From Trade Wars to Trade Wins: How Trump Can Redefine U.S.-China Economic Relations

Not long ago, American and Chinese people mostly liked each other. In 2011, polls showed that the majority in each country viewed the other favorably. That same year, the Kung Fu Panda series was a hit at the box office for the second time, offering a rare cultural touchpoint both nations shared. Economically, the United States and China seemed inseparable. The term “Chimerica” captured this dynamic: China produced and saved; the United States consumed and borrowed. The relationship was celebrated as the engine of global growth, helping the world recover from the 2007–08 global financial crisis.

Today, that amicability is long forgotten. A 2024 Pew survey showed that 81 percent of Americans viewed China unfavorably, with 42 percent perceiving it as an enemy of the United States. The turning point came in 2012, when presidential candidates Barack Obama and Mitt Romney blamed China for U.S. job losses to court swing voters in Ohio. The narrative stuck, although the true culprits—automation, demographic shifts, and underinvestment—were largely ignored.

Both the United States and China have become disillusioned with each other; yet the United States has some advantages that China lacks. The United States’ domestic resources and friendly neighbors make it more likely to muddle through its challenges, while China faces a steeper climb due to resource constraints and volatile relationships with its neighbors. Economically, the gap between U.S. and Chinese per capita gross domestic product (GDP) has widened since the end of the COVID-19 pandemic.

All those developments mean that the United States can negotiate with China from a position of relative strength. The 2020 Phase One trade agreement with China negotiated during President Donald Trump’s first term fell short of its goals and was largely abandoned during the COVID-19 pandemic. Now, Trump has a second chance to reshape U.S.-China trade relations—and this time, he should think big.

Trump treats foreign affairs like a game of Monopoly, viewing countries as properties to control, trade, or leverage to outmaneuver rivals. There are no permanent friendships rooted in shared values, nor enemies defined by ideology; every foreign leader is simply another player vying to dominate the board. Under the rules of this new game, Trump and his fellow world leaders have wide latitude to act in ways that were once inconceivable. Counterintuitively, Trump’s anti-China rhetoric could grant him the public credibility needed to broker a broad and enduring deal, much like former President Ronald Reagan’s arms-control deals with the Soviet Union. His firm grip on the Republican Party makes him nearly impervious to criticism from the right, giving him diplomatic flexibility where his predecessors would have been tangled in knots.

Treasury Secretary Scott Bessent has suggested a summit with U.S. allies to renegotiate trade terms. Modeled after the 1985 Plaza Accord, the proposed “Mar-a-Lago Accord” would blend substantive trade talks with Trump’s penchant for spectacle and personal branding. Though the feasibility of such a gathering remains uncertain, many countries could be willing to grant Trump the optics of a diplomatic triumph if it means more favorable trading terms. However, restricting the summit invitee list to U.S. allies would limit its economic impact and miss a golden opportunity: to truly reshape trade policy and strengthen U.S. economic leadership, a prospective accord needs to include China.

Like two oversized passengers squeezed into adjacent airplane seats, the size and influence of U.S. and Chinese economies make avoiding each other impossible. Together, the United States and China account for about 43 percent of global GDP and nearly 48 percent of global manufacturing output. Economic reality underscores the futility of decoupling efforts by Washington’s China hawks and Beijing’s so-called wolf-warrior diplomats. China remains the United States’ largest trading partner in goods and services outside North America. In 2023, the U.S. trade deficit with China stood at $252 billion—its lowest level since 2009, but still 55 percent larger than its deficit with Mexico, the next largest. This trade imbalance often overshadows the significant flow of U.S. exports to China, which exceeded $195 billion last year—surpassed only by exports to Canada and Mexico.

Redefining the United States’ relationship with China does not mean compromising on important security issues; Washington should not grant Beijing access to sensitive technologies or turn a blind eye to state subsidies that unfairly advantage Chinese industrial products. Trump’s goal should be to keep China firmly embedded within the U.S.-led global economic system while sharing more of the benefits of bilateral trade with American workers.

But Trump will need to rely on more than just coercion to extract meaningful concessions from China in a trade deal. Higher tariffs on Chinese goods will likely provoke reprisals, leading to increased U.S. consumer inflation and damage to U.S. industry. Instead, the Trump administration should adopt a bear-hug strategy—one that ensures China’s economic growth aligns with a vested interest in the future success of the United States.

