The Trump administration approached its high-stakes summit with Chinese leader Xi Jinping projecting absolute confidence. Confident that the United States held the upper hand as the primary trade deficit country in the bilateral relationship, American officials believed they possessed unmatched economic leverage. As U.S. Treasury Secretary Scott Bessent asserted ahead of the meetings, "What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them."
This tough-talking premise was quickly exposed as political folly. As analysts have long warned, trade wars are remarkably easy to lose when major nations remain deeply dependent on a dominant exporter for hard-to-replace industrial inputs, yet continue to conceive of international commerce through an outdated, zero-sum framework. China firmly holds escalation dominance over the United States. This means that at virtually any level of geopolitical or economic threat, Beijing retains the capability to inflict significantly more economic pain on the American economy than Washington can reciprocate.
To ease severe Beijing-imposed restrictions on rare-earth elements—a vital sector where China exercises ironclad control over 80 to 90 percent of global production—the United States has repeatedly found itself forced to concede on broad tariffs, advanced technology controls, and restrictive visa policies during successive rounds of bilateral negotiations.
Yet, Washington’s inability to instantly decouple or cleanly extract sweeping unilateral concessions from China through tariff threats should not signal an abandonment of economic diplomacy altogether. For centuries, secondary powers in the global economic architecture that are subject to escalation dominance have successfully navigated complex relations with more powerful adversaries by engaging in pragmatic bargaining while carefully avoiding outright confrontation. Until recently, this nuanced view characterized how China—and essentially every other major global economy—approached its economic interactions with the United States, occasionally frustrating American officials who preferred a more dominant posture.
Economic relationships are rarely all-or-nothing endeavors; instead, they contain substantial room for both calculated resistance and necessary cooperation, even when one side recognizes it would suffer heavily if tensions escalated into outright conflict. Despite soaring mutual distrust and escalating strategic rivalry between the two superpowers, the U.S.-Chinese economic relationship does not have to be permanently shackled to a zero-sum game. The underlying mutual benefits derived from trade and economic diversification for both domestic economies remain substantial. Furthermore, China’s theoretical escalation dominance would not spare its own domestic economy severe pain if it were forced into a prolonged, tit-for-tat trade conflict with Washington. Indeed, Beijing, which remains broadly comfortable with the existing geopolitical status quo, harbors little genuine appetite for such reckless escalation.
At subsequent summits between Xi and President Donald Trump, the U.S. government faces a valuable opportunity to chart a fundamentally different course in the bilateral economic relationship. By pursuing increased imports of critical strategic goods alongside welcoming expanded foreign direct investment from China, Washington could secure vital breathing room. Of course, this pivot must form only one pillar of a much broader economic strategy. Close cooperation with international allies will remain essential to encourage any sustained, long-term changes in Chinese commercial behavior and to diversify global supply chains over time. A more sophisticated assessment of Xi’s underlying strategic objectives and China’s domestic vulnerabilities will also be vital for long-term strategic success. Nevertheless, high-level diplomatic meetings provide Washington with a crucial window to buy time to address the nation’s most acute economic and industrial needs.
Start with Stockpiling
Despite more than a decade of fierce political rhetoric denouncing the perceived threats of Chinese imports and investment under both the Trump and the Biden administrations, the U.S. government has utterly failed to meaningfully decouple even its most sensitive industries from Chinese supply chains. As economic researchers Mary Lovely and Christine Wan have effectively demonstrated, declining direct U.S. imports from China have not eliminated reliance; instead, they have simply resulted in global supply chains becoming more attenuated, opaque, and difficult to monitor.
China remains the indispensable source of rare-earth minerals, specialized permanent magnets, and the lower-end legacy semiconductors heavily utilized in modern automobiles and household appliances, even if intermediate assembly steps now temporarily take place in third countries. In the critical arena of pharmaceuticals, for instance, the United States may import large volumes of generic drugs from India, but India itself remains deeply reliant on China for the foundational chemical feedstocks and active components required to produce them.
