China Responds to Trump’s Tariffs With Caution

Welcome to Foreign Policy’s China Brief.

The highlights this week: Ten percent tariffs on Chinese goods bound for the United States come into effect, the Trump administration’s early moves create national security risks that China could take advantage of, and questions are still swirling about Chinese firm DeepSeek’s new AI model.

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How Will China Respond to Trump’s Tariffs?

After days of uncertainty, China has ended up the sole target (so far) of U.S. President Donald Trump’s long-promised tariffs, as Mexico and Canada bought themselves a monthlong delay for 25 percent tariffs at the last minute. New 10 percent tariffs on all Chinese goods came into effect on Tuesday—in many cases adding to existing tariffs from Trump’s first term.

However, a less noticed provision of Trump’s executive orders might end up doing the most damage to Chinese business in the long run: The elimination of a key customs exemption could hamstring e-commerce firms in the U.S. market.

Amid China’s general economic slowdown and severe manufacturing deflation, the country’s room for maneuvering is more limited than during Trump’s first term, despite the size of its economy. As a result, Beijing’s response to Trump’s new tariffs is cautious: It targets specific U.S. sectors, such as fossil fuels, with 15 percent tariffs that will not take effect for five days.

Crucially, that creates some breathing room for discussions with Trump like those that won relief for Mexico and Canada on Monday—and potentially for mutual de-escalation. China also imposed limited export controls on some critical minerals, falling short of a full ban, and announced that it would open an antitrust investigation against Google.

This response is still relatively limited. Google, for instance, doesn’t operate in mainland China anymore; it pulled out in 2010 under Chinese government pressure, and its services are nearly universally blocked. The export controls on five critical minerals are more significant but still focus on the defense and clean energy sectors rather than everyday consumer products.

Where else will China squeeze if it doesn’t see any movement from the U.S. side? The juiciest potential target is Tesla’s operations in China, but that is unlikely. Chinese leaders see Elon Musk—who has called himself “kind of pro-China”—as an important channel to the White House. China’s vice president met with Musk ahead of Trump’s inauguration.

Despite Western efforts to build independent supply chains, China dominates in both manufacturing and the processing of critical minerals. It already flexed its muscles with export limits on rare earths last year. Further efforts risk the same problems that the United States has encountered in trying to use chip sanctions against China: spurring the other side to find new suppliers and build its own production lines.

The leadership in Beijing generally lacks a nuanced understanding of U.S. politics, which makes China unlikely to pursue the kind of Republican-targeted countermeasures that Canada was contemplating, for example.

Chinese officials understand power and personal connections, however. One overlooked potential target is the Macao casino sector, where major U.S. projects are under development by firms linked to Trump. Blocking those new casinos would be ideologically acceptable—Chinese President Xi Jinping has targeted gambling and money laundering in Macao—and send a message.

Trump says that the motivation for his tariffs is in part to halt the fentanyl trade. But what would Chinese concessions on fentanyl look like? To secure their tariff delays, Canada seems to have rebranded steps that it already agreed to on border security, while Mexico is either sending fresh troops to the U.S. southern border or just keeping existing ones there.

Likewise, Chinese leaders may be able to satisfy Trump’s desire for a win by simply announcing further cooperation or claiming that they will impose tougher export controls, without actually taking the costly industrial steps to reduce the production of precursor chemicals for fentanyl.

Even if China is able to push off or stop Trump’s tariffs, an additional clause in the executive orders could undermine commerce: the suspension of the de minimis rule for Chinese imports, which exempts shipments from China to the United States worth less than $800 from customs duties. That has created big opportunities for Chinese e-commerce firms such as Temu and Shein in the United States.

Without the de minimis rule in place, millions of U.S. customers will have to pay extra tariffs—and in many cases simply won’t do so. If the rule stays in place but the tariffs are canceled, it will still create a processing logjam as already-overworked staff are suddenly forced to check a far greater load of packages.

Whatever happens, Trump’s moves are also fuel for Xi’s inclinations toward autarky and will only encourage those in the Republican Party who want complete decoupling from China.

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What We’re Following 

U.S. security crisis. Trump’s team is blowing holes in U.S. national security that will make for easy pickings for China. The Department of Homeland Security has abolished key advisory boards on cybersecurity—that were working on the Salt Typhoon hack, among other things—in part because Trump is hostile toward anti-disinformation efforts online, which these groups have also worked on.

Meanwhile, the FBI faces a morale crisis and ideological purge, risking destruction of expertise that has built up over decades. Some agents who usually work on Chinese influence were pulled into the Jan. 6 investigation and could now be dismissed as the Trump administration guts the agency from within.

Funding freezes are undermining the U.S. ability to monitor Chinese global influence. Around 60 State Department contractors working on democracy promotion have been fired, but the crisis goes beyond that. Numerous projects such as the Stimson Center’s Mekong Infrastructure Tracker, which monitors the environmental and social impact of China’s water control policies, are seeing grants frozen.

Finally, at departments including the U.S. Treasury, an inexperienced and largely unvetted team of young engineers from Musk’s Department of Government Efficiency is being granted full access to extremely sensitive government data.

Goodbye, friendshoring. Though Canada and Mexico have avoided U.S. tariffs for now, Trump’s willingness to go after some of the United States’ oldest and closest allies shows that so-called friendshoring—the process of bringing supply chains controlled by opposing states (chiefly China) back to friendly powers—is effectively a dead letter.

Friendshoring was largely a Biden-era project, but in some ways it aligned with Trump’s first-term foreign-policy goals. But today, Trump wants that manufacturing to return directly to the United States. There is no reason for a company to bring manufacturing to Canada or Mexico if it will be hit with larger tariffs than if business remains in China.

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FP’s Most Read This Week

• The Domino Theory Is Coming for Putin by Casey Michel
• How Trump’s Tariffs Are Changing Geopolitics by Ravi Agrawal
• What IR Theory Predicts About Trump 2.0 by Stephen M. Walt

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Tech and Business

DeepSeek questions. Chinese artificial intelligence firm DeepSeek’s large-language model, known as DeepSeek R1, crashed like a meteor into the dinosaurs of the U.S. market last week, and the shockwaves are still throwing up dust.

In a deep dive this week, education expert Ryan Allen points out that China’s technology sector was often dominated by “sea turtles,” as returnees from foreign universities are known. But almost all of the young DeepSeek team attended Chinese universities, showing that China’s 2017 investments in AI education have paid dividends. (This also puts paid to the idea that the United States can win the tech talent race by shutting its doors to China.)

Another useful piece from SemiAnalysis dives into the likely costs of DeepSeek and highlights where the R1 model is truly innovative versus iterative. Calculations from SemiAnalysis, which are somewhat ballpark, suggest that DeepSeek’s costs are around $1.6 billion—not the low figure bandied about last week, but still much lower than those of OpenAI.

Delayed stock shock. Tuesday was the last day that Chinese stock markets were closed for the Spring Festival holiday, or Lunar New Year, which began last week. Wednesday might be economically painful, as the impact of Trump’s tariffs hits home and cuts into last year’s Chinese stock gains.

But the Chinese government might be reluctant to allow a stock slide and could impose controls seen in the past during sensitive moments, such as during the COVID-19 pandemic or in the 2015 market crisis. Chinese authorities often impose limits on trading or coerce major investors not to sell; if the market is still seriously affected, it would be a sign of real panic.