Trump’s dealmaking diplomacy grows fragile as China fires back

President Donald Trump’s preference for one-on-one deals with allies and rivals has been a hallmark of his self-proclaimed deal-making magic, but as the China trade truce appears headed for collapse, the fragility of such an approach has been revealed.

China’s Ministry of Commerce announced new export controls on rare earth elements and other critical materials important for U.S. defense and technology applications late Wednesday night New York time. The news shocked these specific groups, but did not face similar reactions in broader markets.

That is, until Trump threatened to “massively increase” tariffs on goods from China in a nearly 500-word Truth Social post published in New York around 11 a.m. Friday. This move sent major US indexes into free fall throughout the day. Hours later, Trump said he would impose additional 100% tariffs on China starting Nov. 1, threatening to cut rates to near the level that both sides warned earlier this year would represent an effective decoupling. It also announced plans for export controls on critical software.
The sudden and unexpected back-and-forth between the world’s two largest economies comes just weeks before a consequential meeting between Trump and Chinese President Xi Jinping in South Korea, where the two sides plan to hammer out the details of a broad-based trade deal. The main lever of negotiations is export controls; specifically the current US export controls on semiconductors and AI chips that China needs, and China’s export controls on critical minerals and magnets that the US needs.

“The Chinese saw their pushback and pressure on export controls earlier this year, so it’s not surprising that they’re trying to turn the tables in their favor by participating in these negotiations,” said Jon Hillman, senior fellow for geoeconomics at the Council on Foreign Relations. “Any deal will always be at risk if China decides to use this trump card again.”

And so they did. Trump negotiated a 90-day ceasefire with China in May, postponing the imposition of new tariffs or export controls threatened during his “Liberation Day” announcement in April. This move calmed global markets, which were shaken by the rapid increase in tariffs and retaliatory tariffs that caused the US to briefly increase duties on Chinese goods to 145%. China has similarly agreed to lift its export ban on critical minerals and magnets. But as the months went by, Trump’s allies in the farming states began to complain that China had essentially halted imports of U.S. soybeans; it was a move the president described as a negotiating tactic. The White House has announced that it is planning an aid package for farmers, but has not yet disclosed the details.

Still, it was a relatively peaceful ceasefire period. But all that came to an end this week when China announced it would increase export controls. Now, just like six months ago, both economies are once again on the brink of a trade war.

This is the uncomfortable reality of many of Trump’s bilateral trade negotiations. While U.S. and global markets react positively to big announcements that the president has agreed to make deals or delays with China, Russia’s Vladimir Putin, India and others, they are often equally shocked when Trump or his trading partner backs away from promises that throw deals into new uncertainty.

“The United States now faces a more assertive, well-prepared, less US-dependent and self-confident Beijing than during the Trump 1.0 era,” Wendy Cutler, senior vice president of the Asia Society Policy Institute, wrote in a post on LinkedIn on Saturday, during the so-called “phase one” period when the agreement was signed, in which many concessions were made by Beijing. “The past 24 hours leave no doubt that those days are behind us.”

US stocks suffered their worst sell-off in six months on Friday. Wall Street’s main fear gauge rose above a level not seen since April. Nvidia Corp., the world’s largest publicly traded company and the central actor caught in the middle of the two countries’ export control negotiations. It lost approximately 5% of its value. All this happened after a single post from the president on social media.

“We’ve actually been pretty risk-averse on the equity side because of the view that there’s a lot of uncertainty and risk out there,” said Dan White, head of research at Blue Creek Capital. “Market sentiment towards us was showing a rosy scenario, but the reality was there was a lot of risk and uncertainty out there, so today was a wake-up call for a lot of people.”

The United States can more easily conduct bilateral negotiations with smaller countries in weaker positions, but collective responses are more effective when it comes to larger countries like China, said Cutler, who spent decades negotiating deals for the government in the U.S. Trade Representative’s office.

The president floated the idea that he might not meet Xi in South Korea due to tensions, but there is a belief among experts that China’s statement and Trump’s response were part of negotiations before the actual meeting. But the concern of many, including hawks and former Trump administration officials, is that China’s hand is stronger than ever.

“There is a recognition among the Chinese media in China that China is holding and using levers to significantly weaken our manufacturing sector, including semiconductors, artificial intelligence and defense materials,” said Nazak Nikakhtar, a former Commerce Department official during Trump’s first term and current partner at Wiley Rein, which represents clients in those sectors.

“But if you pursue handshake agreements, it’s classic game theory: The other side will evaluate your reaction if they back out. And if they think you’re a coward, they won’t stick to the agreement.”