This complex reality explains precisely why industrial decoupling has proven to be such an uphill battle. Powerful economic fundamentals originally drove these integrated commercial arrangements, and systematically unwinding them is proving to be both remarkably slow and extraordinarily costly. For the immediate future, Washington’s most pragmatic priority should be to aggressively build up short-term domestic inventories of these strategic goods that ultimately trace their origins to China. In an ideal world, the United States would immediately source these materials elsewhere. Yet the Trump administration, much like the Biden administration before it, has failed to make significant, tangible progress on this front. Both administrations tried, but ultimately failed, to incentivize the creation of alternative domestic or allied sourcing through wider access to the lucrative U.S. market or through direct financial compensation. At their worst, driven by a misguided attempt to spontaneously foster domestic U.S. production through manufactured deprivation, both administrations tried to force American businesses to abruptly do without Chinese inputs through punitive tariffs and harsh restrictions.
Meanwhile, successive generations of U.S. officials have squandered past summits and diplomatic negotiations by fruitlessly trying to convince their counterparts in Beijing to increase Chinese purchases of various nonstrategic goods—none of which China actually values most. Current and former officials often rationalize these efforts as a clever indirect maneuver to make China more dependent on American agricultural or industrial goods, thereby gaining leverage for future negotiations. However, massive exports of American airliners and soybeans neither alleviate immediate national security vulnerabilities nor improve underlying U.S. macroeconomic fundamentals. In fact, to the degree that this obsessive focus on export promotion allows China to successfully pit the United States and its traditional allies against each other—such as inducing government-led bilateral deals to favor Boeing purchases over Airbus, or vice versa—it severely weakens Washington’s ability to marshal a unified international front against economic coercion.
During high-level meetings, the Trump administration would be wise to adopt a fundamentally different tack. At the October 2025 meeting between Trump and Xi, the United States and Beijing struck a limited deal to temporarily reduce tariffs in exchange for a partial, temporary relaxation of export restrictions on critical materials from China. In doing so, the administration essentially abandoned its grand strategic goals the moment its political bluster was revealed to be masking underlying weakness. With that provisional agreement facing expiration, Washington might be tempted to simply renew its existing terms.
Instead, the Trump administration should pursue a far more ambitious arrangement encompassing multiyear, large-scale purchasing agreements for the exact critical goods whose production remains heavily concentrated in China, or whose foundational components are sourced from China for supply chains located elsewhere. The United States could utilize targeted government guarantees and direct federal purchases to establish robust strategic national reserves until reliable domestic or allied production alternatives finally emerge. In exchange, Washington should permit China to legally import select, highly sought-after technologies where American firms still maintain a decisive global lead.
Such an ambitious agreement is both significantly more attainable and far more sustainable than skeptical critics might assume. Even during the height of the Cold War throughout the 1970s and 1980s, the Soviet Union and the United States successfully negotiated a series of major grain deals that permitted the Soviets to reliably import American wheat, corn, and soybeans. Despite the constant political temptation to exploit Soviet vulnerability—such as when President Jimmy Carter enacted a sweeping trade embargo against the Soviet Union in 1979 following its invasion of Afghanistan—these commercial deals were consistently renewed and even expanded by subsequent administrations under Presidents Ronald Reagan and George H. W. Bush.
China could, of course, attempt to renege on such strategic agreements at any given moment. Beijing has already carefully structured the terms of its rare-earth exports in a manner explicitly designed to discourage resale and stockpile accumulation, precisely to preserve the geopolitical leverage it has meticulously built. The direct cash value of rare-earth export sales by China is relatively small and, viewed in isolation, provides an insufficient financial incentive for Beijing to willingly surrender that strategic leverage.
Yet the pervasive threat of a sustained, total economic cutoff by China, while real in theory, is heavily exaggerated in practice. For its part, China maintains a powerful domestic economic interest in maintaining high export volumes to help offset its persistently weak domestic demand and severe industrial overcapacity. Furthermore, heavy reliance on aggressive export bans is economically costly, inevitably provokes retaliatory measures, and ultimately accelerates the development of hostile, segregated alternative economic systems. Washington should understand these systemic risks intimately, given that the overuse of American financial sanctions over the past five years has encouraged foreign nations to steadily move away from the U.S. dollar and toward Chinese-led alternative payment systems. It is far more likely that a credible U.S. offer of substantial commercial benefit would successfully induce China to export its critical goods more freely.
