U.S. tariffs and China's limited retaliation will likely yield negotiations on stemming flows of Chinese fentanyl into the United States, but likely additional U.S. tariffs will see Beijing escalate its retaliation, making a broader trade deal unlikely due to the wide scope of U.S. grievances and Chinese reticence to concede on sensitive issues. On Feb. 4, China's finance ministry announced 10-15% tariffs on imports of U.S. liquefied natural gas, coal, crude oil, farm equipment and large-engine vehicles that will enter into force on Feb. 10. China's market regulator also announced an investigation into U.S. tech giant Google for potential violations of China's Anti-Monopoly Law, while China's commerce ministry placed PVH — the parent company of U.S. clothing brands Tommy Hilfiger and Calvin Klein — and U.S. biotechnology company Illumina on its Unreliable Entity List (UEL), subjecting them to potential sanctions. In addition, China's commerce ministry placed export licensing regimes on tungsten, tellurium, bismuth, molybdenum and indium products. These announcements were in response to U.S. President Donald Trump's Feb. 1 announcement that he was placing 10% tariffs on all Chinese imports in retaliation for China's alleged subsidizing and incentivizing of exports of fentanyl, a deadly opioid, and its precursors to the United States. Trump's executive order noted the new tariffs will also apply to Chinese imports valued under $800, and will not be exempt under the de minimis clause. Additionally, the order stated that the White House can impose more restrictions on China if Beijing ''fails to take adequate steps to alleviate the illicit drug crisis,'' but it also notes that the president can remove these tariffs if China sufficiently cooperates on the fentanyl issue. 

• The extra U.S. tariffs on China came alongside new tariff threats on Canada and Mexico announced on Feb. 1, though both were put on hold on Feb. 3 after Ottawa and Mexico City promised to increase border controls to help address the immigration and illicit drug problems. 
• On the campaign trail in mid- to late- 2024, Trump had pledged to put tariffs as high as 60% on Chinese goods, including some he pledged to deliver on ''day one'' of his presidency. On his first day in office, the White House imposed no such tariffs, but it released the ''America First Trade Policy,'' which outlined multiple ways in which Trump had assigned authorities to investigate whether new restrictions (including tariffs) were necessary to retaliate against various Chinese policies, including on the fentanyl issue.
• As part of the ''Phase One'' trade deal the first Trump administration reached with China in 2020, Washington agreed to pause some tariff hikes and cut other tariffs in exchange for Beijing agreeing to purchase an additional $200 billion worth of U.S. exports and to give U.S. companies stronger intellectual property protections.
• While China's market regulator was vague on its allegations into Google's behavior, sources cited by The Financial Times claim the investigation centers on the U.S. company's Android operating system and whether it is disadvantageous to Chinese smartphones like Xiaomi and Oppo. The Anti-Monopoly Law could result in fines, bans on certain activities, or even criminal charges.

For now, Chinese retaliation will remain modest but flexible, and will likely become more aggressive as new U.S. tariffs are released. The lack of significant ''day one'' tariffs on China, as well as Trump's threat of larger tariffs on close U.S. partners (Canada and Mexico) than on China, suggests China for now has reason to be cautiously optimistic for the prospect of trade talks, a stance that is reflected in Beijing's relatively modest trade retaliation measures. Though small in scale relative to U.S. measures, China's retaliatory methods (e.g. export licensing regimes and listing of U.S. companies, with pending sanctions) allow for the scaling of individual restrictions based on the direction of U.S. restrictions and of any trade talks. Additional U.S. tariffs are likely, given the plethora of lengthy trade investigations Trump announced into China in his America First Trade Policy, which are intended to give new tariffs more legal justification and staying power (so that they are less likely to be challenged in U.S. courts or otherwise revoked). As new U.S. tariffs start to arrive later in 2025, Chinese retaliation will grow in magnitude as Beijing aims to signal to Washington its ability to hurt the U.S. economy and U.S. businesses as a means to push the Trump team to the negotiating table. These restrictions would likely take the form of larger tariffs on more U.S. sectors, as well as export restrictions on industrial inputs for strategic U.S. sectors (e.g. electronics, aerospace, defense), entity listings for non-strategic sectors (e.g. clothing and food services) and other non-tariff barriers targeting entire sectors of U.S. imports. These two-way tariffs will heighten inflation, drag on industrial employment and topline economic growth, and raise costs and supply chain delays (e.g. as manufacturers relocate to dodge tariffs) in both the United States and China, though the magnitude of these impacts will vary by sector and be generally smaller in the United States than in China, given the latter's greater reliance on trade for economic growth.

China's interest in a trade resolution and recent U.S. dealmaking suggests the fentanyl tariffs could be resolved somewhat quickly, but a broader U.S.-China trade deal remains unlikely and dependent on the competing interests in the new White House vis-a-vis tariffs and China. The traditional drivers of China's post-COVID (2023-present) economic growth — real estate, consumption and foreign investment — remain lackluster, and Chinese exporters remain heavily reliant on the U.S. market. China is also highly concerned about its labor market and the deleterious effects unemployment and low wage growth are having on consumption. For these reasons, Beijing will be open to coming to the negotiating table with Washington on individual issues (e.g. fentanyl), as well as on some form of a broad-scoped, ''phase two'' trade deal, even if mutual distrust is higher than it was during the first deal. Moreover, Trump's early successes in bilateral negotiations — with Colombia agreeing to accept migrant deportations, Panama withdrawing from China's Belt and Road Initiative, and Mexico and Canada deploying troops to their borders — suggest at least preliminarily that the Trump administration is open to freezing some tariff hikes in exchange for concessions. Thus, in the likely event that China makes concessions (e.g. by enacting sector-wide restrictions on certain fentanyl precursor exports), there is a chance the White House could remove the new 10% tariff on Chinese goods. However, it will be harder to resolve the United States' various other, broader grievances with China — including Beijing's failure to fulfill the Phase One trade deal, intellectual property and tech transfer issues, and the discriminatory treatment of U.S. businesses in China — as Beijing will either not be open to negotiating these issues or refuse to make the concessions that Washington demands. A Phase Two trade deal, which would comprise many of these fraught issues, thus remains unlikely for now. Without a broader deal, U.S.-China trade and investment decoupling would accelerate more quickly under new tariffs. The degree to which this results in manufacturing relocation out of China and into South and Southeast Asia, for example, as opposed to a true decoupling (with final goods ending up in new markets) will depend on Washington's willingness to impose measures that actually stop trade as opposed to just tariffs, which can be circumvented (e.g. through off-shoring to third countries). However, the new U.S. administration's appetite for such measures against China remains uncertain, partly due to competing interests within Trump's cabinet, and it will take many more months to glean greater insights into what interests (trade vs. national security, domestic vs. foreign priorities) hold more sway in the White House. 

• Key drivers of Chinese growth have seen slowdowns in recent years, including retail sales (an indicator of consumption) dropping 3.7% year-on-year (compared with the pre-COVID average of 8-11%) in Dec. 2024, real estate sales revenue down 17% year-on-year in that same month, and foreign investment into China down 27% in 2024. 
• The United States remains China's top export destination, buying over $500 billion of Chinese exports in 2023, or roughly 15% of China's total exports to the world.