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China and the US prepare for the next round
Key Insights:
What is happening: China has long preferred a targeted approach to trade disagreements. As the scope of US action expands, however, China is correspondingly extending its legal measures to respond to these restrictions with a focus on companies that comply.
Why it matters: A more targeted approach reduces potential impacts on export growth and the overall Chinese economy, which is projected to slow in the second half of 2025. For foreign entities operating within China, however, they will bear the risk of a double penalty in the ongoing trade war.
What happens next: Although the US and China have eased some of the most severe trade tariffs and export controls applied in April, both nations continue to pursue opposing objectives and are positioning themselves for potential future conflicts. As the US seeks “strategic decoupling” - not just for itself, but for its closest partners - China will continue to expand the use of these tools as deterrents.
ANALYSIS
On 13 March, the US Bureau of Industry and Security (BIS) released new guidelines warning that any firm worldwide using Huawei’s Ascend chips would violate US export controls. While the BIS softened its language a day after, Beijing threatened to apply its Anti-Foreign Sanctions Law (AFSL) against foreign entities that complied with the BIS guidelines. The warning marked the latest in a series of China’s retaliation against third countries and firms it viewed as siding with the US and harming Chinese interests.
Historically, Beijing has employed both informal and formal economic measures, including trade and service restrictions, as a form of retaliation. Countries such as Korea, Japan, and Australia have each experienced direct economic repercussions in response to disputes. This approach, while still a part of Beijing’s tool kit, can complicate China’s growing need to woo trade partners, particularly in the face of a US effort to force third countries to limit Chinese inputs. Weaponizing trade and market access can also lead to economic strain for sectors that have to cope with a collapse in foreign demand and a lack of domestic buyers, such as China’s rare earth miners. These are the same sectors facing challenges from US decoupling. While the volume of redirected exports originally bound for the US is not substantial for the global economy to absorb, Beijing has nonetheless been keen on diversifying its trade and diplomatic ties in the Global South as a long-term strategy.
In contrast, using legislation such as the AFSL, Unreliable Entity List, and the Export Control Law allows China to surgically target individual entities for both deterrence and pressure. The ambiguous scope of the AFSL also provides authorities with considerable discretion in its application, enabling China to calibrate its interactions with partners as circumstances require on a moment-to-moment basis. In March, just two months before the BIS guidance, China applied the AFSL for the first time against an EU firm. The firm withheld payment from a Chinese marine engineering firm after its vessel order was completed, as the Chinese firm was sanctioned under the US Office of Foreign Assets Control (OFAC). In response, Chinese authorities detained the vessel and prompted the EU firm to apply for an OFAC license, demonstrating the effectiveness of the AFSL to bring about desired results.
Looking ahead, as the US lines up a range of planned and potential actions to further pry apart deeply fused elements of the economic structure, China is preparing an array of possible responses. The risks of corporations in being directly targeted as a means of exerting influence on Washington and other capitals continues to increase.
Topics: China, United States, Trade, Industrial, Trade Agreement, Manufacturing, Technology
Written by Onyx Strategic Insights
