Can the United States and China Find a New Equilibrium on Trade and Technology?

China 2026: What to Watch

By Brendan Kelly and Michael Hirson

The Stakes: Implications for the Global Economy

U.S.-China trade and technology tensions are central to the global economic shifts now underway. Both advanced and emerging economies will be materially affected by U.S.-China policy choices and the trajectory of the two countries’ relationship, facing risks from potential escalation as well as the effects of any unexpected improvement in bilateral ties.

Core Dilemma: Bilateral Stability Depends on Mutual Vulnerability

The October 30, 2025, summit in Busan, South Korea, between President Donald Trump and General Secretary Xi Jinping signaled a tenuous new equilibrium, rooted not in accommodation but in a shared recognition of each side’s capacity to inflict significant economic harm on the other. Yet this recognition reinforces the impetus for both sides to accelerate “de-risking” — gradually undermining the very foundation of that equilibrium.

In April 2025, the United States and China briefly tested uncontrolled decoupling as tariffs and export controls escalated on both sides. The two governments then spent the summer negotiating a mutual de-escalation. U.S. Secretary of State Marco Rubio described the relationship then as entering a period of “strategic stability,” as both parties recognized the costs of continued trade conflict.

This stability was tested earlier than expected, however, by two major flare-ups. The first came in May 2025, when Washington warned companies around the world that using semiconductors produced by China’s Huawei was a violation of U.S. export controls, and Beijing responded by tightening rare earth export licenses. The second flare-up occurred in September and October 2025, when Washington broadened its export controls and China retaliated with a significant expansion of its rare earth licensing regime. Following threats of further escalation by Washington, Trump and Xi agreed in South Korea to a partial “disarmament” of export controls and retaliatory tariffs. After the Busan summit, U.S. Treasury Secretary Scott Bessent described reaching an “equilibrium” that both sides would seek to maintain over the next twelve months.

These flare-ups have sharpened the extent to which both sides are racing to eliminate the other’s strategic chokepoints. China forced Trump to the negotiating table by withholding rare earths and rare earth magnets, shutting down key production lines in the United States and Europe. Even as Trump was preparing to meet with Xi, Washington announced a flurry of new agreements with domestic industry and allied governments to reduce dependence on China’s rare earth supply chain, with Bessent pledging an 18- to 24-month timeline.

Meanwhile, Beijing’s 15th Five-Year Plan — previewed at the Fourth Plenum of the 20th Central Committee just before the Busan summit — doubles down on Xi’s agenda of controlling key technologies and supply chains to make China more resilient against U.S. pressure. China’s leadership is increasingly confident that it can break the United States’ chokehold on advanced semiconductor technology over the next several years. The new Five-Year Plan also targets China’s vulnerabilities in software and aerospace technologies.

The stakes are high. If either side reduces its key vulnerabilities ahead of the other, it will erode the very condition — mutually assured supply chain disruption — that is keeping the new equilibrium in place.

Outlook for 2026

A tenuous truce is likely to hold into 2026, but it is fragile, offering no resolution to the underlying pressures. Ahead of the fall 2026 midterm elections in the United States, Trump may be wary of inflation risks, tempering his appetite for additional tariffs on China and for more aggressive decoupling steps.

In China, Xi will begin to focus on the 2027 political transition at a time when the economy remains weak. As the effects of fiscal stimulus measures and front-loaded exports faded, China’s economic momentum slowed in the second half of 2025. Chinese business and household confidence remains weak, with the risk of renewed U.S.-China tensions a key factor holding back recovery.

Two leader-level meetings expected in 2026 will help keep tensions in check, and may bring additional incremental economic agreements — but not a sweeping “grand bargain.” Beijing will use Trump’s desire for political wins to offer additional commitments to purchase U.S. exports (and perhaps invest in the United States), so long as they do not undermine Xi’s agenda of self-reliance. Indeed, with Trump’s time in office limited — and Beijing uncertain about the United States’ China policy once he leaves office — Beijing has little incentive to gamble on major concessions.

