China: An Emboldened Trump Increases Trade and Tech Risks

SUMMARY

• The growing momentum behind President Trump’s fiscal package increases the risks around the US-China trade truce, which expires on August 12; if Congress passes the fiscal bill by its August recess, Trump will have less incentive to keep trade tensions in check.
• The probability of US-China tariff re-escalation has thus risen from 30% to 45% following House approval of the fiscal bill; Trump’s tariff threats against Apple and the EU today will deepen Beijing’s concerns that his desire to de-escalate tariffs may be fleeting.
• Investors should also pay attention to rising US-China technology tensions, which pose risks for the tariff truce but also for supply chains; US export controls on Chinese tech firms make it less likely that Beijing will loosen its own restrictions on critical minerals.
• As a trade idea, buying August puts on FXI (the main Chinese stock ETF) is an attractive way to hedge against the risks around trade and lackluster Chinese stimulus announcements.

RENEWED TRADE THREATS

In our update on the US-China outlook on Tuesday (link HERE), we emphasized the tight linkage between the progress of Trump’s “big beautiful” fiscal package and risks around the US-China trade truce that expires on August 12:

• A key reason why Trump de-escalated the tariff dispute with China in Geneva in May was the fear that domestic political blowback over tariffs would threaten the fiscal bill, his key legislative priority.
• Passage of the bill in July would remove that constraint, providing more leeway for Trump to re-escalate with China and lowering his incentives to strike a deal that provides additional tariff relief.

Dynamics over the last two days reinforce this linkage between the fiscal bill and Trump’s risk tolerance for tariffs:

• On Thursday, the House approved the fiscal package and sent it on to the Senate. 22V’s head of Washington Research, Kim Wallace, has now increased the odds of the bill passing by the August recess to 55%, up from around 20% (link to Kim’s note HERE).
• On Friday morning, after several weeks of relative calm, an emboldened Trump threatened a 50% tariff on imports from the EU, starting June 1, and a 25% tariff on Apple if it does not build iPhones in the United States.

The threat against Apple underscores that one of Trump’s key objectives with tariffs is to promote the onshoring of US manufacturing. And of course, iPhone supply chains are highly concentrated in China. While Treasury Secretary Bessent has said that the US does not seek to decouple with China, the President does not share view – at least not consistently.

Trump’s threats against the EU are more nuanced in terms of the implications for China. On the one hand, hiking tariffs on imports from the EU might reduce Trump’s ability to also re-escalate with China. But his threat underscores his affinity for tariffs and unpredictability.

In short, Beijing will view Trump’s comments today as evidence that Trump is using tariffs to restructure the US economy – not just as leverage for deals – and that his desire to de-escalate may be fleeting. These conclusions matter because they may reduce Beijing’s willingness to make major concessions to the US – such as signing up for ambitious purchase commitments and approving a sale of TikTok – as part of talks to extend the tariff truce. To be clear, we think Beijing is keen to find a path that lowers trade tensions. But if Beijing has no confidence in Trump’s commitments, it will view concessions as simply giving up negotiating leverage. We also think Beijing’s offers to boost imports of US commodities and other goods will be more limited than Trump may want or expect, given a weak Chinese economy and a strategic priority of reducing reliance on inputs from the United States.

These developments will challenge Bessent and US Trade Representative Jamieson Greer as they engage in dialogue with Beijing. If they want a genuine “deal” in August – tariff relief in exchange for Chinese concessions – they must convince Beijing that Trump is serious about the tariff relief. Of course, the other option is that the two sides just kick the can, extending the truce without either side making new concessions. That is certainly possible if Trump feels pressure from the markets or politics come August. But whereas Trump dispatched Bessent and Greer to Geneva with the directive of de-escalating, we are less confident that those will be his clear marching orders next time around.

