Analysis

China’s economy is showing signs that the combination of US tariffs and export controls are undermining manufacturing and causing widespread uncertainty, if not a slowdown. A fiscal decline, a flatlining housing market, and foreign capital flight has squeezed household and government spending. The global trade war is adding further pressure to an economy still recovering from the pandemic. 

As US tariffs cause decreased demand from the US (owing to higher prices for US buyers) China’s leadership will consider additional top-down economic stimulus. The last stimulus round in September, combined with a boom in China’s tech market after the release of DeepSeek’s industry-shaking models in February, have buoyed the Chinese stock market in recent months. This was a welcome, although temporary boost to investors’ positions, as additional stimulus akin to earlier rounds are unlikely to dramatically change China’s economic outlook.  

However, despite gloomy news for China’s economy in the short run, the US administration’s economic moves against China may unblock Beijing’s otherwise hesitance to pivot its economy towards long-run growth. With trade wars bringing external pain to China’s economy, Chinese leaders have, perhaps ironically, more flexibility to make previously unpopular decisions that would have otherwise caused unnecessary disruption. Chief among these is the embrace of science- and technology-driven growth as “new productive forces” that will simultaneously prioritize technology to achieve economic growth through improved efficiency while weaning China off of US (and other foreign) supply chains. While embracing new technologies or cutting off a major buyer is usually a fraught move, the spat with the United States has made these decisions politically much more tolerable in China. 

US trade and investment controls give China’s leaders cover to reorient the economy and blame the United States for the short-term pain involved in the transition. The trade war with the United States allows the government to speed up plans to diversify away from the US towards domestic markets and other trading partners, which may have otherwise proved unpopular. The unintended consequence of the US trade war may therefore be that China becomes both more insulated from the US and expands its competitive advantage in other markets. Companies should pay close attention to what this means for their sectors in terms of disrupted supply chains, potential additional trade restrictions, and shifting market shares as Chinese entities try to take over new markets. 

Foreign companies could face significant challenges, depending on how they respond to shifting markets. The search for alternative locales or suppliers outside of China comes with its own risks that are often overlooked, and frequently underestimate how China’s supply chains and influence likely extend deep into these alternative sites. That said, diversifying, stockpiling inventory, and understanding that engagement with China will likely persist through supply chains and partners, are each important facets to mitigating risks. These risks will force companies to think about long-term resilience or face short-term failure.

Analysis

The administration's much-touted negotiations with China have already hit a snag. Despite high hopes from Treasury Secretary Scott Bessent that a US-China trade deal was in the cards for “opening up” the Chinese market, negotiations were paused after President Trump accused China of violating a tariff truce–agreed on only last month–that would mutually roll back tariffs and trade restrictions. As we predicted, negotiations are unlikely to rewrite global trade, as promised, with meetings today in London unlikely to move the needle dramatically in favor of either side. 

It is unclear, however, whether President Trump’s accusations, which China denies and instead accuses the US of violating, are part of a broader negotiating strategy or reflect a change in policy by the administration to steer away from a future potential deal. Either way, last week’s Trump-Xi conversation, intended to resolve trade issues and force China to the negotiating table, suggests that the US administration is trying to salvage negotiations despite its accusations that China failed to remove trade barriers as agreed. Meanwhile, American tariffs on goods imported from China sit at 51.1% while China’s levies on U.S. imports stand at 32.6%, with neither showing signs of decreasing anytime soon. Chinese exports to the US are down 34% in May from a year ago. 

Key to the current tensions is China’s restrictions on rare earth exports, which are crucial to US supply chains. Rare earth processing is China’s strongest position in negotiations because it touches so many global supply chains, ranging from consumer products to microprocessors. Somewhat undermining the US’s position, for example, the EU is pursuing a potential “fast track” for rare earth exports from China to secure supplies independent of the US. 

One of the looming questions about the US-China trade conflict is how the rest of the world will respond to Washington and Beijing’s increasing pressure for countries to pick a side; the EU’s move on rare earths shows the backlash to the US’s unilateral imposition of tariffs on its allies, and therefore the limits of Washington’s negotiations. This tension between the United States and its traditional allies undermines US and China’s hopes that they will be able to neatly divide global markets into “pro-US” or “pro-China” camps. Markets are, instead, likely to become a messy patchwork of leaning towards the US in some areas and sectors, while favoring China in others, with both the US and China attempting to cut the other out through additional negotiations. Companies should note the likely increasing complexity and volatility in world trade relationships, conditions, and rules.

Analysis

Huawei Technologies–one of China’s largest technology companies, a leading global provider of telecommunications technology, as well as a purveyor of EV autonomous driving systems and solar technology–has been creating supply chain resilience since the US first sanctioned the company in 2019. Through the creation of its own venture capital firm, Hubble, Huawei has invested in more than 60 semiconductor-related companies since its founding in an effort to foster a fully domestic supply chain. More recently, Hubble has shifted its focus to supporting AI and robotics companies in support of Huawei’s new, advanced technology production plans. While this does not mean that the company is fully insulated from tariffs or related trade-war effects, it does help explain why major Chinese companies are withstanding tariffs better than expected and continuing to successfully innovate in the current, unpredictable economic climate. 