While Trump has floated the idea of selling advanced artificial intelligence (AI) chips to China — which would be a clear sign that technology decoupling is easing — a major agreement is unlikely. Trump has sidelined officials pushing for strict export controls, but he appears to have accepted the argument that the United States must be careful not to cede its lead in computing power. Beijing is also walking a fine line: Chinese tech firms still depend on certain advanced U.S. chips to keep up with AI developments, but Beijing is focused on replacing those with domestic alternatives.

Conditions and Contingencies

• Currently, leader-to-leader engagement is especially consequential, particularly in the increasingly personalized regimes of Xi and Trump. Two summits scheduled for 2026 — a tentative Trump visit to China in the spring and a reciprocal Xi visit to the United States later in the year — should serve as important stabilizing influences.

• The agreements reached at the October 2025 summit—to extend the tariff truce for one year, and to temporarily suspend both the implementation of China’s broader rare earths export controls and U.S. expansion of export control restrictions to affiliates of companies on the Entity List (“Affiliates Rule”) — should support stability in the months ahead.

• An additional prerequisite for sustaining the truce is active communication at the senior cabinet level. The Trump administration appears to have settled into two primary channels: Secretary of State and National Security Adviser Rubio engaging with Foreign Minister Wang Yi, and Treasury Secretary Bessent coordinating with Vice Premier He Lifeng. As examples across multiple U.S. administrations have demonstrated, such channels are essential for managing security and economic tensions that might otherwise escalate.

What to Watch

Signs that the U.S.-China truce is strengthening or breaking down would include the following:

• Post-summit rhetoric. A key factor to watch will be how both sides behave after the leaders meeting, particularly before the disciplining effects of a potential Trump visit to China in the spring come to bear. Will the Trump administration maintain its positive rhetoric on China even when it conflicts with the realities of the relationship and actual policies?

• Outcomes of the trade deal and trade balance. China’s follow-through on the Busan agreements — particularly regarding Chinese purchases of U.S. agricultural products or new Chinese investments in the United States — will draw intense scrutiny. Likewise, the trajectory of the U.S. trade deficit with China could also serve as a potential trigger, if this remains high or even grows.

• Continuing technology controls. Both sides will continue imposing technology controls to protect against risks from the other, each testing how far they can go without upsetting the strategic stability described by Secretary Rubio — and without triggering retaliatory escalation.

• Implementation of U.S. “economic security” clauses. Provisions in many U.S. trade deals on economic security and trans-shipment with other key trading partners are largely viewed as targeting China.10 As the United States begins implementing these agreements in 2026, bilateral tensions could increase.

Alternative Scenarios

• Baseline (most likely): Managed decoupling. The base case is a continued trade truce that maintains the process of managed decoupling, punctuated by periodic flare-ups. China’s use of rare earths as leverage raises the costs for Washington to pursue aggressive measures, such as more stringent export controls. These stakes may compel both sides to tread carefully in 2026, especially with Trump focused on the U.S. midterm elections. The risk of escalation or broader deterioration in the relationship, however, remains significant.

• Alternative 1: Re-escalation. A military incident in the South China Sea or the Taiwan Strait — particularly given limited U.S.-China communication channels and weakened national security coordination within the Trump administration — would carry heightened risks of escalation. Moreover, the relative lack of internal coordination in Washington means that Trump may have limited ability or willingness to rein in hawkish measures, even if the hawks are currently sidelined.

• Should the current truce break down, Washington may seek other forms of leverage—or “weaponized interdependence” — to counter Beijing’s use of rare earths. Under this scenario, nontariff measures could again follow the escalatory pattern seen in June 2025. Financial decoupling measures could also return to the agenda, carrying risks and destabilizing effects comparable to those posed by trade and technology decoupling.

• Another potential flashpoint is technology competition, particularly in AI and semiconductors. A major Chinese breakthrough that threatens U.S. dominance — a more profound version of China’s “DeepSeek moment”—could be viewed in Washington as both a geopolitical risk and a near-term economic threat, given the central role of AI investments in U.S. growth and equity markets. Such a development could increase pressure on the Trump administration to tighten export controls (e.g., on semiconductor manufacturing tools) to blunt China’s advances, even as the Busan agreement puts the Commerce Department’s “Affiliates Rule” on hold. Restrictions on biopharmaceutical cooperation between the two countries could also move to the fore in 2026.