Historically, even fierce geopolitical rivals approaching the precipice of war have successfully engaged in strategic stockpiling and continued trade. In the lead-up to World War II, imperial Japan did everything within its power to import vital energy, rubber, and other critical industrial supplies, sourcing as much as 40 percent of its essential war materials directly from the United States as late as 1941, just before Washington enacted a total trade embargo against Tokyo. Meanwhile, Nazi Germany and the Soviet Union continued actively trading militarily useful technology and petroleum products right up until their respective invasions of Poland in 1939. Similarly, bilateral trade between France and Germany remained largely stable throughout the volatile decade leading directly up to World War I.
The exact same economic incentives that have governed strategic rivals throughout modern history apply directly to China and the United States today. The Trump administration and its more hawkish political critics should recognize that exhibiting greater flexibility regarding U.S. export controls—combined with a selective opening of inbound investment opportunities within a broader commercial framework—is well worth pursuing to secure reliable access to essential Chinese goods for which Washington currently lacks viable domestic alternatives. This approach is simply a matter of recognizing economic reality, rather than capitulating or stubbornly clinging to policy tools that have repeatedly failed to deliver results. The smartest move for the U.S. government is to import and stockpile as much as possible from China for as long as possible. Doing so should not discourage the long-term creation of domestic or allied supply chains any more than Washington’s previous attempts to cut itself off from Chinese supplies have managed to encourage them.
Invested in Success
Since ancient times, potential adversaries have engaged in various forms of hostage exchange, requiring rival nobles or members of royal families to live—and remain at risk—within an opposing power’s capital city. While this practice rarely served as an absolute deterrent to ultimate conflict, it successfully functioned as a tangible disincentive to sudden attacks and noticeably slowed down precipitous escalations. Many of these historical hostages even proved to be remarkably useful envoys, substantially enhancing mutual understanding between wary nations through public diplomacy and intelligence gathering.
The modern, highly evolved economic equivalent of this historical hostage exchange is foreign direct investment. Leading multinational corporations establish permanent operations inside rival countries, transferring advanced technologies, specialized capital, and sophisticated management practices across international borders. Much like the noble hostages of antiquity, this physical corporate presence carries immense symbolic and economic value, as these companies are typically tied closely to domestic political elites while placing their substantial capital investments directly at risk in foreign territory.
Contemporary two-way foreign direct investment flows also generate vastly greater economic benefits than the exchange of individual hostages ever did. Robust FDI is statistically associated with the creation of high-paying jobs relative to local average wages, significant increases in local research and development spending, and a marked reduction in supply chain volatility achieved through geographic diversification. This exact type of deep economic exchange formed a foundational component of successive economic agreements forged between the United States and Western Europe, Japan, and South Korea during periods when those nations achieved rapid relative gains in industrial competitiveness vis-à-vis American industry from the 1960s through the early 2000s. Back then, FDI effectively reduced the frequency of punitive tariffs and export controls, both by directly mitigating the underlying need for them and by fostering powerful domestic political constituencies with a direct economic stake in peaceful bilateral integration.
The contemporary U.S.-Chinese relationship is, admittedly, quite distinct from those historical partnerships between Washington and its formal military allies. Furthermore, many American corporations that poured substantial direct investments into China during the early 2000s grew deeply frustrated by stringent government limits on their ability to repatriate profits, secure fair market share, or adequately protect their proprietary intellectual property. As a direct result of these commercial disappointments, coupled with a severely deteriorating security climate, cross-border bilateral foreign direct investment flows between the United States and China have plummeted by roughly 90 percent from their previous historic highs recorded in 2016.
Yet the fundamental economic incentive structures—and the immense potential benefits—remain entirely intact. Furthermore, the net economic benefits to the United States of attracting Chinese FDI have actually risen in recent years as Chinese technological prowess in critical sectors such as advanced batteries and electric vehicles has accelerated. The Trump administration should therefore shift its primary strategic focus toward actively attracting inward Chinese FDI. Washington’s most effective use of access to the domestic U.S. market as leverage remains enticing foreign investment inward rather than fruitlessly pushing for one-sided export increases.
