Trump-Xi Trade Tensions Escalate: Rare Earth Restrictions and Tariff Threats Reshape US-China Relations

US President Donald Trump and Chinese President Xi Jinping have escalated their trade dispute, with each side now claiming they are waiting for the other to make the next move as deadlines for increased import tariffs draw closer.

Following Trump's indication of willingness to negotiate, US Vice President JD Vance stated on Sunday that progress "depends on how the Chinese respond." Shortly after, China's Foreign Ministry spokesperson Lin Jian made it clear that Beijing's actions would be determined by Washington's next steps, having already implemented what it considers retaliatory measures.

"If the US continues on its wrong course, China will firmly take necessary measures to safeguard its legitimate rights and interests," Lin stated during a regular briefing in Beijing. Chinese authorities have not yet responded to Trump's threat of 100% tariffs over recent rare-earth restrictions, though they mentioned potential "exemptions" to facilitate continued trade.

Treasury Secretary Scott Bessent expressed optimism on Monday that the Trump-Xi meeting "will still be on," noting "substantial communication over the weekend." He anticipated staff-level meetings between the US and China this week, alongside Trump administration efforts to mobilize allies against Beijing while threatening "straight brute force countermeasures" if China fails to act.

"This is China versus the world," Bessent declared. "They have pointed a bazooka at the supply chains and the industrial base of the entire free world. And you know, we're not going to have it."

The critical question remains which side will concede first.

Financial markets showed resilience Monday, with the S&P 500 closing 1.6% higher—its best performance since May—as investors interpreted the exchange as strategic posturing. China's markets also withstood the turbulence, with the CSI 300 benchmark for onshore shares ending Monday down just 0.5%.

Christopher Beddor, deputy China research director at Gavekal Dragonomics, noted that while determining leverage is complex, China's export sector can clearly withstand US tariffs around 50%. "Beijing does care if the tariffs go past 100%, but as long as that scenario doesn't materialize, tariffs are a lesser priority," he explained. "The rare-earth actions are intended to extract US concessions on tech export controls, but it's also not in either side's interest to completely derail the negotiations."

Trade data released Monday showed China's exports growing at their fastest pace in six months, potentially reducing the impact of US tariff increases. Trump has additional options to increase pressure, including threats to block Beijing's access to jet parts and critical software.

Bessent said he expects to meet with Chinese Vice Premier He Lifeng "in Asia" before the Trump-Xi meeting. Last month, before the current dispute, he had suggested Frankfurt for the next round of discussions aimed at extending the 90-day truce set to expire in early November. These talks will likely establish groundwork for resolving the current conflict.

Josef Gregory Mahoney, international relations professor at Shanghai's East China Normal University, believes China feels it has the advantage. "China is confident it's better positioned than the US to absorb any shocks from the trade war," he said. "Trump needs a deal before the holiday shopping and maybe even before the Supreme Court rules against him," referring to a pending decision on the legality of Trump's tariffs.

When a previous US-China trade truce collapsed in May after Washington targeted Chinese chip manufacturer Huawei Technologies Co., Beijing restricted exports of rare earth magnets essential for products ranging from mobile phones to missiles. Trump subsequently eased some export controls, marking a significant shift in Washington's approach.

Without similar US concessions in this round, Xi could again disrupt rare earth supplies to the US by slowing the recently implemented license approval system. However, reversing US restrictions imposed for national security reasons would likely face opposition from China hawks in Washington, who continue advocating for a tougher stance on Beijing despite being less prominent than during Trump's first term.

Trump faces additional pressure from farmers in key electoral states seeking Chinese markets for US soybeans. Meanwhile, jeopardizing the agreement that keeps Chinese app TikTok operating in the US would hamper his ability to connect with voters on the platform ahead of the 2026 midterm elections.

Xi's framework for controlling rare earths—which now applies even to shipments by foreign companies overseas—mirrors long-standing US controls on advanced semiconductors. While China previously condemned such measures as "long-arm jurisdiction," it appears to be adopting similar tactics.

"Beijing might also be incorporating some of Trump's signature negotiation tactics," observed Ting Lu, chief China economist at Nomura, including "extreme opening offers, exploiting leverage and opponents' weaknesses and credible walk-away threats."

Wu Xinbo, director at Fudan University's Center for American Studies in Shanghai, indicated that for the two leaders to hold their first meeting since 2019, the US would need to reverse actions taken following last month's Trump-Xi phone call. Recent US measures include implementing port fees on Chinese ships and eliminating a Biden-era waiver that allowed major chipmakers to maintain operations in China.

"If you want to go ahead with summit meeting, then you have to adjust your regulations, your policies," Wu stated. "If not - fine. We don't beg for a summit meeting."