Commentary: In a Post-Tariff World, China Should Make Unshackling Investment a Bigger Priority

U.S. President Donald Trump’s sudden flexibility in the ongoing U.S.-China trade negotiations, particularly after recent Geneva discussions, is not due to a shift towards free trade ideals but is a pragmatic move driven by domestic pressures. Specifically, Trump is responding to rising national debt and persistent inflation, which have made it increasingly difficult for his administration to maintain its previous hardline stance without risking significant harm to the U.S. economy.[para. 1]

Analysis reveals two central realities underlying this shift in strategy. First, while rhetoric around hardening stances has been intense, neither Washington nor Beijing desires a complete economic decoupling. This reluctance is particularly strong in the U.S., despite Trump’s earlier tough talk. Second, a sharp decoupling would inflict immediate and more severe economic pain on the U.S. than on China, contradicting earlier assumptions of American resilience in such an event.[para. 2]

The primary catalyst for Trump’s retreat from aggressive tariffs is the instability observed in key U.S. capital markets — most notably the Treasury market — following previous confrontational trade moves. Unlike equity markets, whose swings can sometimes benefit Trump and his allies, turmoil in the bond market directly threatens the government’s ability to fund its operations and manage the growing fiscal deficit, thus impacting the administration’s capacity to govern effectively.[para. 3]

Trump’s policy pivots are not usually influenced by abstract macroeconomic trends but rather by specific, short-term economic indicators with tangible impacts on his political fortunes. Chief among these are Treasury yields and inflation rates, which directly affect the cost of government borrowing and voter sentiment, especially among his base. His rapid change in tariff strategy suggests he misjudged the domestic consequences and Beijing’s likely response.[para. 4]

Historically, Trump’s tariff strategy followed a recognizable pattern, consisting of: a 10-15% baseline tariff to increase revenue, 25-30% “Section 232” tariffs related to national security, and reciprocal tariffs of 25-30% levied on nations with trade surpluses against the U.S. However, his April announcements were broader and harsher than these assessments anticipated, extending to many countries, including some developing nations, and sometimes exceeding tariffs placed on China.[para. 5]

Despite this initial broad push, the tariff policy has since narrowed again to its traditional pillars. The U.S. has negotiated only preliminary agreements, even with trade deficit nations like the U.K., where a 10% base tariff and Section 232 duties persist.[para. 6]

Recent rulings from the U.S. Court of International Trade have further complicated Trump’s tariff authority, striking down several tariffs, including those on fentanyl and certain Chinese goods, stating he lacked appropriate statutory basis under the International Emergency Economic Powers Act. Legal experts widely expect Trump to lose any appeals, potentially limiting his ability to unilaterally impose broad tariffs.[para. 7]

In response, Trump may shift towards expanding targeted Section 232 tariffs and rely more on Section 301 investigations, following patterns from his first term.[para. 8] For China, while some tariffs may be rescinded, others like Section 301 could be broadened, maintaining high overall U.S. tariff rates on Chinese goods and likely provoking Chinese retaliatory measures.[para. 9]

The trajectory for U.S.-China trade points towards a gradual but persistent decoupling. While overall trade figures remain robust, each nation’s dependence on the other is diminishing. Future negotiations are likely to focus less on cooperation and more on managing risks and conflicts.[para. 10]

However, indirect economic connections are strengthening via third countries, creating new global value chain dynamics — a development reminiscent of post-Cold War globalization but now driven by increased friction rather than easing tensions. China maintains leverage as a major supplier of intermediate goods, as long as the U.S. does not force “connector” countries to take sides.[para. 11]

Looking ahead, the world economy may evolve toward a dual-core configuration centered on the U.S. and China, characterized by reduced efficiency but continued overall circulation.[para. 12]

For China, this context calls for elevating the importance of international investment alongside trade. Despite some restrictions, outbound investment remains underdeveloped, suggesting room for growth. Effective risk management will be vital for Chinese firms expanding abroad.[para. 13] As China’s global export share grows, friction is expected. Therefore, China must diversify from its trade-centric model to one that balances trade with investment abroad.[para. 14]

At the institutional level, priorities should shift from tariffs and market access to investment liberalization and regulatory harmonization between countries. Future agreements should focus on investment facilitation, market openness, and updating outdated bilateral treaties to reflect these priorities.[para. 15][para. 16]