Pursuing this strategy would not be breaking new historical ground. The Reagan and George H. W. Bush administrations successfully courted heavy FDI from Japanese and German automakers and chemical firms throughout the 1980s. Similarly, China utilized massive inflows of global FDI to rapidly build up its domestic industrial base during the first two decades of the twenty-first century. Most recently, the European Union has begun strategically leveraging Chinese FDI to foster the growth of its own domestic electric vehicle sector.
Recent political friction—such as public criticisms directed at traditional American automakers over licensing agreements with Chinese battery manufacturers, alongside broader congressional outrage regarding Chinese investment—ignores this historic economic opportunity. China successfully accelerated its national economic resilience and sustained long-term growth by negotiating local production and technology transfer at the dawn of the twenty-first century. The United States has every strategic reason to emulate that proven path up the global competitiveness ladder. In a modern world defined by remote sensing, cyberattacks, advanced reverse engineering, and the rapid diffusion of artificial intelligence, the marginal additional risk of technology loss stemming from Chinese corporations establishing physical facilities inside the United States is minimal. In reality, welcoming targeted Chinese FDI would add tangible benefits to domestic employment, advanced research, and manufacturing know-how, thereby bolstering broader U.S. national security.
Time for Sale
Last year’s summit served as a rude awakening for the Trump administration and bipartisan trade hawks alike, imparting a profoundly useful lesson: no amount of bilateral trade-related threats or heavy-handed exclusion from the U.S. economy will ever grant the United States an easy, swift victory over China. The United States urgently requires time to systematically reduce its dangerous dependence on China—and, equally importantly, on other overly concentrated supply sources of critical industrial inputs—while simultaneously rebuilding international alliances to make those alternatives viable. Past attempts by both the Biden and Trump administrations to unilaterally decouple from China and bully traditional allies into providing immediate alternatives have failed to advance these vital national needs.
Fortunately, China’s top leadership perceives that time is firmly on its side, particularly now that Washington has largely ceded its historical position as the undisputed leader and economic insurer of the global order. High-level summits should therefore be utilized pragmatically to reassure and incentivize China to sell this essential time through mutually beneficial commercial ties.
The essential first step is for the United States to return to the traditional forms of economic diplomacy long practiced by lesser powers accustomed to not always getting their own way. Having already helped forge a new global economic geography, Washington must now learn to act like every other secondary power has acted toward it over the past eighty years: by actively seeking win-win commercial deals, negotiating cautiously from a position of relative weakness, and deliberately utilizing whatever ongoing economic interdependence remains to construct lasting national resilience.
History clearly demonstrates that even seemingly inevitable adversaries routinely continue to trade, invest, and cooperate with one another across geopolitical divides. For the United States and China, that enduring pattern is likely to hold true, potentially lasting even longer than past periods of major-power rivalry thanks to the vast geographic buffer of the Pacific Ocean, the stabilizing reality of nuclear deterrence, and the enduring technological leads that American firms maintain across multiple critical sectors. Furthermore, China’s own severe internal economic and demographic headwinds make it overwhelmingly likely that Beijing retains a powerful national interest in preserving relative peace, including by continuing to export to and invest heavily in the United States.
There are no absolute guarantees that restoring a measure of pragmatic economic interdependence will permanently prevent China from one day cutting off U.S. access to vital goods or instigating a military conflict. Nor will a purely bilateral diplomatic approach single-handedly generate complete U.S. economic resilience; robust domestic investments and coordinated allied efforts remain indispensable. Nevertheless, importing essential goods from China at scale, trading valued agricultural and industrial exports to stockpile critical supplies, and exchanging modern commercial hostages in the form of foreign direct investment will buy the necessary time and critical economic resources required to strengthen American resilience.
The Trump administration must look beyond both its initial, simplistic zero-sum approach and its subsequent pendulum swings toward flattering accommodation and piecemeal deals. Serious bilateral economic diplomacy truly begins the moment a government honestly recognizes its unavoidable interdependence with a potential adversary; it should never end there.
