Our outlook for China’s economy and markets in 2026 is in two parts. In this report we discuss the international dimension, focusing on US-China dynamics. In a second report, we will discuss China’s domestic economic outlook.
SUMMARY
- China enters 2026 with a largely favorable geopolitical backdrop, driven by a reduction in US-China tensions; however, these benign external conditions increase the risk that Beijing will be complacent about supporting weak domestic demand.
- Deliverables for Trump’s visit to China in April will focus on Chinese purchase commitments and commercial deals for US firms; Beijing will resist committing to currency appreciation as a tool for addressing trade frictions.
- The US will refrain from imposing major restrictions on Chinese tech companies this year; Beijing will use this window to make as much progress as possible to promote tech self-sufficiency.
- Trump’s antagonism towards the European Union lowers the EU’s willingness to pursue hardline trade measures against China; China-Japan relations will stay tense, however.
- Risks of a major conflict or crisis involving Taiwan are very low; in the case of both Iran and Venezuela, the danger is a military accident between the US and China rather than intentional confrontation between the two superpowers.
China enters 2026 with a favorable geopolitical backdrop. US-China relations have stabilized, as Beijing used its rare earths deterrent and boycott of US agricultural imports to force Trump to the negotiating table. Chinese officials are under no illusion that this is a permanent situation, but – with the necessary caveats about the unpredictability of policy under Trump – the stability should persist through US midterm elections in November and a series of in-person meetings between President Trump and General Secretary Xi Jinping.
At the same time, Trump’s disruptive foreign policy is helping China to expand its global influence and manage frictions with other countries – including over a massive global trade surplus ($1.2 trillion in 2025). For example, a European Union that did not have to contend with Trump’s threats against Greenland and lukewarm support for Ukraine would likely be more aggressive in addressing its mounting trade complaints with China. But an emerging EU-China trade deal over electric vehicles, in which Beijing will institute a minimum price for exports, suggests that (1) Beijing will be able to ride out trade frictions in 2026 without major risks to its export sector; and (2) as we argued in December (link HERE) Beijing will manage trade frictions with administrative measures, like the export price floor as well as the recent cancellation of export tax rebates for the solar and battery industries, rather than through major appreciation of the CNY.
The flipside of this benign external environment is the risk of complacency towards the domestic economy:
- Comforted by reduced US-China tail risks, Beijing has shown little urgency in supporting domestic demand despite weak growth momentum. Instead, the focus is on making progress on the innovation and industrial policy objectives in the next Five-Year Plan (2026-2030). As we will discuss in our forthcoming companion piece on the growth outlook, this relative complacency will persist at least through H1 2026, unless Beijing is forced to respond to renewed US-China risks or a major deterioration in domestic economic conditions.
- There is also a risk that policymakers decide to use this window of stability to make progress in pursuing regulatory campaigns, such as a recently announced anti-trust investigation into Trip.com.
US-CHINA OUTLOOK: SURFACE STABILITY AND SUMMITRY
Our base case is that US-China relations will be mostly stable in 2026, even as underlying pressures on the relationship build. The Trump-Xi summit in late October established a truce that will likely last at least through US midterm elections in the fall. The reasons to expect overall stability are as follows:
- Trump wants China to continue buying US agricultural products, and – more important – cannot afford re-escalation of tensions over tariffs and rare earths. The Trump-Xi deal lowered US tariffs on China imports by 10%, bringing the total increase in US tariffs on China since Trump’s second inauguration to 20% — only 5% higher than the tariff increases for key US allies and trading partners such as Japan. In exchange, China agreed to resume purchases of US soybeans and some other products, addressing what was clearly a key political liability for Trump and Republicans in farm states. Trump will be eager to maintain this momentum in the run-up to midterm elections. The even more important factor in the truce is Trump’s recognition that he cannot afford to re-escalate trade tensions with China, because: (1) China’s restrictions on rare earths have the demonstrated power to disrupt key US supply chains; and (2) high tariffs on imports from China add to inflation at a time when affordability concerns dominate his domestic political agenda.
