U.S.-China Trade Tensions Resurface: Volatility Surges, Long-Term Rivalry Continues

Over the past week, U.S.-China trade tensions escalated once more, heightening policy uncertainty and increasing market volatility.

On one side, China’s Ministry of Commerce announced further restrictions on exports of rare earths, lithium batteries, and other critical materials, adding more companies to the “unreliable entities list” and expanding export controls to cover rare earth materials, key equipment, and lithium batteries. On the other side, the U.S. government threatened to impose an additional 100% tariff on Chinese goods and plans to restrict exports of critical software and aircraft components starting November 1.

Within just a few days, both sides acted swiftly and decisively, alternating between signaling willingness to negotiate and applying pressure. This made it difficult for traders to accurately price in the potential market impact of the U.S.-China standoff.

Global risk assets came under broad pressure, with the CN50 and Hang Seng Index (HK50) both falling nearly 5% on the day the tariffs were announced. Although investor sentiment in other Asia-Pacific markets, such as Japan and Australia, has since stabilized and partially recovered from the tariff-induced pullback, stocks in mainland China and Hong Kong remain mixed.

Chinese market participants are processing the news flow while closely monitoring several key questions: Will these tariffs and export restrictions actually be implemented? If so, what impact could they have on China’s economy and capital markets? And which upcoming events or potential risks should investors pay attention to?

Export Controls in Focus, Technological Independence Urgent

Compared with the tariffs announced by the U.S. in April, the latest round of U.S.-China frictions shows significant shifts.

First, the dispute has moved from traditional tariffs to export controls and technology restrictions, particularly in rare earths and high-tech sectors. China controls approximately 70%-80% of global rare earth mining and around 90% of refining and processing capacity. This round of restrictions targets not only raw material exports but also key equipment and processing technology.

While the U.S. can seek alternative supplies from countries like Brazil, India, and Australia, fully compensating for China’s production gap would take significant time. A 2010 precedent—China’s two-month rare earth export ban on Japan—took nearly five years for Japan to partially offset the supply shortfall, highlighting the strategic leverage inherent in rare earth controls.

Similarly, U.S. restrictions on exporting high-end chips to China make technological independence increasingly urgent. Accelerating domestic development of semiconductors and AI chips is not only a necessary step to mitigate supply risks but also strengthens China’s bargaining position in tariff and trade negotiations.

Political factors have also added complexity to this round of talks. Ongoing U.S. government shutdown risks and the Supreme Court’s pending ruling on IEEPA tariffs could reduce administrative efficiency and delay policy implementation, complicating negotiations further.

China Market: Short-Term Impact Contained, Supply Chain Resilience Evident

Even if the proposed 100% tariffs and export restrictions were fully implemented, the direct impact on China’s macroeconomy may be less severe than some market expectations suggest.

From a trade perspective, while China’s effective tariffs are already approaching 40%, diversification of export markets provides a buffer. In September 2025, China’s exports to the U.S. fell 27% year-on-year, marking six consecutive months of decline, yet exports to ASEAN, the EU, and Japan rebounded significantly.

With trade increasingly shifting toward regional partners and emerging markets, China’s external demand structure is gradually reshaping. Trade diversion, combined with potential policy offsets from Chinese authorities, should help mitigate the negative effects of U.S. tariffs.

At a deeper level, this round of friction is not just about tariff rates or export volumes; it is a contest over technological leadership, supply chain control, and global institutional influence.

Critical materials like rare earths hold strategic positions in global supply chains, giving China an irreplaceable advantage. Restricting exports may raise short-term downstream costs but simultaneously enhances China’s leverage in negotiations.

In addition, U.S. software exports to China account for just 5.8% of total exports in 2024, limiting overall impact. Facing U.S. restrictions on high-end equipment and semiconductors, China’s ongoing push for domestic substitutes and technological autonomy is gradually closing the gap while strengthening supply chain resilience.

Overall, short-term frictions may raise risk premiums, increase capital outflow pressures, and heighten expectations of RMB depreciation. Industries such as technology, semiconductors, electronics, and machinery—especially small and medium-sized enterprises—may bear the initial brunt, with some companies possibly accelerating shipments to avoid tariffs.

Nevertheless, China’s relatively ample foreign exchange reserves, flexible exchange rate management, and solid fiscal tools should help stabilize market sentiment and ease short-term volatility.

Limited Probability of Tariff Implementation, Focus on Quantifiable Issues

Despite the continuous news flow, the likelihood of these tariffs being fully implemented remains low.

President Trump’s well-known “TACO Strategy” involves escalating tariff threats and issuing vague statements to create a high-pressure negotiation environment, signaling to other economies that the U.S. is willing to endure short-term pain for long-term gains. China, meanwhile, seeks to condemn and retaliate while signaling to markets that it will not compromise. Their interactions have largely been a credibility game, where political signaling often outweighs immediate economic impact.

Domestic political uncertainty in the U.S. is the biggest obstacle to implementing these tariffs, with government shutdowns and compliance risks limiting practical execution. In contrast, China has more flexibility to respond with countermeasures, and this timing gap reduces the feasibility of fully implementing U.S. tariffs.

The APEC summit and planned U.S.-China presidential meetings remain on schedule, and the new tariffs proposed by the White House are not expected to take effect until November, leaving room and time for negotiations.

In the short term, discussions are likely to focus on quantifiable issues such as trade balance, tariff levels, export controls, and exchange rate fluctuations. The U.S. may push China to increase agricultural purchases and U.S. investments while pressing on issues like fentanyl; China could respond strategically by slowing the pace of foreign investment reforms.

Over a longer horizon, U.S.-China relations are likely to oscillate between temporary truce and ongoing negotiations. For the U.S., short-term pauses help ease domestic political and market pressures while retaining leverage for future action. For China, they stabilize external conditions, alleviate economic pressure, and provide breathing space for domestic reforms.

Breaking this cyclical deadlock ultimately depends on building verifiable mechanisms of trust. Setting concrete execution checkpoints to verify commitments, using temporary compromises to gain negotiation space, and gradually establishing reciprocal expectations could open new avenues for bilateral relations. This approach mirrors the framework of the 2019–2020 interim agreements and may again serve as a practical reference for current negotiations.

Rising Market Volatility: Balancing Defense and Opportunity

Overall, with temporary agreements becoming part of U.S.-China trade friction, such tensions are likely to represent a recurring feature of bilateral competition. Both sides use policy tools to signal positions and gain bargaining leverage, but the market impact ultimately hinges on the balance between “deterrence” and “executability.”

Market volatility is inevitable amid this strategic game. In the near term, key points to watch include the leaders’ planned meeting in South Korea at the end of the month and the U.S. Supreme Court’s IEEPA tariff ruling in early November. Both sides are sending negotiation signals; if tensions ease, risk sentiment could improve, and China-Hong Kong stocks, supported by technology and AI sectors, may show more stable gains.

In the face of short-term uncertainty, market participants may consider balancing defensive and opportunistic approaches.

Defensively, attention can be given to export-oriented companies, raw materials, and critical supply chain nodes to reduce short-term volatility risks. Maintaining adequate liquidity, managing exposure to firms heavily reliant on U.S. exports, and hedging systemic risks are also prudent. Close monitoring of foreign exchange and interest rate markets can help respond to potential RMB depreciation pressures.

On the opportunity side, investors may focus on growth prospects arising from technology upgrades, industrial substitution, and long-term structural reforms. High-quality targets in domestic substitution chains—such as semiconductor equipment, upstream materials, and core components for new energy—could benefit from both policy support and growing demand.