Xi summit. Now, analysts see as the primary aim of a meeting, if it happens, will be to reinforce guardrails in the relationship.

But work needs to happen before a Xi-Trump meetup in Korea, with the trade teams likely needing to meet and create new agreements around rare earths, U.S. export controls, and other areas of contention including the sale of TikTok’s U.S. operations and tariffs-related to fentanyl, says Paul Triolo, partner at c onsultancy DGA-Albright Stonebridge Group.

While Triolo doesn’t expect Beijing to roll back its rare earth controls, it’s possible they can assure the U.S. negotiators that licenses will be issued in a timely manner and Beijing will go easy on implementing some of the extraterritorial provisions aimed at U.S. access to non-U. S. companies’ goods using its rare earths or technologies. In return, Triolo says in an email that the U.S. will likely need to roll back its recent move to restrict subsidiaries of companies on its entities list.

“It remains unclear if the U.S. will agree to reduce tariffs to the point that Beijing will be willing to order though this could be a precondition for the leaders’ meeting,” Triolo says, noting that both need something positive to give a meeting of the two leaders a more constructive tone and spin.

For investors, this period of escalation and de-escalation is likely the norm given the approximate 70% control China has over the global supply of rare earths and dominance on processing and refining it and the chokehold the U.S. can create on China’s access to advanced technology, including semiconductor equipment.

Write to Reshma Kapadia at reshma.kapadia@barrons.com