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As U.S. and Chinese officials meet in London for a fresh round of trade negotiations, markets are watching closely for signs of de-escalation—or entrenchment. The renewed dialogue marks a critical juncture in the increasingly complex economic relationship between the world’s two largest economies. The goal appears to be a revival—or at least a reinforcement—of the temporary truce reached in Geneva in May, which only provided a 90-day suspension of the steepest tariffs.
PGIM’s fixed income team sees the rivalry entering a critical new phase. What was once a costly game of ‘chicken’ is evolving into a ‘stag hunt’—a dynamic in which short-term gains may tempt both sides. Yet, “longer-term self-interests are better served when key decisions revolve around the concept of cooperation,” notes Shikeb Farooqui, Lead Economist Asia at PGIM Fixed Income.
Farooqui notes that China seems to prefer a negotiated, incremental path over full decoupling—so long as it aligns with its strategic goals. Beijing would seek to avoid the perception of giving in to U.S. pressure, aiming instead to project parity in the relationship. “China wants to dispel the notion that the U.S. has escalation dominance, and as a result, does not want to be seen to be caving into the U.S.’ ‘might is right’ policy,” he observes, pointing to a belief in Beijing that Washington needs China just as much—and that any misstep could weaken U.S. global credibility.
Both sides are under pressure: China’s exports to the U.S. fell sharply in May—down 34.5%, the steepest drop since the pandemic’s onset—while the U.S. dollar faces headwinds from ongoing policy uncertainty.
China’s trade advantage
While negotiators focus on immediate issues like rare earth exports and tariff compliance, the broader contest over technology, supply chain security, and global economic influence remains unresolved.
As PGIM shows in its May analysis, the U.S. is dependent on China for complex supply chains, particularly for technology-related goods such as communications equipment and computer devices.
Conversely, China mainly imports easily substitutable primary goods from the U.S.
“Therefore, China’s reliance on the U.S. is either built on simpler supply chains or has been receding in the case of more complex goods, such as avionics, advanced transportation systems, high-purity chemicals, and advanced semiconductor manufacturing equipment,” says Farooqui.
What is more, China is still deeply integrated into global supply chains, complicating Washington’s push for decoupling. While direct exports from China to the U.S. have been declining since 2019, Chinese supply continues to flow into the U.S. via transshipment hubs in ASEAN, India, and Mexico.
“The ability of the U.S. to exert any long-term leverage over China via trade depends on the success of substituting away from Chinese goods and components—not just in the U.S., but globally. Therein lies the difficulty given China stands alone in the manufacturing value that it adds across the global trading spectrum,” adds Farooqui.
PGIM expects a multi-year process, making a quick, one-shot, comprehensive solution unlikely, but sees trust-building mini deals emerging.
“We see a medium- to long-term landing zone where the U.S. will push to decouple in core strategic areas. But in a global ‘stag hunt,’ the dependency of the U.S. and its trading partners on China means that they may have to tolerate bifurcated supply chains in non-strategic sectors into the foreseeable future,” Farooqui concludes.