Chinese companies have also adopted long-term strategies to offset tariff-effected goods. A prime example of this is Windrose, a Chinese EV, long-haul truck manufacturer. A NYT profile on the company from March captures an essential part of the company’s strategy: to collect a global team of investors–including in the US and Australia–and develop localized production plants in order to downplay fears about the company’s “Chinese origins.” By moving production state-side, Windrose avoids the majority of existing tariffs and will become a direct competitor to Tesla’s Semi, which is more than eight years past its original production expectations. 

The flip-side of this issue is China’s continued restrictions of rare-earth supplies, discussed above. More than just a political bargaining chip, foreign companies are already feeling the consequences of China’s export controls: European auto-parts manufacturers have already begun to halt production owing to a lack of resources, as fewer than 25% of export control applications have been approved since April. Compounding this issue is the new steel tariffs imposed by the Trump administration last week, which raised tariffs on foreign steel to 50%. Economists predict these tariffs will raise the cost of domestic steel production. 

In short, Chinese companies have been making long-term plans to circumvent US tariffs, both by cultivating domestic alternatives to ensure supply chain resilience and diversifying their investment and production bases to enable access to global markets even in times of political tensions. Moreover, the policies of the moment are simply that–subject to change and demonstrably unreliable for serving as the foundation of long-term strategies. With this in mind, US companies should not assume that tariffs are going to provide them a competitive edge over their Chinese competitors and should find ways to maintain their innovative advantages at all costs.

Analysis

The Dutch Defence Minister has warned of China’s intensifying espionage efforts against the Netherlands’ semiconductor industry, a key sector at the heart of China’s efforts to achieve technological self-reliance. While China’s targeting of semiconductor manufacturers is not new, semiconductors have taken on particular significance for national security amid the US administration’s new restrictions on chip exports to China. 

Chips are vital to China’s plans to exploit AI and other emerging technologies, to dominate global markets, and to outcompete the US on the battlefield. Semiconductor manufacturers are particularly vulnerable to IP theft attempts, not only because they are direct competitors to Chinese manufacturers, but also because Taiwan, through TSMC, dominates the global semiconductor market. Undermining Taiwan’s market position, while simultaneously improving China’s domestic economy and flooding foreign markets with Chinese-made chips, is therefore as much about national security as it is about business. 

The tech sector is slowly realizing that foreign states want sensitive IP in the name of their own geopolitical advantage. The challenge is that the US is simultaneously reducing its focus on protecting companies in favor of other priorities. Adding to this, reductions in US government funding for scientific research and restrictions on visas for foreign researchers, mixed with China’s massive increase in funding, makes relocating to China–and taking skills with them–increasingly attractive for key scientific talent. 

This means that the burden of protecting one’s IP from state-sponsored cyber attacks, insider threats, and brain drain falls onto the private sector. Shouldering this burden will therefore become increasingly vital not only for tech companies to survive in the face of geopolitical challenges, but also to continue to be able to attract top talent amid an increasingly heated international competition for technical talent.

Analysis

China’s willingness to use the entire weight of the Chinese government in extracting critical corporate IP is an attack that most in the private sector are unprepared and ill-equipped to counter. A series of recent reports, however, suggests that the biggest IP transfers to China likely occurred not because of cyber attacks or insider theft, but because companies willingly (if reluctantly) transferred IP in the name of potential profit and access to China’s market. Joint ventures and other mandated corporate arrangements that are often required for operating in China generated huge revenues for US corporations, ranging from Apple to GM. As companies are finding out, however, cheap, skilled labor and access to China’s vast market traded short-term profits for irrevocable damage as Chinese partners obtained sensitive IP to create parallel entities that then outcompeted their US counterparts on cost.

The challenge for companies making this calculation is that China is not in the business of creating a welcoming market environment; rather, foreign companies are permitted to operate temporarily, with the ultimate aim of bleeding them for IP through joint ventures and other mechanisms that allow China to create competitors. These Chinese competitors backed by state subsidies, depressed labor rates, and financing, are then able to squeeze foreign companies out of the Chinese market and eventually out of global markets. The intention of the CCP’s permitting foreign companies in China is one of self interest: learn in the short run, out compete in the long run. Companies responding to the current trade war by redoubling their China-based operations to avoid export controls will therefore likely see long-term damage, even if such a move brings short-term gains. 

The challenge for foreign companies is that even those that opt not to hand over IP willingly are still the target of Chinese espionage to extract IP through nefarious means. As we have argued at 2430 Group, Chinese corporate espionage and IP theft manifests as nine distinct approaches, each of which threaten Western companies. This multipronged approach, often steered by Chinese state actors, means that companies, particularly those with China exposure or in sensitive industries like tech, will need to pay increased attention to protecting against internal and external threats, or risk losing it all.