Military tensions in East Asia and fierce competition between the United States and China are eroding the international trading system that the US created. The United States generally promoted open trade rules—especially with Europe, Asia, and Africa—after World War II, in order to avoid another economic catastrophe like the one that occurred in the 1930s with the Great Depression.
The major exception was American restrictions on exports to the Soviet Union of high-technology items, ranging from oilfield equipment to aircraft to information technology. Similarly, it strangled flows of traded goods and investment to adversaries like Syria and Iran for decades and, more recently, against President Putin's Russia.
The first Trump administration—followed by the Biden administration—imposed steadily harsher controls and higher tariffs against China in response to China's success in exporting to the United States, as well as its growing technological capabilities and increasing military power. The Biden administration never sought permission from the World Trade Organisation for its measures to restrict trade with these adversaries, insisting national security justified the restrictions. And Trump has never paid attention to the World Trade Organisation.
China, meanwhile, had for decades hidden behind its official status as a developing country in the World Trade Organisation to impose restrictions on trade and investment, including helping specific sectors and companies grow. The requirement that foreign investors share sensitive technology and expertise with Chinese firms has especially angered the United States and countries in Europe.
Trump's goal is to use trade restrictions as an incentive to encourage new investment in the US and create more jobs in the country
Two big shocks
Disputes between Washington and Beijing over trade began two decades ago, but in 2025, China surprised the Americans by demonstrating how vulnerable the US economy had become to Chinese actions. First, the Chinese decision to stop imports of soybeans from the United States has hurt American farmers across states that are essential to Trump's political base. And while he promised to compensate them for their financial losses, that has been delayed as most federal government offices in the United States remain closed due to sharp political disputes in Washington over the government budget.
In addition, China restricted exports to foreign companies of rare-earth metals and magnets that are used in advanced electronic systems for automobiles, warplanes such as the F-35, cruise missiles, and military drones. China exports 70% of the world's supply of rare-earth metals and 90% of the magnets that utilise them. Beijing's halt of all rare-earth magnet exports to American automobile companies led to the temporary closure of some American factories until the Chinese allowed limited exports again.
In October, Beijing announced a stringent new licensing system that could halt exports of the magnets again, as well as Chinese technology used for the processing of rare-earth metals and the production of special magnets that utilise the metals. The new Chinese regulations closely resemble American regulations that limit and often block the sale of high technology to Russia and China.
This recalls the American vulnerability to shocks in the world oil market in the 1970s and early 1980s. However, the American economy in that instance developed innovative technologies and new energy sources, so that by 2025, it would be far less vulnerable to pressure from oil-exporting nations.
The Biden administration, in response to Chinese advances, chose specific sectors and even specific companies to receive government subsidies for growth and expansion in industries such as semiconductors and chips, renewable energy, and electric vehicles. Trump eliminated renewable energy and electric cars from his list but added companies in the rare-earth metals market.
Washington plans to use these subsidies eventually to replace imports from China. This violates basic WTO rules, but Washington will pay no heed, arguing again that national security requires this programme. Already, there are two factories in America producing a few types of rare-earth mineral magnets, including one that produces magnets meeting military standards. More factories and mining projects are under development.
Because increasing production to the level needed by the American economy will take time, America still relies on imports of rare-earth metals and magnets from China. However, the Chinese advantage in technologies related to the processing of these metals and the production of magnets may not last. The latest Chinese moves to limit the export of its rare-earth metal technologies suggest that China is pondering whether to impede the American strategy in this extremely sensitive sector, especially given its military implications.
In a sense, the Chinese vulnerability with respect to semiconductors and chips resembles the American and European vulnerability to Chinese superiority in rare-earth metals and the magnets that utilise them.
Some economic analysts expect a deal structure to emerge in the upcoming negotiations between Washington and Beijing. China wants Washington to reduce its restrictions on high-technology exports to China, especially in advanced semiconductors, chips, and production technology. Meanwhile, Washington wants China to ease restrictions on the export of rare-earth metals and magnets.
There are indications that the Trump administration is prepared to be flexible. Some of Trump's advisors agree with the argument from the chief of the high-technology company Nvidia that exporting advanced American chips to China will ensure that China depends on American semiconductors instead of building a strong Chinese semiconductor sector. In August, Trump personally approved permission for Nvidia to export advanced chips used for artificial intelligence. (The agreement came with the typical Trump condition that Nvidia share profits from these sales of these chips with Washington.)
