Chinese leader Xi Jinping’s unflinching response to President Donald Trump’s trade war this year has paid off: Tariffs have been dramatically reduced, new export controls and port fees have been suspended, and China can even now buy the more advanced Nvidia chips that will help its AI ascendancy.
By pulling China’s economic levers — like weaponizing the supply chains of rare earth minerals that China dominates — Xi was able to inflict enough pain to cause Trump to backtrack on his toughest measures.
Heading into 2026 with two meetings with Trump on the schedule, Xi’s negotiating position might be weakened by widening imbalances in the world’s second largest economy: Despite its exporting might, China’s domestic slump has only grown worse in the last few months of this year.
Still, Xi is likely to harden his approach in dealings with the Trump administration, analysts say.
“The U.S. literally tried its best to put economic pressure on China, and it failed,” said Victor Shih, an expert on China’s political economy at the University of California at San Diego. “This will reinforce Xi Jinping’s mindset: everything we’ve done up to this point has worked fabulously, and now the U.S. has nothing on us.”
For the United States, that rigidity heightens the risk of renewed trade conflict just as Washington and Beijing prepare for high-stakes diplomacy.
China has for years run a two-speed economy: While its export sector has been booming as the world snapped up Chinese-made furniture and toys, solar panels and electric vehicles, domestic demand has been sagging.
China’s global trade surplus expanded to more than $1 trillion in the first 11 months of this year, already exceeding 2024’s full-year total. The large fall in sales to the United States was more than offset by increases elsewhere, particularly to Southeast Asia.
But other economic data point to a domestic economy that is losing momentum across multiple fronts: Imports have remained subdued, factory output slowed to a 15-month low last month and retail saleswere the worst since the end of the “zero covid” measures in 2022.
Investment levels have been falling sharply, and China’s long-running property downturn continues to weigh heavily on household wealth and confidence. Rising job insecurity adds another drag on the economy.
The World Bank forecasts China’s economy will grow by only 4.4 percent next year, which would be the slowest non-covid year in five decades and significantly below the Chinese Communist Party’s forecast of “about 5 percent.”
“China is already in a depression,” said Zhu Tian, a professor of economics at the China Europe International Business School in Shanghai. “The downward pressure and economic challenge China faces is tremendous.”
Beijing continues to insist, as it has for decades, that it will focus on boosting domestic demand and reducing its reliance on exports. After its most important annual economic policymaking meeting ended last week, the semiofficial Global Times said that, among the major tasks for 2026: “First and foremost is to maintain a demand-driven approach and build a strong domestic market.”
That promise received some skeptical responses. “China has been saying this forever,” said Andy Xie, a Shanghai-based independent economist and financial adviser, adding that he doesn’t believe the promise will be carried out. “China is sacrificing consumption for technology development,” he said, and will continue to do so for years to come.
Nor has Beijing taken serious measures to kick-start consumption. It used big stimulus measures to revive the domestic economy after the 2008 global financial crisis but has since shunned similar policies, viewing them both politically risky and prohibitively expensive.
Economists warn that the growing imbalances are creating vulnerabilities for China — and the world.
“As the second-largest economy in the world, China is simply too big to generate much growth in exports,” International Monetary Fund Managing Director Kristalina Georgieva said while visiting Beijing earlier this month.
She urged China to “accelerate” its plan to bring greater balance to the economy, saying this would be “beneficial for China, it is beneficial for the world economy.”
Georgieva’s message echoed what foreign leaders — most recently, France’s Emmanuel Macron — and economists have been telling Beijing for years.
That reluctance to rebalance “is creating serious fragilities in China,” said Alicia Garcia Herrero, chief Asia economist at the French investment bank Natixis. With the domestic economy already under strain, a sudden external shock could have severe consequences.
“If export demand suddenly disappears — it could be a pandemic, it could be anything — the day it goes wrong will be big,” she said, possibly catastrophic.
But the obstacles preventing Beijing from moving decisively to boost consumption are substantial, said Arthur Kroeber, founder of the China-focused research firm Gavekal Dragonomics.
“To make a serious shift toward consumption-led growth they would need to dismantle some of the elaborate production machine they have built over four decades and start building the machinery of a consumer society,” Kroeber said, a process Beijing is only at the earliest stages of initiating.
Another policy change long urged by foreign economists — allowing the renminbi to appreciate — also appears politically out of reach. A stronger currency would make Chinese exports more expensive overseas, helping narrow the trade surplus, while lowering the cost of imports and potentially supporting domestic consumption.
“A proactive and significant appreciation of the renminbi is almost impossible and completely contrary to the current economic situation,” said Zhu of the China Europe International Business School. “The downward pressure and economic challenge China faces is tremendous,” Zhu said.
As China maintains — or increases — its huge surpluses, its trading partners are becoming increasingly spooked. The European Union has already imposed tariffs aimed at stemming the flow of cheap Chinese electric vehicles, citing the threat to domestic industry.
Nor are measures to block cheap Chinese imports confined to developed economies. Earlier this month, Mexico announced tariffs of up to 50 percent on more than 1,000 types of goods, many of which originate in China.
Economists warn that such measures are likely to spread if China continues to rely on export-led growth to offset domestic weakness.
“There is a broad consensus among economists that if countries run beggar-thy-neighbor surpluses,” said Michael Pettis, a Beijing-based economist and fellow at the Carnegie Endowment for International Peace, “eventually the deficit countries will have no choice but to counteract.”
But Xi is unlikely to change his current stance on China’s manufacturing dominance when he and Trump meet next year, said Kroeber of Gavekal Dragonomics. That’s because, beyond the usual political and economic considerations, Beijing’s leadership carries a deeply embedded conviction that China’s future — and indeed its destiny as a superpower — depends on what its factories churn out and the technology driving that production.
“These guys basically believe that economic power comes from the physical production of technology,” Kroeber said. “You make more physical stuff, there’s more embodied technology. And that is how you achieve power and growth.”
Lyric Li contributed to this report
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