By Reshma Kapadia

The hope, and the expectation, is that when U.S. officials meet their Chinese counterparts in Stockholm to talk economics and trade next week, they will build on a recent lessening of tensions as the U.S. tries to set up a fall meeting between the countries' leaders and lay the groundwork for another loosely defined trade pact.

While the Trump administration has the hardest of hard-liners who want to decouple from China, as well as those who want to cut big deals, some of the hawks now look to be on the run, says Kurt Campbell, formerly the top Asia advisor in the Biden administration and co-founder of the strategic advisory firm The Asia Group.

The more commercially oriented faction now hold more sway, he says, although it is impossible to tell how the balance of power will develop. Campbell expects moves from Commerce and Defense Departments that could run counter to the more commercially-oriented efforts, adding to the fragility of the relationship..

A second positive indication is that the administration is looking for President Donald Trump to visit with Xi in China, possibly alongside U.S. corporate chiefs, in a trip akin to those in the 1990s, Campbell says. That was a time when globalization was in vogue and the relationship on a better footing.

The recent truce between the two countries has calmed investors, allowing the S&P 500 to reach record highs, even as many Chinese imports still face levies of 55% -- including 20% related to fentanyl flows imposed early in the administration. Another 34% in tariffs loom if an Aug. 12 deadline to reach a deal isn't extended.

Analysts expect the two countries to not revisit the level of escalation seen in April, when China retaliated against Trump's far-reaching tariffs. The tit-for-tat spiraled into three-digit tariff rates that stifled trade and cut U.S. industrial companies off from critical rare-earth minerals such as those used to make magnets.

After two meetings, officials were able to walk back the tensions. China agreed to allow export licenses that would give U.S. companies access to the magnets they need. The U.S. eased restrictions to allow Nvidia, for example, to sell its H20 AI chips to China.

Treasury Secretary Scott Bessent, who will take part in the Stockholm talks, said on Fox Business this week that the two sides would discuss extending the Aug. 12 tariff deadline, as well as China's purchases of sanctioned oil from Russia and Iran. Commerce Secretary Howard Lutnick said this week that discussions would include export controls, which have become a focal point for tensions.

The web of controls the U.S. has put into place to limit China's access to advanced technology, starting with the first Trump term and tightened during the Biden administration, has been a sore point for Beijing. "They tell us every time that this is what they want -- and they are getting traction," says Mary Lovely, a senior fellow at the Peterson Institute for International Economics. "China flexed its muscle [with its own export controls on magnets]. It has other cards to pull."

It's possible Beijing may not have to in the near term. In recent weeks, U.S. officials have taken a softer tone. Bessent this week described the relationship as reaching a "very constructive" level and Lutnick spoke talking about kicking off a bigger trade discussion.

"The odds of a trade deal with China -- while still low -- appear to be rising," says Andy Rothman, head of the China-focused research firm Sinology, noting Trump's consistently positive comments about Xi and his relationship with the Chinese leader. He formerly served as a U.S. diplomat in Asia.

Rothman sees little incentive for Xi to sign any trade pact where China is stuck with levies higher than others, considering Japan just signed a deal for 15% tariffs. "If Trump wants a 25% or higher tariff on Chinese goods, Xi can't stop him, but would decline to sign a deal," Rothman says.

Trump though may have something else on offer -- retreating from other export controls if it gets to a "big, beautiful trade deal," says Rothman, arguing that the president views export controls as form of negotiating leverage, rather than as a critical tool to protect national security.

Indeed, in the first term, Trump canceled sanctions that had been imposed by his Commerce Department on the Chinese telecom ZTE, noting at the time that the company bought many of the parts it uses from U.S. companies.

The takeaway at this point is that the administration could eventually emerge with a deal similar to the one it struck with Beijing in the first term. For now, most analysts are looking for the two sides to kick the can down the road, keep tariffs from going higher -- and possibly lower the 20% fentanyl-oriented tariffs Trump imposed early in this term.

One possible way the tariffs could be reduced emerged in the latest U.S.-Japan trade pact, in which Tokyo agreed to invest $550 billion in the U.S. Many trade watchers are focusing on Trump's suggestion Friday that countries may be able to "buy down" their tariff rate with commitments to invest in the U.S. or buy U.S. goods.

While there are questions about the nature of Japan's investment and purchase commitments, analysts say Trump would likely welcome Chinese offers to buy U.S. goods -- whether that is Boeing planes, liquefied natural gas, soybeans, or pork. One caveat is that Beijing didn't make good on similar purchase agreements during Trump's first term.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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July 26, 2025 03:30 ET (07:30 GMT)

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