Are US-China Relations a House of Cards?

President Donald Trump is fond of using a card-playing metaphor to describe his approach to international relations.

He cautioned Ukrainian President Volodymyr Zelenskyy that he doesn’t have the cards to emerge victorious in his war against the Russians. Similarly, in describing the economic relationship between the United States and Canada, Trump told reporters that “we have all the cards. We have every single one.… Economically, we have such power over Canada.”

Trump hopes that by betting on his strong hand, he can exact concessions from other countries. The tensions between the United States and China have arisen, in part, because China sees itself as a rising super power with a role to play in a multi-polar world and well-placed to resist the United States’ strong-arm tactics. Indeed, China is one of the few countries that has imposed retaliatory tariffs on the United States.

In keeping with President Trump’s card-playing metaphor, US-China relations will be portrayed as a game of Texas hold’em with particular focus on the strength of the two countries’ hands in the three areas the tensions are felt most acutely: security, supply chain vulnerabilities and international trade.

It appears that the two countries are fairly evenly matched. This suggests that they will continue to define the contours of their relationship, knowing that neither will dominate the other in the foreseeable future. Their ability to use soft power to create friendly coalitions with other countries will also shape the evolution of their relationship.

“The Flop”: Security

China’s military spending has grown rapidly in recent years. According to estimates from the Stockholm International Peace Research Institute (SIPRI), it rose by 84 percent between 2014 and 2024. This has profoundly shaped US perceptions of China as a rising strategic competitor and potential existential threat.

Like all Chinese data, the numbers on military spending have to be put in context. The Chinese economy more than doubled over this period. In fact, military expenditure has fallen as a share of the Chinese government’s overall spending, suggesting defence has actually become a less important government priority (see Figure 1).

China’s announced defence budget for 2024 was CNY 1.67 trillion ($231 billion). Many foreign defence analysts believe that this figure understates China’s true military spending because it does not account for off-budget expenditures and does not reflect the renminbi’s actual purchasing power at home. For example, in December the US Department of Defense, now the Department of War (DoW), estimated that actual Chinese military spending in 2024 may have been between 40 and 90 percent higher, approximately $330–450 billion. SIPRI’s own estimate is $314 billion.

The level of US military spending provides the key comparison here. In 2024, US defence spending was close to $1 trillion. So, even taking the DoW’s estimates, US defence spending was between 2.2 and 3 times higher than China’s.

Table 1 presents a comparison of American and Chinese military strength. It shows that while China has the edge in active personnel, the United States has an advantage in hardware. For example, it has close to four times as many military aircraft. China has more tanks but the United States has many more armored vehicles. While China has a larger navy, it employs more frigates, corvettes and patrol vessels. These smaller ships are well-suited to coastal defence. In contrast, the US Navy wants to project power across the seas and it has more aircraft carriers, submarines and destroyers. In fact, despite its smaller fleet, the tonnage of the US Navy is estimated to be about twice that of China’s.

The DoW estimates that China had some 600 operational nuclear warheads in its stockpile as of mid-2024 (see Figure 2). It projects that China’s stock of warheads will grow to over 1,000 by 2030. If the experts at the DoW are correct, then China’s future stockpile of nuclear warheads will still only amount to 27 percent of those currently deployed or stored by the United States.

While China lags behind the United States in terms of military hardware, the gap in combat readiness could be even greater.

In the latest DoW report to Congress, there is a special topic on the corrosive effect of corruption in the People’s Liberation Army (PLA). It notes that 15 high-ranking military officers and defence industry executives were removed from their posts in the second half of 2023. Many of those investigated or removed for corruption headed the Rocket Force, which was responsible for China’s ground-based nuclear and conventional missiles. According to US intelligence assessments, missiles were found filled with water rather than fuel and faulty silo lids hampered effective missile launches.

Who Has the Cards?

In discussing the DoW’s report on military power, Ely Ratner — then assistant secretary of defense for Indo-Pacific security affairs in the Biden administration — noted that the United States is not standing still even as China modernizes its military. Indeed, Ratner suggested that the PLA may be “finding themselves just as distant, if not more distant, from solving some of the operational problems they’re trying to solve. And that’s really the essence of the pacing challenge and the essence of deterrence.”

