Trump-Xi talks end in truce, not deal, with new potent risks

US President Donald Trump and Chinese President Xi Jinping finally met in Busan, South Korea, for long-awaited talks aimed at easing trade tensions.

If that was the objective, it was only narrowly achieved: the US “fentanyl tariffs” on China were halved—from 20% to 10%—bringing Chinese tariff levels closer to those of other Asian economies.

In return, China agreed to resume imports of American soybeans—hardly a breakthrough—and, more importantly, to lift the new export controls on rare earth elements (REEs) announced in October. These controls covered five additional REEs and extended existing restrictions.

However, the earlier controls announced in April—on seven REEs, including gallium and germanium, both critical for the defense and semiconductor industries—remain firmly in place. In other words, Trump failed to turn back the clock on REEs, leaving China with a potent strategic lever for future pressure tactics and disputes.

Still, China’s upper hand in this “deal” is more limited than it might have hoped. Reports suggest Xi wanted to raise the Taiwan issue and secure a US assurance against supporting Taiwanese independence—a topic that apparently didn’t make the agenda.

Beijing also pushed for Washington to lift export controls on Nvidia’s latest advanced AI chips – the Blackwell B30A – but Trump appears to have stood firm on the restrictions. Finally, the agreement carries a one-year expiration date, underscoring its fragility.

Based on recent precedent, it could unravel much sooner—and abruptly—should either side choose to withdraw for any number of retaliatory reasons. To buoy markets that had anticipated more substantial progress, Trump announced he would visit Beijing in April.

Against this backdrop, markets have reacted with justified caution to what looks less like a breakthrough and more like an extended temporary truce. Yet investors may be underestimating the risks of Trump’s apparent shift from economic to military coercion.

Hours before meeting Xi, Trump reportedly ordered the Pentagon to resume nuclear testing. While this decision could be read as a response to Russian President Vladimir Putin’s nuclear-powered missile test in the Arctic on October 28, Trump’s warning extended beyond Moscow.

This shift should not surprise observers or investors, as unsettling as it is. China has been expanding its nuclear arsenal, partly through its “limitless” cooperation with Russia, but the US still maintains clear superiority in nuclear capabilities—an advantage Trump may seek to use to tighten alliances and pressure rivals.

Two recent announcements reinforce this interpretation: the revival of the AUKUS deal with Australia and the promise to deliver a nuclear submarine to South Korea, both made just before the Trump-Xi meeting at Busan.

All in all, the summit avoided the worst outcomes—no direct clash over Taiwan, no new threatened technology transfer bans on advanced chips, no new REE restrictions—but it still revealed US vulnerability in using economic pressure against China.

The American gains are minimal–soy exports and a partial reprieve on REE restrictions–and come at the cost of exposing its economic dependence on China.

Meanwhile, China retains its supply-chain advantage, though with heightened awareness that the stakes—and mutual mistrust—are perhaps higher than ever.

The most consequential outcome of the Trump-Xi meeting may ultimately be the acceleration of an arms race, including in the nuclear domain.

Putin’s ongoing war in Ukraine is hardly stabilizing the picture, nor is North Korea’s Kim Jong Un, whose recent hypersonic missile launch coincided with Japanese Prime Minister Sanae Takaichi’s visit and presaged Trump’s.

In sum, the Trump–Xi summit in Busan was pragmatic but precarious. It may have given China a short-term tactical edge, but Trump’s pivot toward overt military signaling marks the beginning of a far more dangerous phase—one that bodes ill for China, Russia and the world at large.

Alicia Garcia-Herrero is chief economist for Asia-Pacific at Natixis and senior research fellow at Bruegel. Follow her on Twitter @Aligarciaherrer.