- Beijing will gladly accept a transactional relationship in 2026, which buys time for China to pursue its agenda of domestic innovation and industrial dominance. Xi Jinping will happily keep purchasing US agricultural products, and consider other transaction commitments, as these are a low cost for buying a year or more of stability in the relationship.
- An active pace of high-level summitry in 2026 should also help reduce the risk of flareups, though Trump’s priorities and policy process are hard to anticipate. The main risk to our base case of stability is that the US side takes actions that Beijing views as highly provocative (such as on tariffs, tech controls, or foreign policy), leading to retaliatory measures from a confident Chinese leadership. Such actions could happen without Trump’s initial attention to the implications for the US-China relationship. That said, Trump is highly invested in making a state visit to Beijing in April, and has invited Xi for a state visit to the United States later this year. The two leaders could also meet twice more in the fall, as China will host the APEC leaders’ summit, and the US will host the G-20. Advisors to Trump and Xi will be looking for deliverables that the two leaders can announce, and mostly attuned to avoiding major provocations that could disrupt preparations.
Despite this surface stability, each country will be racing to limit its dependence on the other and to pursue advantage in the global rivalry. A grand bargain is not in the works.
- The same factor that brought a truce in 2025 – avoiding mutual destruction of critical supply chains – provides each country with enormous incentives to continue to “derisk” from the other. Specifically, the US and China are in a race to limit their key vulnerabilities: US dependence on Chinese rare earths, and Chinese dependence on US/allied semiconductor technology. Neither country will achieve this goal in 2026, but reducing economic and technological dependency on the other side will remain the overall strategic logic in the relationship. This fact, along with domestic political incentives to show resolve, will prevent a “grand bargain” on trade – e.g., broad mutual reductions of market access barriers, localization requirements, and industrial policies.
- Another key factor is that Trump has limited time left in office, and approaches “lame duck” status after November mid-terms. Beijing has few assurances as to what US policy towards China will look like after Trump leaves office, and thus limited incentive to invest in a grand bargain by making major concessions to Trump other than in transactional areas.
Trade Expectations
Deliverables for Trump’s April visit to China will focus on purchase agreements and commercial deals. The two sides are still at a very early stage of planning Trump’s April visit. The trip may include a delegation of US business leaders, in which case commercial deals will be a particular focus. Our initial expectations for deliverables are in the table below.
- Likely:
- Formalization and extension of Beijing’s commitments to purchase US soybeans, sorghum, and other US agricultural products.
- Finalization of the sale of TikTok to a US-led consortium
- Continued commitments by Beijing to reduce exports of fentanyl precursors. These actions (started during Biden’s term) appear to be contributing to a decline in US fentanyl overdoses.
- Possible:
- Major commitment by China to order Boeing planes
- Commitment by China to increase purchases of US LNG exports
- Intention by Chinese companies to explore investment projects in the United States. But we are skeptical of major investment commitments, given political misgivings both in the United States and China.
- Unlikely:
- A commitment by Beijing to promote appreciation of the yuan. We argued in December (link HERE) that Beijing will use transactional agreements (e.g., US purchase commitments) and administrative measures (e.g., canceling export tax rebates), rather than significant currency appreciation, to address trade complaints.
- Agreement on selling Nvidia Blackwell chips in China. We would not be surprised to eventually see sales of the Blackwell, but on a slower timeline.
Trump will avoid major tariff increases on China, but pending Section 232 investigations are wild cards. The existing Section 301 investigation into China’s industrial policies, initiated in the first Trump administration, in theory provides Trump with broad legal authority to raise tariffs on imports from China. This means that, should the Supreme Court limit Trump’s authority to impose tariffs under IEEPA, the US could replace IEEPA tariffs imposed on imports from China in 2025 much faster than it could for most other trade partners. However, it is unlikely that Trump would choose to do so, given that Beijing would retaliate through its own tariffs and, more importantly, reducing US agricultural purchases. Indeed, in recent weeks the administration has suspended planned 301 tariffs on China’s shipbuilding sector and punted on new Section 301 tariffs on China’s semiconductor sector (delaying a tariff decision to mid-2027). The Commerce Department also backed off on plans to impose restrictions on Chinese drones (though recent FCC restrictions on new drone models by foreign companies will still move forward).