In assessing the likelihood of a short, sharp invasion of Taiwan at acceptable costs, Dr. Ratner added that “they’re not there today. They’re trying to get there.…But it’s not clear they’re getting any closer than they were over the last couple of years.”

His views are echoed by the senior defence official who briefed the press on the DoW’s report. He said that despite the PLA’s rapid development, China “has not yet demonstrated the type and sophistication of certain capabilities it would need in a major regional contingency.”

The United States clearly has stronger security cards. But can it play them?

In comparing China and the United States, President Trump recently told South Korean President Lee Jae Myung that “they have some cards. We have incredible cards. But I don’t want to play those cards. If I did, that would destroy China. I’m not going to play those cards.”

In the security realm, it appears that we are headed for more of the status quo: much sabre-rattling on both sides but a clear understanding that a war would be disastrous.

Still, history teaches that countries can be overtaken by small events that have catastrophic results. This is the message of Christopher Clark’s book The Sleepwalkers: How Europe Went to War in 1914.

More dialogue is needed for the United States and China to avoid mistakes or misreadings from growing into actual conflict. Such dialogue has been useful. The DoW notes that after the San Francisco meeting between Presidents Biden and Xi Jinping in 2023, the Chinese air force no longer engaged in risky aerial intercepts.

On September 9, the US Secretary of War, Pete Hegseth, held a video call with Dong Jun, China’s minister of national defence. They agreed to further discussions. This is clearly a step in the right direction.

“The Turn”: Supply Chain Vulnerability

After decades of rising globalization, events since the early 2020s have exposed vulnerabilities in global supply chains. Foremost among these was the COVID-19 pandemic, which led to a sharp contraction in international trade in 2020. Subsequently, the blockage of the Suez Canal in 2021, Russia’s invasion of Ukraine in 2022 and ongoing US-China tensions have all weighed on imports and exports. As a result, the volume of international trade in goods and services in 2024 was some five percent below the 2015–2019 trend (see Figure 3).

To mitigate the effects of natural disasters and pandemics, supply chains can be reinforced by sourcing from multiple suppliers, building inventory buffers and seeking alternative trade routes. But these remedial practices will be less effective if the supply chain concerns are geopolitically driven — and it is geopolitics, not logistics, that has led to calls for onshoring or nearshoring.

With the imposition of tariffs on each other’s exports, trade between the United States and China has stalled. Yet, this has not been a symmetric development (see Figure 4). China’s share of US imports has fallen sharply, as has the United States’ share of China’s imports. The United States’ sales to China have been more resilient, with its share of Chinese imports only dipping modestly. China’s share of US exports has also only experienced a minor decline.

From Figure 4, it appears that China is more dependent on the United States than vice versa. And this is true from a narrow, mercantilist perspective, as Chinese exporters have more sales at risk than their American counterparts. However, from the point of view of domestic consumers and producers that rely on imported inputs, the situation is reversed.

One way to assess supply chain vulnerabilities is to consider the extent to which a particular product represents a large share of Country A’s imports, compared to Country B’s exports. Table 2 presents China’s top exports to the United States in 2024. There are five products for which imports from China represented more than half of total US imports: batteries, plastic items, toys, lighting, and water heaters and other heating devices. But sales of these products to the United States only accounted for about a quarter of Chinese exports. This suggests that it would be difficult for the United States to find new sources of supply, while it would be relatively easy for China to divert its US sales to other markets.

Table 3 repeats this exercise for the United States’ top exports to China. Only two of the top US exports — vaccines and medical devices — accounted for more than 30 percent of Chinese imports. Moreover, the United States was highly dependent on China for sales of soybeans and copper scrap. This has put the US exporters of these products in a relatively vulnerable situation.

It is said that supply chains are only as strong as their weakest link. The loss of a small but important imported component could have cascading effects on domestic production and consumption.

Take rare earth magnets, for example. In 2024, the United States bought $360 million of these magnets from China, accounting for three-quarters of total such imports. Although they only represented 0.1 percent of all US imports from China, the magnets are vital to the production of electric vehicles, defence systems, semiconductors, wind turbines and consumer electronics. As a result, China was able to exploit this vulnerability in order to negotiate a tariff rollback.

Who has the cards?

Tables 2 and 3 suggest that the United States may be more vulnerable than China to trade disruption. They show that, on average, China’s top exports to the United States accounted for 24 percent of China’s exports of these products. But the same goods amounted to 39 percent of total US imports of these products. In contrast, the United States’ top exports to China represented 23 percent of US exports but only 16 percent of China’s imports.