If China rejects concessions on its restrictions on rare-earth metals and magnets, however, Trump may actually implement his threat to raise tariff rates to 100% or more. Since the Chinese and American economies have developed such close supply-chain linkages over the past 40 years, taking those ties completely apart risks even sharper economic pain.
No turning back
Even though Washington and Beijing cooled trade tensions recently when their respective presidents met in South Korea, it is unlikely that a worried United States and a more assertive China will return to the trade environment of 15 or 20 years ago.
Michael Froman, the President of the American Council on Foreign Relations and a deputy national security advisor to President Obama, assessed the use of trade policy to harm other nations' economies in a piece published in the influential Foreign Affairs magazine in August, stating that the global trading system we know is dead. The World Trade Organisation has essentially ceased to function.
It is unclear what would replace the WTO-managed system, but there are indications about how Trump views the future of trade. The American goal is to use trade restrictions as an incentive to encourage new investment in the United States and create more jobs in the country.
Trump did not, therefore, eliminate the North American trade bloc, but he did limit its scope. His tariffs on imports from Canada and Mexico—particularly in sectors such as automobiles, steel, aluminium, and lumber—aim to protect American company operations in the United States, thereby encouraging them to hire more American workers.
Trade between the United States, on the one hand, and Canada and Mexico, on the other, will continue but at reduced levels and with higher prices for consumers and lower profits for companies. Trump will also accept special bilateral trading arrangements with select countries, such as Japan, South Korea, and the United Kingdom. He would lower tariffs on some—not all—imports from countries that sign special bilateral deals with Washington, always aiming to compel foreign firms to invest within the United States.
While Trump sees few advantages to America from the global trading system, China supports maintaining the system so that its exports can enter the largest number of markets possible. Beijing regularly supports the World Trade Organisation in public statements.
In September, at the United Nations General Assembly meetings, China announced that it would voluntarily relinquish its status as a developing country. This status had granted it exemptions from certain trade practices enforced by the World Trade Organisation. The Director-General of the World Trade Organisation called China's move a key step in reforming the organisation.
US President Donald Trump (L) and China's President Xi Jinping shake hands as they leave after their talks at the Gimhae Air Base, located next to the Gimhae International Airport in Busan on 30 October 2025.
Recognising that the environment for trade with the United States has changed permanently, Chinese firms aim to sustain and improve access to other foreign markets, and there are indications that they are enjoying some success. According to Reuters, Chinese exports worldwide in August 2025 were 8% higher than in August 2024, despite a decline in exports to the United States. The country spent vast amounts of money building up companies in various sectors, including steel, telecommunications, and renewable energy.
But not all is good for the Chinese economy. It has too many companies and excessive production capacity in sectors such as electric cars and steel, leading to intense competition in the domestic market at a time when domestic consumers are still recovering from the real estate market collapse. Chinese companies are also not hiring new workers. And Chinese companies selling their products abroad face accusations of benefitting from government subsidies to sell at unfair, cheap prices. China, thus, will find few wide-open markets in North America or Europe.
China, under President Xi, shows no sign that it will diminish the government's role in managing the economy. Xi's strategy is to ensure that China remains a key source of imports for major countries, even as it builds production capabilities in vital sectors—especially semiconductors and chips—so that it is less vulnerable to disruptions to its own economy from trade restrictions.
This is not ideal for China, as some sectors, including some in the semiconductor and chip technology field, are less efficient and competitive. Thus, Beijing will continue to press the Americans to ease restrictions on high-technology exports.
Even though the US and China cooled trade tensions recently, it is unlikely that things will go back to the way they were
Trade and military competition
The increasing use of trade as a weapon to harm a rival comes as military competition between China and the United States in East Asia—particularly in Taiwan and the South China Sea—also intensifies. Some observers think Beijing might condition reduced American support for Taiwan as part of an agreement to ease controls on rare-earth metal exports.
The respected Massachusetts Institute of Technology last summer published an analysis that warned that China is eroding the American military advantage in East Asia, and the current American strategy to defend Taiwan risks "catastrophic defeat." In September, the influential Asia expert and former government official Kurt Campbell wrote in Foreign Affairs that the absence of bilateral military communications between China and the United States increases the danger of an unintended minor incident between military units escalating quickly into a significant conflict.
It is also worth noting the geo-strategic angle of Chinese trade restrictions. By blocking the export of rare-earth metals and magnets, China could significantly impact European firms that produce military equipment and thus hinder European efforts to support Ukraine in its war against Russia, a key ally of China.
The tensions from global trade competition and supply-chain linkages harm the diplomatic environment needed not only to contain economic competition but also military competition.