IMPLICATIONS

In light of the dynamics above, we are updating our US-China scenarios as follows. Note that the probabilities here are not meant to imply conviction or precision, just a sense of relative risks:

• Re-escalation of tariff dispute in August (45% probability, from 30%). This will become the clear basecase if the probability of Congress passing the fiscal package before the August recess increases beyond the current 55%.
• “Muddle-through”: US-China extend the trade truce with minor changes to tariffs (40% probability, down from 55%).
• Deal-making and further tariff relief (15% probability, unchanged).

As important as the tariff scenarios is the broader point that the US-China outlook is now likely to be noisier and messier in coming months. By “messy,” we would also highlight the complicated picture around US-China technology tensions as AI competition heats up (see next section).

As a trade idea, one way to address these risks is through the hedge proposed this week by 22V’s head of derivate strategy Jeff Jacobson (link HERE). Jeff notes an attractive price for 3-month puts on the main China stock ETF (FXI), capturing downside risks for the August 12 truce as well as China’s potential stimulus signals at the end-July Politburo meeting, which we expect to underwhelm (see our Tuesday note).

DON’T SLEEP ON TECH TENSIONS

As part of its May 13 rescission of the Biden Administration’s AI Diffusion rule, the Trump administration made two highly provocative warnings regarding Chinese technology:

• First, use of Huawei’s Ascend 910 chips – a competitor to Nvidia’s GPUs – are a potential violation of US export controls. This means that any company globally that uses Ascend chips without authorization from the US is at risk of US enforcement actions, including a cut off from US exports.
• Second, a warning to companies that they be violating US export restrictions by using chips with US technology to train Chinese AI models, if there is knowledge that models may be used for a “military-intelligence end user.” In practice, the guidance is meant to increase the due diligence obligations of firms around the world in supporting the training of Chinese AI models.

While these announcements are guidance rather than formal new rules, they underscore the Trump Administration’s growing concern over China’s semiconductor and AI advances and signal more actions to come. These could include export restrictions against DeepSeek, Chinese cloud services providers, and an expansion of controls on exports to leading Chinese chipmakers.

China’s Ministry of Commerce (MOFCOM) has reacted strongly to these moves. MOFCOM described the US actions as “violating the consensus reached in Geneva” and endangering China’s “development interests” – a phrasing that is significant as Xi Jinping has warned that such interests are one of China’s red lines in the relationship. MOFCOM also announced that companies implementing or assisting in implementation of US measures will be suspected of violating China’s Anti-Foreign Sanctions Law and thus potentially subject to enforcement measures in China.

The rise in tech tensions poses two main risks for coming months:

• First, it complicates the prospects of extending the trade truce. It is more difficult for Chinese negotiators to make concessions if the US is interfering with what Xi has called China’s development interests. Note that export controls are the responsibility of the Commerce Department, not Bessent’s Treasury or Greer’s USTR. It may take significant internal coordination to ensure a consistency in approach between export controls and trade talks. It is not clear that Trump’s White House has the inclination or structure to do so.
• Second, export controls increase the probability that China maintains tight restrictions on exports of critical minerals, posing risks to US supply chains. Beijing’s stance here remains deliberately vague. MOFCOM has not committed to unwinding China’s restrictions on critical minerals, imposed in retaliation for earlier US moves. The FT reported last week that Beijing has allowed some shipments to go through but at a slow pace. Beijing is taking some steps to reassure US and European automakers, who rely on critical minerals for EV production. But global supplies could be tight, especially for US defense/aerospace firms for whom Beijing is much less sympathetic. The Trump administration’s strategy and degree of sensitivity to such concerns remains unclear to us.

NEAR-TERM WATCHPOINTS

• A Trump-Xi call will be important for aligning expectations
• Details on next steps for US-China trade negotiations
• US export controls on China
• Beijing’s approvals of critical mineral exports
• US negotiations with other trade partners. If Trump does strike a deal with the EU – escalating to de-escalate – it will provide him more scope to retain high tariffs on imports from China.