It is also worth noting that, on the one hand, almost half of the United States’ top exports to China are agricultural, energy or metallic commodities for which other countries can provide reasonable substitutes. On the other hand, China exports a wide variety of manufactured goods to the United States for which substitutes, at comparable prices, may be difficult to find.

Over time, it is possible to overcome supply chain vulnerabilities by onshoring or nearshoring the production of key components. This is what the Chinese are doing with advanced chips and what the United States hopes to do with rare earth magnets. However, these endeavours are time-consuming, costly and fly in the face of the logic of comparative advantage.

The United States and China are unlikely to come to a broad agreement to de-weaponize trade. We are more likely to see barriers erected and dismantled in a series of one-off transactions.

“The River”: International Trade

President Trump is fixated on trade imbalances.

He believes that the US goods deficit, which reached $1.2 trillion in 2024, is the result of its trading partners’ bad behaviour. Indeed, the Liberation Day tariffs he imposed in April, under the International Emergency Economic Powers Act, appear to have been calculated as a function of the size of countries’ bilateral goods deficits.

In 2018, President Trump imposed a series of tariffs to address the United States’ trade imbalance with China. At that time, the bilateral deficit was some $400 billion or close to half of the United States’ overall goods deficit. During the first Trump administration, the US average trade-weighted tariff on Chinese goods rose from just over three percent to 21 percent. China responded to the Trump administration’s tariffs with those of its own, which rose from eight to 22 percent. The tariffs remained in this range until early in Trump’s second term.

The tariffs had their desired effect on the US trade deficit with China. By 2024, it had fallen to one percent of US GDP from two percent in 2018. However, the tariffs did nothing to address the United States’ overall trade balance, which has remained at about minus four percent of GDP over the past decade (see Figure 5).

In his second term, Trump has doubled down on tariffs as a trade policy tool, raising them to levels not seen since the late 1930s. This time, however, the tariffs are being imposed on all of the United States’ trading partners.

Currently, the US trade-weighted tariff on China is almost 60 percent, close to three times as high as during the first Trump administration (see Figure 6). Moreover, its average trade-weighted tariff on all other countries jumped from three to 21 percent over the same period.

For its part, China increased its average tariff on the United States from 22 to 33 percent while maintaining those on the rest of the world at 6.5 percent, 1.5 percentage points lower than pre–trade war levels.

The tariffs imposed in April will be even more painful than those in 2018. Since their imposition, China’s exports to the United States have declined sharply, while its sales to the rest of the world have remained robust.

The Liberation Day tariffs are designed to boost the long-run attractiveness of the US economy. However, in the near term, they suck purchasing power out of US consumers. This is why most forecasters believe that they will have a negative impact on the US economy, even in the long run.

The Budget Lab at Yale University estimates that those currently in place will cost US households an average of $2,300. The tariffs are expected to slow US GDP growth by half a percentage point in each of 2025 and 2026. In the long run, US GDP is predicted to be 0.4 percentage points below the pre-trade war baseline.

Who has the cards?

Clearly, the trade war is a lose-lose proposition, hurting both the United States and its trading partners. What, then, are the prospects for a trade deal between China and the United States that will improve outcomes for everyone?

President Trump has shown a willingness to cut deals with US trading partners, offering tariff reductions in return for some combination of increased purchases of American goods, enhanced market access and commitments to invest in the United States.

The Federal Reserve has pointed to the moderation of economic activity, slowing employment growth and rising unemployment as the rationale for cutting interest rates on September 17. Further interest rate cuts are expected this year. As the state of his economy deteriorates, the value of his cards will fall and Trump will become increasingly eager to make a deal with China. A key part of this deal would be China’s offer to support the US economy in return for a mutual rollback of tariffs.

One option is China’s promise to buy billions of dollars of US goods, as it did in 2020. That deal was undermined by the outbreak of COVID-19, which led to a collapse in global trade. Such a deal has a better chance of success this time.

A second option is to increase the effectiveness of US monetary policy. As the Fed cuts interest rates, the dollar should weaken, potentially boosting US net exports. The renminbi has been tightly managed against the US dollar. However, the Chinese authorities have the scope to allow their currency to appreciate modestly.

