How Trump Could Strike a Trade Deal With China

U.S. President-elect Donald Trump has threatened tariff hikes on the United States’ largest trading partners, but China seems to be in the most immediate line of fire as his inauguration approaches. Late last year, Trump announced plans to impose an additional 10 percent tariff on Chinese imports, citing Beijing’s inadequate efforts to curtail the fentanyl trade.

Trump has repeatedly argued that China has stolen U.S. jobs and industries and taken advantage of the United States, leading him to threaten increased tariffs of 60 percent or more on the campaign trail. The tariff proposals don’t stop there: There is growing interest within Congress to revoke China’s current “permanent normal trade telations” (PNTR) tariff status—a move supported by Trump’s nominee for U.S. trade representative, Jamieson Greer.

As the threats pile up, the incoming administration’s endgame is not clear. Are Trump and his allies issuing these tariff threats to lure China to the negotiating table, or are they more about further disentangling the world’s two largest economies? Scott Bessent, Trump’s nominee for treasury secretary, has espoused the former view, suggesting that tariffs can be an important bargaining chip. On the other hand, Greer has talked more about the importance of “strategic decoupling from China,” even if it causes “short-term pain.”

The U.S.-China Phase One trade agreement was concluded during Trump’s first term, in the wake of an escalating trade war. At the time, he lauded the “historic” agreement as “righting the wrongs of the past.” He was proud of securing China’s commitment to purchase at least $200 billion worth of U.S. goods and services over a two-year period. The agreement went even further, obligating China to strengthen its intellectual property regime, curtail technology transfer requirements, lift barriers to U.S. agriculture exports, and refrain from currency manipulation. China lived up to most of these commitments but fell short on its purchasing obligations.

When the Phase One agreement was signed in January 2020, the United States and China envisioned a Phase Two negotiation to focus on unresolved issues, such as subsidies, state-owned enterprises, excess capacity, and cross-border data transfers. However, these talks never got off the ground due to the need to take a breather after the high-stakes Phase One negotiation; the complexity of the next set of issues; and the outbreak of the COVID-19 pandemic, which quickly raised tensions between the two countries.

Six years later, the challenges to negotiating a new trade agreement have become more formidable. Both sides have expanded trade and technology restrictions while taking steps to reduce their mutual dependence. Beijing has doubled down on increasing the role of the state in its economy by providing massive subsidies and expanding the reach of state-owned enterprises. Moreover, China is now unloading its excess domestic production capacity on foreign markets at unprecedented levels, leading to record global surpluses.

These developments, coupled with the unfulfilled commitments of the Phase One agreement, suggest that a negotiated trade solution between the United States and China is out of reach. However, Trump sees himself as a dealmaker with the skills and temperament needed to achieve what was not previously possible. As the president-elect made clear during his first term, he is prepared to ratchet up tariff pain to unseen levels, regardless of the cost to U.S. interests.

Facing its own economic challenges, China may conclude that a deal with the United States—even with unconventional provisions—is a better outcome than jeopardizing what remains of the $600 billion trade relationship. If Trump orders his trade team to reengage in negotiations with China, what should the United States ask for this time around, in light of past experiences and growing obstacles?

A first step would be to revisit Washington’s initial demands of Beijing during the Phase One talks to consider putting some of these requests back on the table—or updating them for 2025. This could include demanding more in terms of intellectual property protection, agriculture, and technology transfer while adding new areas of focus, such as cloud computing. Lessons could be drawn from the first go-around regarding purchasing commitments: making targets more realistic, conducting more regular progress monitoring, and realigning products of interest with what the U.S. private sector is ready to sell.

A new agreement should not stop there. U.S. negotiators should try to curb China’s use of subsidies and financial assistance and address the factors leading to excess production, such as limited domestic demand. But they shouldn’t be surprised if these efforts don’t gain traction. Washington might also consider an accommodation aimed at limiting U.S. imports of unfairly traded Chinese products. Rather than imposing unilateral high tariffs, this could be accomplished by setting quantitative limits on select Chinese exports, like batteries, that are subject to strong enforcement provisions (such as an immediate snapback to high tariffs).

But a deal that only addresses trade flows between the United States and China would miss the mark, as many Chinese companies are moving operations to Southeast Asia, Mexico, and elsewhere to avoid U.S. tariffs. To be durable, an agreement with Beijing must also consider its growing investments in third-country markets, particularly in the automotive and electronics sectors. Strengthened anti-circumvention measures, stricter rules of origin, greater operations transparency, and even export bans on specific Chinese companies would concretely address U.S. concerns about these investments.

Currency matters should also be an integral part of any U.S.-China trade deal. Even with the risk of capital outflows, Beijing may be tempted to allow yuan depreciation to soften the blow to its exporters. The Phase One agreement’s currency provisions should be strengthened—in terms of both transparency and enforceability—to ensure that currency swings don’t undermine the objectives of a potential deal.

Both sides should also consider unwinding tariff increases imposed in recent years in nonstrategic sectors. This could be pursued through a step-by-step approach, starting with low-value consumer goods and possibly broadening over time to include certain low-tech manufacturing goods and machinery. Finally, any deal would need strong enforcement provisions, allowing the United States to quickly respond with punitive measures should China slow-walk or violate its obligations.

These proposals would face challenges, including getting Beijing on board—and Chinese negotiators will have their own demands, many of which would be nonstarters for the United States, such as the relaxation of technology export controls. But one area certainly worth exploring is opening the door for select Chinese investments in the United States, a move that has already sparked Trump’s interest. At a rally last March, he welcomed Chinese automotive investments that would provide benefits to U.S. workers.

U.S. trading partners would certainly protest such a deal with China, claiming that it would reroute Chinese exports to their markets, discourage Chinese foreign direct investment in their countries, and violate World Trade Organization obligations. Washington should do its best to allay these concerns, persuade partners to align with its approach, and continue developing alternative supply chains.

Greer has been clear that Washington needs to be “committed to fundamentally changing the U.S. trade relationship with China.” These recommendations aim to do just that.

There is no doubt that tariffs are coming in Trump’s second term, but the timing, magnitude, and the targeted economies remain unclear. The new administration’s endgame when it comes to tariffs against China is anyone’s guess; like other matters in Trump’s world, it may change week to week. In light of his transactionalism, a Phase Two trade negotiation—no matter how challenging—could be in the offing. It’s important that Washington gets it right this time.