However, there are also a host of sectoral investigations in progress under Section 232, of which imports from China could be a prime target. These include processed critical minerals and derivative products; semiconductors and semiconductor manufacturing equipment; pharmaceuticals and pharmaceutical ingredients; polysilicon and its derivatives; drones; wind turbines; steel and aluminum; and automobile parts. Some of these investigations will result in tariff decisions, especially if the administration is looking for tools to replace IEEPA authority.
Tech competition
The US will refrain from major new tech restrictions on China, but Beijing will not slow its self-sufficiency goals. As covered in our Webinar on the US-China AI outlook (link HERE), Trump’s decision to allow Nvidia to sell H200 chips in China marked a major inflection point in US tech policy towards China. The Biden administration’s approach of seeking to maintain as large an absolute lead as possible on China in critical technologies (especially AI) has been replaced by a “sliding scale” in which it is sufficient for the US to maintain a relative lead. The dominant position of national security officials in overseeing export control policy has been replaced by influence from Silicon Valley figures (Jensen Huang, David Sacks), who believe the best defense against Chinese tech is a good offense (removing restrictions on US exports). All of this is filtered through Trump’s personalistic approach, rather than a structured policy process.
These shifts, and the desire to maintain the truce in which China keeps rare earths flowing to US industry, make it unlikely that the US will take highly aggressive steps against Chinese tech companies this year. Access to H200s will help Chinese tech companies train their next generation of AI models and maintain competitiveness against US frontier models, particularly on a cost-to-run basis. More broadly, the relative stability of US tech control policies provides a window for Beijing to try to make as much progress as possible in advancing its domestic tech capabilities, particularly in advanced semiconductors.
However, intense US-China AI competition creates risks of flareups. US Congress, and parts of the bureaucracy, will look for opportunities to push through restrictions on Chinese tech companies. Major breakthroughs by Chinese companies – such as a model that surpasses US capabilities – will spur calls to tighten controls to maintain US AI supremacy. “DeepSeek moments” that showcase China’s tech prowess will be important to monitor.
GEOPOLITICAL FLASHPOINTS
The probability of military conflict/crisis over Taiwan in 2026 is very low. Direct military actions against Taiwan remain highly risky for China, and Beijing is unlikely to decide that it must act now to reunify Taiwan rather than maintaining strategic patience:
- Xi pushed through an unprecedented purge of military leaders in the fall, suggesting continued reservations about the PLA’s loyalty or competency.
- Trump will not challenge Beijing’s red lines (such as by supporting Taiwan’s formal independence), as he has continually shown a preference to keep the issue quiet.
- Taiwan President Lai Ching-te, whom Beijing detests, is deeply unpopular, while the main opposition party, the KMT, has its most mainland-friendly leader ever.
US actions against Venezuela and Iran are deeply troubling to China, but these countries are not important enough interests to risk major confrontation with the United States. The main risk is an accident, such as a US military strike on a Chinese asset that leads to a loss of life. Fatal military accidents have twice come close to creating serious crises in the US-China relationship: in 1999, with the accidental US bombing of China’s embassy in Belgrade; and in 2001, with the collision of a US surveillance plane and Chinese fighter off the coast of China. A similar incident today, when US-China tensions are overall much higher, would be harder to defuse.
China-Japan tensions will not quickly subside. Beijing’s announcement that it will restrict dual-use exports to Japan is the latest sign that China’s leadership intends to maintain heavy pressure on Prime Minister Takaichi Sanae to repudiate her comments in support of Taiwan. Such pressure has not yet hurt (and may have helped) Takaichi’s domestic political support, leading her to announce this week that she will call a snap general election (probably in February) in a bid for the LDP to regain its majority control of the parliament. Tensions with China reinforce Takaichi’s agenda of state investment in strategic industries and defense spending, which are positive for fiscal stimulus but weigh on concerns about public debt.