Due to much better inflation control in China than in the United States, the renminbi is already super-competitive. Between January 2020 and August 2025, the US price level rose by 25 percent, but Chinese prices were only up 2.0 percent over the same period. Moreover, the renminbi depreciated by 2.3 percent against the dollar. That means that the real renminbi — the nominal exchange rate adjusted for relative prices — has actually fallen by 20 percent (see Figure 7).

Apart from being an attractive bargaining chip for a deal with the United States, appreciating the renminbi would be helpful for China to rebalance demand from external to domestic sources. A stronger currency makes imports cheaper and increases domestic purchasing power.

A modestly stronger exchange rate would have a dampening effect on China’s exports, but the real renminbi is already very cheap. In part, this is why China’s exports to all countries outside of the United States have been doing so well. Moreover, an agreement to roll back the Trump administration’s tariffs could offset much of the effect of the appreciation in the US market.

A second element of this deal would be the further relaxation of US restrictions on the export of chips and chip-making equipment. Trump already appears to be moving in this direction. In return for a 15 percent cut of their sales, he is allowing Nvidia and AMD (Advanced Micro Devices) to sell China powerful chips that had previously been banned. Earlier this year, he allowed the world’s three leading semiconductor design software companies — Synopsys, Cadence Design Systems and Siemens — to sell their products in China without having to apply for licences. President Trump does not seem as bothered by the national security concerns that preoccupied the Biden administration.

“Community Cards”: The Rest of the World

In Texas hold’em, the value of a player’s two hole cards (the starting hand) depends on the composition of the five community cards. For example, a 2 and a 3 unsuited can beat a pair of aces if they can be combined with the community cards to make a straight.

The analogue for the community cards here is the rest of the world. The American or Chinese cards’ value increases to the extent soft power is used to create a coalition of friendly countries. Bringing other nations onside can shift the balance of both military and economic power.

For decades, the United States has wielded its soft power effectively and was popular internationally. Conversely, China, with its unique language, culture and form of government, has been regarded with suspicion.

Recent polling from the Pew Research Center suggests that global attitudes toward China are moderating. In its 2025 poll, Pew found that in eight of the 25 countries polled (all eight being emerging markets), a majority of respondents had a favourable opinion of China (see Figure 8). Importantly, since the 2024 poll, the perception of China improved in 21 of the 25 countries surveyed. Perceptions only declined in one country, South Korea. Perceptions were unchanged in the three remaining countries.

It is noteworthy that Americans are among those who began to perceive China more favourably. Pew found that the share with a favourable opinion rose from 16 to 21 percent, while those who said China was the United States’ enemy fell from 42 to 33 percent.

It is not clear what is driving the improved perception of China. It is possible that it is a side effect of the Trump administration’s aggressive America First orientation. (Pew’s 2025 poll was conducted between January 8 and April 26, 2025, and may underestimate the changes in global sentiment arising from the April 2 Liberation Day tariffs.)

“The Showdown”: Where Do We Stand?

No one wins a trade war.

The sky-high tariffs that the United States and China imposed on each other in April not only threatened to undermine growth in the world’s two largest economies, but also would have inflicted serious collateral damage on the rest of the world.

That is why we all heaved a huge sigh of relief in May, when American and Chinese officials agreed to massive reductions in their reciprocal tariffs for 90 days. In a promising development, they also agreed to establish a mechanism for ongoing trade discussions.

The United States and China are playing a high-stakes game, but they appear to be fairly evenly matched. America has a large edge in military superiority. As the pre-eminent manufacturing power, China has fewer supply chain vulnerabilities. Both sides lose from their high bilateral tariffs. China is not well perceived abroad, but that is changing.

Is the US-China relationship a house of cards? Probably not. So much depends on the two countries finding a modus vivendi. Harvard political scientist Graham T. Allison, who coined the phrase Thucydides trap, believes that the United States and China are in a deeply symbiotic relationship. Allison compares them to inseparable, conjoined Siamese twins. Thus, it is reasonable to expect the two countries to agree on a deal that makes everyone better off.

A potential deal could involve both countries rolling back their tariffs: China supporting the US economy through some combination of goods purchases and a modest nominal appreciation, and the United States relaxing its controls on the export of advanced chips and chip-making equipment.

The devil, as they say, will be in the details, but a deal along these broad lines would certainly be helpful for the United States, China and the rest of the world.