• Finally, many key Trump appointees and Republican members of Congress remain hawkish on China, and they may be eager to move quickly to renew restrictions if the political winds change.

• Alternative 2 (least likely): Negotiated stabilization. A less likely pathway is an ambitious U.S.-China agreement in which Washington further lowers tariffs on China and potentially eases certain export controls to boost U.S. exports, thereby reducing incentives for supply chain diversification and broader decoupling efforts.

• Amid continued uncertainty over U.S. tariff policy, and with ASEAN tariff rates at 19% to 20%, some U.S. firms are reportedly reconsidering or pausing further diversification out of China. The 10% reduction in fentanyl tariffs on Chinese goods has already brought the 2025 U.S. tariffs on China broadly in line with those applied to ASEAN. Given China’s unparalleled cost, manufacturing, and logistics advantages — further boosted by a weakened currency — and concerns that the United States could quickly raise tariffs on other trade partners (as seen with India), companies may choose to stay in China or even deepen their commitments.

• Similarly, if the United States is seen as weakening semiconductor export controls to support higher sales to China — for example, on high-bandwidth memory — it would become harder to convince key partners to maintain their own restrictions on key semiconductor equipment and inputs tied to high-bandwidth memory. The “economic security” provisions of U.S. trade deals, such as those with the European Union (EU) aimed at jointly diversifying away from China, would be similarly undermined, limiting the United States’ ability to achieve its own economic security goals.

Strategic Implications

If the forecast of a tenuous truce marked by largely positive rhetoric holds, it could enable limited, transactional cooperation on select global security issues, such as in Ukraine or the Middle East. Expectations, however, should remain modest. Some limited cooperation in basic science may also continue, provided it steers clear of critical and emerging technologies.

Domestically, any U.S.-China trade deal is unlikely to change China’s policy trajectory. The 15th Five-Year Plan is set to entrench China’s self-sufficiency and de-risking efforts. The United States’ willingness to abruptly cut off critical inputs, as it did for ethane and airplane parts in May and June 2025, is likely to accelerate China’s efforts to reduce any dependence on the United States.

Meanwhile, Chinese exporters have steadily redirected their exports to Europe and emerging markets. As China’s economic imbalances deepen — its trade surplus is set to far exceed last year’s record $1 trillion amid surging exports and falling imports — they are increasingly spilling over to the EU, ASEAN, India, and others. A core question for the global economy is how quickly and forcefully these economies will push back, and how much damage may occur in the meantime.

Policy Shaping and Conclusion

2026 will be an important year for U.S.-China de-risking, serving as a test of whether it can take a less volatile path. Both sides have incentives to buy time to address their vulnerabilities, even though such de-risking measures will, almost by definition, have a negative impact on the export and investment opportunities for firms in both countries. In the context of long-term de-risking, the transactional nature of the Trump administration offers limited openings for both governments, as well as for firms and allies, to shape more collaborative outcomes.

The current trade truce could create incremental opportunities for U.S. firms in China and Chinese firms in the United States. The Trump administration appears more willing than the Joe Biden administration to negotiate for increased U.S. commercial access to China, providing a chance for U.S. industry to engage the administration and push for expanded export opportunities. While Chinese overseas investment remains controversial in the United States — not helped by reports that Chinese authorities seek to discourage any tech transfer — a key area to watch in 2026, particularly during the two potential leaders meetings, is signals of support for such investment by both governments.

China’s supply chain weaponization and stark exposure of U.S. vulnerabilities have, ironically, encouraged greater bilateral and multilateral cooperation by the Trump administration with allies, as these vulnerabilities cannot be addressed alone. China’s dramatic new rare earth controls (even if now on pause) significantly threatened European and Asian supply chains as well, and appear to have reinvigorated the G7 critical minerals alliance for advanced economies to collectively de-risk their reliance on China in this space. The success of this effort — counterbalanced by China’s efforts to de-risk its own reliance on Western semiconductor technology — will be central to the U.S.-China trade and technology equilibrium going forward.