To succeed in trade negotiations with China, the Trump administration needs to present the Chinese leadership with a dilemma rather than a direct confrontation. Instead of using tariffs solely to shrink the trade deficit, the administration should explicitly link tariff levels to the amount of Chinese investment in the United States. If Xi wants lower tariffs, he need only invest more in the United States. This move would allow Washington to set the terms of a trade deal and leave Beijing with a clear choice: accept penalties for noncompliance or reap rewards for cooperation.

For example, in 2023, the U.S. trade deficit with China exceeded that of the next highest country, Mexico, by about $90 billion. China paid down part of this gap by adding $6.3 billion to its holdings of U.S. long-term securities and launching $621 million in new foreign direct investment (FDI) in the United States—leaving an “unpaid” balance of approximately $83 billion. The Trump administration could make tariffs directly proportional to this unpaid balance, incentivizing China to close the gap through a combination of increased U.S. exports or direct investments that benefit U.S. industries and communities.

To address potential national security concerns, Chinese investments could be restricted to designated industries and subject to rigorous U.S. government reviews. Acquisitions of U.S. companies would be discouraged, while greenfield investments—such as newly built factories that create jobs—and startups in nonsensitive technologies would receive preferential treatment.

China would have multiple pathways to meet its spending and investment targets, as well as avoid higher tariffs. For instance, Chinese FDI in the United States has dropped by 97 percent since 2016. Returning to 2016 levels, adjusted for inflation, would require approximately $35 billion in new investments. Similarly, the People’s Bank of China (PBOC) has reduced its holdings of U.S. Treasury debt by more than one-third since 2016.

Reversing this trend by redirecting the PBOC’s purchases of gold during 2024 back into U.S. Treasury debt could generate $43 billion in new investment. This would help support U.S. efforts to keep interest rates low, particularly as Trump’s policies are projected to increase the national debt by $7.75 trillion over the next decade. As a side benefit, such a move would effectively squelch talk of an emergent BRICS currency or global de-dollarization by publicly recommitting the PBOC to the U.S. dollar as the world’s reserve currency.

On the trade-account side, China could increase its imports of U.S. oil and gas by 25 percent over 2024 levels, generating an additional $5 billion in spending. Even with this increase, the U.S. share of China’s energy imports would remain less than one-third of Russia’s, preserving Chinese energy independence. Those measures—a combined $83 billion increase in spending and investment—would enable China to meet its targets and avoid a tariff hike.

The exact target levels for new spending and investment would undoubtedly become a focal point of negotiations between the United States and China. By allowing Beijing the flexibility to determine how to meet those targets, Washington enhances the likelihood of reaching a mutually beneficial agreement.

Reaching a deal with China is possible if both sides avoid letting the geopolitical tail wag the economic dog. The issue most likely to dash hopes of redefining bilateral relations is Taiwan. Chinese leadership should recognize that the relevance of Taiwan to U.S.-China relations is primarily shaped by decisions made in Beijing, not in Washington or Taipei. Xi’s frequent references to the “inevitable reunification” of Taiwan, punctuated by large-scale military exercises around the island, fuel the narrative that China is an imminent military threat, galvanizing anti-China sentiment in Washington. For most of the last fifty years, both the United States and China have largely sidestepped the Taiwan issue; there is no strategic imperative to resolve it now.

The Trump administration’s initial challenge in negotiating a deal with China is to penetrate the information vacuum surrounding Xi. Here, Trump’s highly personalized approach to diplomacy offers some optimism. Xi enjoys comparisons to former Chinese leader Mao Zedong, and Trump is no stranger to high-impact optics. It would not be difficult to arrange a visit by Xi to Mar-a-Lago, where he and Trump could reset U.S.-China relations, much like former President Richard Nixon’s historic trip to China in 1972.

The symbolic victories from such a summit could lay the groundwork for substantial achievements. Direct engagement between the two leaders could open channels for working-level technocrats to communicate and manage crises more effectively. The summit could become the foundation for a historic accord, turning a potential branding exercise into a diplomatic milestone.

By securing agreements on economic investment, reaffirming the U.S. dollar’s centrality, and stabilizing geopolitical tensions, Trump and Xi could redefine U.S.-China relations for a generation. Such a deal would not only preserve peace but also position both nations as coarchitects of a more balanced global order.