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U.S., China Try to Defuse Tensions. Don’t Bet On Lower Tariffs or Risks.

Oct 21, 2025 15:35:00 -0400 by Reshma Kapadia | #Trade

Officials are working behind the scenes to keep alive a meeting between President Donald Trump and China’s leader Xi Jinping. (China OUT / AFP / Getty Images)

Key Points

Even as the U.S. and China exchange more tit-for-tat, the two sides are working to de-escalate tensions enough to keep alive a meeting between President Donald Trump and Chinese leader Xi Jinping in South Korea at month’s end.

Even if that meeting takes place, it’s unlikely to meaningfully reduce tariffs or export controls—the issues that are central to investors’ concerns in the relationship. Indeed, a recent survey of JPMorgan clients found that 44% expected the status quo on tariffs and 34% expected them to head higher.

On Monday, U.S. and Chinese officials each blamed the other of economic coercion, with U.S. Trade Representative Jamieson Greer calling out China’s efforts to discourage foreign companies from investing in America’s shipbuilding and other critical industries and vowing to respond appropriately while Beijing complained about the U.S. not granting visas to Central American nationals who were working with the Chinese.

The exchanges came after Trump threatened 100% tariffs on China in retaliation for Beijing unveiling an export control regime that could limit U.S. and other countries’ access to much of its critical minerals supply chain, reinforcing the fragility of any truce in the intensifying rivalry.

“We are hearing the behind the scene discussions have been more productive,” says Daniel Kritenbrink, a partner at consultancy the Asia Group who previously held senior State Department roles in Asia. Of note, he says, was that both sides quickly tried to de-escalate after last week’s heated rhetoric. “The sense from both sides is a desire, at a bare minimum, to keep things from spinning out of control.”

Analysts are looking to Treasury Secretary Scott Bessent’s planned meeting with Vice Premier He Lifeng in Malaysia this week for assurances that a leader-level meeting is still on track and to keep tariffs from hitting triple-digit levels as an agreement to delay such an increase expires Nov. 10.

Trump said late Monday he expects his planned meeting with Xi will end up with “a very strong deal” with both leaders happy.

But while efforts to de-escalate are good news for investors, geopolitical analysts are tempering their expectations for the South Korea meeting, which they see as largely about restabilizing the relationship.

“Both sides want a deal but neither is striving for a big deal by the expected meetings of the leaders in November. The best we can hope for is a trade truce where the president walks back from his 100% tariff threat and China provides more clarification that U.S. companies are going to get licenses for rare earths minerals and China clarifies that the regulation they adopted isn’t designed to cut off supply to U.S. companies,” says Myron Brilliant, senior counselor at advisory DGA-Albright Stonebridge Group who formerly was head of international affairs at the U.S. Chamber of Commerce.

Unclear though is whether China will grant licenses to U.S. defense companies and if the U.S. will hasten licenses filed by U.S. companies selling chips to China that are subject to export controls. With both sides dug in and thinking they have the upper hand, it’s unlikely either side will meaningfully roll back export restrictions for now, analysts say.

If the relationship stays on track and Trump follows-through with his intention to visit Beijing next year, analysts see the prospects of a bigger deal that could include China resuming soybean purchases it stopped buying in retaliation for the trade war.

Beijing may also be willing to buy U.S. airplanes but these purchases would likely be conditional on getting some of what it wants—a reduction in fentanyl-oriented tariffs, a relaxation of semiconductor export controls, and to push the U.S. to change from its strategic ambiguity about Taiwan to say it “opposes” the self-ruled democracy’s independence.

If Xi and Trump have a friendly meeting that hints at a pathway to cooperation, Gavekal’s Louis Gave said in a note to clients Tuesday that it could boost the renminbi, oil prices, and Chinese stocks. Any relaxation of the semiconductor restrictions Beijing has been seeking could fuel another rally in semiconductor-equipment manufacturers.

But even then, the rare earths situation could stay unresolved, “hanging like a sword of Damocles over many companies’ heads,” Gave says.

The White House on Monday announced a deal with Australia for both governments to invest $3 billion together in projects in the next six months to help diversify critical mineral sourcing away from China, which controls 70% of global rare-earths mining and even more of the processing and refining. But analysts say it would take several years for the U.S. to reduce its dependence on this key input for everything from the AI ecosystem to military equipment.

Another destabilizer: Russia’s war in Ukraine. Initially, the U.S. levied a penalty tariff of 25% on India for its purchases of Russian oil but didn’t penalize China even though it’s the biggest buyer of Russian oil. In this latest escalation, Trump noted China’s oil purchases though he refrained from imposing tariffs.

If the threat of a tariff penalty looms if Trump looks to put further pressure on Russia, BCA Research geopolitical strategist Matt Gertken says there is little reason for Xi to come to a trade agreement.

For companies and investors, the volatility is going to persist. “We are moving forward on a slow economic decoupling so this is more about each side managing the downward risk of a significant escalation and preventing the relationship from falling off a cliff,” Brilliant says.

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