As tensions between Washington and Beijing simmer beneath a veneer of cooperation, U.S. President Donald Trump and Chinese leader Xi Jinping are set to meet Thursday in South Korea to discuss a partial reduction of tariffs tied to Beijing’s efforts to stem fentanyl exports. The move, if confirmed, would mark the first tangible thaw in bilateral relations since Trump’s return to power — and could ripple across global supply chains and markets.
The Return of Transactional Diplomacy
The meeting, scheduled for Thursday morning in Busan during the Asia-Pacific Economic Cooperation (APEC) summit, represents Trump’s signature brand of dealmaking: linking trade concessions to security priorities. Speaking aboard Air Force One on Wednesday, Trump expressed confidence in reaching an agreement. “I think we’re going have a deal, I think it will be a good deal for both,” he told reporters, adding that he expects to lower tariffs “because I believe they’re going to help us with the fentanyl situation.”
The backdrop is one of escalating trade tensions that have seen tariffs spiral to historic highs. Current average duties on Chinese goods stand at approximately 55%, including a 20% levy specifically imposed over Beijing’s alleged failure to curb exports of fentanyl precursor chemicals. If Trump follows through on halving these fentanyl-related tariffs to 10%, it would bring total average tariffs down to roughly 45% — still elevated by historical standards, but a symbolic retreat from the brink.
This isn’t the first time Trump has wielded tariffs as leverage. During his first term, the Phase One trade deal similarly tied trade concessions to Chinese agricultural purchases and intellectual property commitments. Yet that agreement’s mixed results — China fell short of its purchase commitments, though bilateral trade continued to grow — have left analysts skeptical about the durability of any new framework.
The Fentanyl Factor: Crisis as Currency
The opioid epidemic has become one of America’s most pressing public health emergencies, and Trump has seized upon it as both a policy priority and a negotiating tool. While fentanyl-related deaths have begun declining — dropping from approximately 76,000 in 2023 to 48,000 in 2024, part of an overall 27% decrease in overdose deaths — the crisis remains acute. Over 80,000 Americans died from drug overdoses in 2024, with synthetic opioids like fentanyl still accounting for the majority of fatalities.
China has long faced accusations of insufficient enforcement against manufacturers of fentanyl precursor chemicals, which are shipped to Mexican cartels and then smuggled across the U.S. border. Beijing has periodically pledged crackdowns, including new regulations on precursor chemicals announced in recent years. However, enforcement has remained uneven, and U.S. officials have grown frustrated with what they view as symbolic gestures rather than substantive action.
Now, with tariffs serving as both punishment and inducement, Trump is betting that Xi will deliver more than promises. According to analysts at Evercore ISI, Beijing is likely to offer “a new promise from Xi in person” to facilitate the tariff reduction — a move that would allow Trump to claim a political victory while giving China economic relief.
The calculus is clear: for Washington, even modest progress on fentanyl enforcement justifies tariff relief. For Beijing, escaping punitive tariffs — even partially — offers a political and economic win. “For Beijing, even a limited tariff rollback would be a political and economic win,” noted a Shanghai policy scholar, highlighting how China’s economy has struggled under the weight of trade restrictions and slowing domestic growth.
Tariff Dynamics and Market Impact
The immediate market reaction to news of the Trump-Xi meeting has been cautiously optimistic. The Chinese yuan strengthened slightly, S&P futures ticked upward, and commodity markets showed signs of stabilization. Investors are pricing in the possibility of a temporary détente, even if deeper structural issues remain unresolved.
The sectoral impacts of a tariff rollback would be varied. Manufacturing sectors heavily dependent on Chinese imports — including electronics, furniture, and consumer goods — would see immediate cost relief. The semiconductor industry is watching closely, particularly after Trump indicated he might discuss Nvidia’s advanced Blackwell AI chips with Xi. Any loosening of export controls on high-tech goods could reshape supply chains and competitive dynamics in the critical AI sector.
Pharmaceuticals and medical devices, which have faced supply chain disruptions and cost pressures from tariffs, could also benefit. Meanwhile, American farmers — a key Trump constituency — stand to gain if China resumes large-scale purchases of soybeans and other agricultural products. Beijing has already made goodwill gestures, purchasing at least two cargoes of U.S. soybeans in recent weeks after months of avoiding American agricultural imports.
The U.S. trade deficit with China, which stood at $295.4 billion in 2024, remains a political flashpoint. Trump has consistently framed this deficit as evidence of China’s unfair trade practices, though economists note that bilateral deficits are poor measures of trade fairness and reflect broader macroeconomic factors. Any deal that fails to address the underlying deficit could face domestic criticism, particularly from congressional Republicans and labor unions concerned about manufacturing job losses.
Strategic Context: The Asia Summit Setting
The APEC summit provides more than just a convenient venue for the Trump-Xi meeting — it serves as a vivid reminder of the complex geopolitical chessboard both leaders navigate. South Korea’s President Lee Jae Myung, hosting the summit, has his own fraught relationship with Washington after Trump imposed 15% tariffs on South Korean goods. On Wednesday, Lee awarded Trump South Korea’s highest honor and a replica of a golden Silla-era crown, a gesture clearly aimed at smoothing relations.
Japan, which recently negotiated its own framework deal with the Trump administration, is watching the Trump-Xi talks with keen interest. Japanese officials worry that any bilateral deal between Washington and Beijing could leave Tokyo at a competitive disadvantage, particularly in high-tech sectors where China and Japan compete directly.
