How to Get Everything Wrong in Dealing with China

Trump’s defeat offers a cautionary tale for the European Union

China secured not only tariff reductions but also the reopening of U.S. borders to its students, who already fill the classrooms of top American universities. To underscore their resolve, the Chinese made clear the rare earth agreement is temporary and will be reassessed in six months

Just over two months after “liberation day,” celebrated by the American president announcing tariffs against the entire world, Donald Trump was forced to put on a brave face and accept a deal with China, in what turned out to be a defeat.

The defeat stems from mistakes made during Trump’s first presidency (2017-2020), when the United States began using economic policy tools—such as tariffs and export restrictions on products like semiconductors—for purely political purposes. The goal was to hinder China’s economic rise and try to prevent it from overtaking the U.S.

Although both Republican and Democratic administrations have shared this goal—and while it may be partly understandable for a country that has held global dominance for nearly a century—the effort has failed. The main reason: a lack of strategic vision on the U.S. side, which China has not lacked.

Over the years, America’s protectionist stance convinced many in China that the U.S. was determined to block their legitimate aspirations to improve living standards.

In China’s collective imagination, America has become public enemy number one. That perception provided the perfect excuse to launch a nationalist shift and to channel national efforts toward achieving so-called strategic autonomy.

President Xi Jinping’s main goal is to free the country from dependence on the United States. And the most effective way to do that is to make the U.S. dependent on China.

China pursued this strategy through several key decisions.

First, it forced foreign companies wanting access to the Chinese market not only to manufacture a large share of their products locally, but also to transfer technology to the benefit of Chinese companies. Over time, this policy allowed China to build a highly competitive industrial base.

Second, the Chinese government actively encouraged students to study in top American and European universities—especially in science and engineering—and then return to work in Chinese companies and labs. At the same time, it invested heavily in its own top universities, which have since climbed global rankings and now produce half of the world’s engineering graduates.

Third, China secured control over a dominant share of global rare earth supplies—essential components for high-tech products such as computers, turbines, and aircraft fuselages.

By doing so, China positioned itself to stop American production of exactly those goods the U.S. doesn’t want to export to Asia.

In short, if America refuses to sell semiconductors to China, China can retaliate by cutting off the raw materials needed to produce them.

Before negotiations even began, Chinese officials placed a loaded gun on the table: the threat to suspend rare earth exports.

The result came quickly.

China not only won a reduction in tariffs, but also secured the reopening of U.S. borders to Chinese students—who already fill the classrooms of top American universities. And to make their positions clear, Chinese negotiators stated that the rare earth agreement remains temporary and will be reviewed in six months.

But China’s ambitions don’t stop there.

According to a recent Financial Times article, in exchange for rare earth imports, China asked European and American companies to share sensitive information, especially about their production processes and client data.

China only grants rare earth import licenses in return for detailed data on operating systems, employees, and in some cases, even images of products and production facilities.

Beijing has realized that data is even more valuable than technology or rare earths.

A first version of this article was published in the Italian daily Il Foglio

Lorenzo Bini Smaghi

Lorenzo Bini Smaghi holds a degree in Economic Sciences from the Université Catholique de Louvain (Belgium) and a Ph.D in Economic Sciences from the University of Chicago. He has been Chairman of the Board of Directors of Société Générale since 2015. He is an IEP@BU non-resident fellow

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