India, meanwhile, chose to skip the ASEAN-related events earlier in Trump’s Asia tour, with Prime Minister Narendra Modi reportedly concerned about potential diplomatic complications. The decision underscored India’s delicate balancing act: courting closer ties with Washington as a counterweight to China, while avoiding entanglement in U.S.-China trade disputes that could harm India’s own economic interests.
ASEAN nations, collectively representing a major economic bloc, have watched the U.S.-China trade war with mounting anxiety. Supply chains across Southeast Asia have been disrupted as companies seek to diversify away from China, creating both opportunities and challenges for countries like Vietnam, Thailand, and Malaysia. A stabilization in U.S.-China relations could ease some of these pressures, though it might also slow the region’s emergence as an alternative manufacturing hub.
Risks and Skepticism: Beyond the Handshake
Despite the optimistic rhetoric, significant obstacles remain. Congressional skepticism toward China runs deep, particularly among Republicans who view Beijing as a strategic adversary. Any agreement that appears to soften pressure on China could face political backlash, especially with the 2026 midterm elections approaching. Trump’s own party has grown increasingly hawkish on China, making it unclear how much political space exists for compromise.
Corporate America remains divided. Companies that rely on Chinese manufacturing — from Apple to Nike — would welcome tariff relief, as higher costs have squeezed margins and forced price increases. However, firms that have already relocated production to other countries, often at significant expense, may resist a return to the status quo. The Phase One trade deal’s unfulfilled commitments have left many executives wary of Beijing’s promises.
There’s also the question of enforcement. China pledged in the past to control fentanyl precursors, yet the crisis continued to worsen. Without robust monitoring mechanisms and consequences for non-compliance, any new agreement risks becoming another symbolic victory that fails to change ground-level realities. U.S. law enforcement and drug policy experts remain skeptical that Beijing can or will effectively crack down on chemical manufacturers, many of which operate in regulatory gray zones.
The timing is also politically fraught. Trump faces a government shutdown crisis back home, with Congress deadlocked over spending. Critics could argue that the president is focused on photo-ops abroad while pressing domestic issues go unresolved. Furthermore, any perception that Trump is going “soft” on China could undermine his broader tough-on-China messaging, which has been a cornerstone of his political brand.
A Tentative Thaw or Tactical Pause?
The Trump-Xi meeting represents less a resolution than a recalibration. At best, it offers a temporary easing of tensions, allowing both sides to step back from the brink of an escalating trade war that has unsettled global markets and disrupted supply chains. At worst, it’s a tactical pause that postpones rather than resolves fundamental disputes over trade, technology, and geopolitical influence.
For Trump, a deal — even a limited one — provides political ammunition. He can claim credit for addressing the fentanyl crisis, securing concessions from China, and stabilizing economic relations with America’s largest trading partner. The symbolism of a presidential handshake with Xi, particularly after months of heated rhetoric, offers a narrative of leadership and deal-making prowess.
For Xi, the calculus is equally pragmatic. China’s economy faces headwinds from slowing growth, property sector troubles, and demographic challenges. Tariff relief, particularly on a sustained basis, would ease pressure on exporters and provide room for economic policymakers to focus on domestic priorities. Politically, Xi can frame the meeting as evidence of China’s indispensability to global commerce and its willingness to engage constructively — even with a challenging counterpart.
The long-term implications for the global trade order remain uncertain. If the Trump-Xi deal holds and leads to further normalization, it could signal that the era of unrestrained decoupling is giving way to a more managed form of strategic competition. Supply chains might stabilize, investment flows could resume, and the risk of a catastrophic economic rupture would recede.
Alternatively, if the deal falters — whether due to enforcement failures, political opposition, or renewed tensions over Taiwan, technology, or human rights — it could reinforce the trend toward fragmentation. Companies would accelerate diversification away from China, governments would double down on industrial policy and protectionism, and the global economy would increasingly split into competing blocs.
Outlook for 2025: Navigating Uncertainty
As 2025 unfolds, several factors will determine whether the Trump-Xi meeting marks a genuine turning point or merely a brief respite. China’s compliance with any fentanyl enforcement commitments will be scrutinized closely, with U.S. law enforcement agencies tracking seizures and arrests. The trajectory of the trade deficit will remain a focal point, particularly if it continues to widen despite tariff adjustments.
Broader geopolitical developments will also matter. Tensions over Taiwan, disputes in the South China Sea, and U.S. efforts to restrict Chinese access to advanced technologies will continue to strain relations. Any one of these issues could derail progress on trade, as happened repeatedly in the past when promising negotiations foundered on non-economic disputes.
For global markets, the immediate outlook is cautiously positive. A tariff truce, even if temporary, reduces uncertainty and provides breathing room for businesses to plan. However, investors should remain wary of over-optimism. The underlying drivers of U.S.-China tensions — divergent political systems, competing visions of regional order, and clashing economic models — haven’t changed.
What’s clear is that transactional diplomacy, for all its limitations, has returned to the forefront. Trump and Xi are both pragmatists willing to make deals when the incentives align. Whether those deals stick, and whether they address the deeper structural issues dividing Washington and Beijing, remains to be seen. For now, the world watches Busan, hoping that a handshake between two leaders can bend the arc of history, if only slightly, away from confrontation and toward cooperation.
