China warns US on tariffs, AI sanctions before 2026 Trump-Xi meeting

Beijing drew red lines on trade and technology weeks before President Donald Trump and Chinese leader Xi Jinping are scheduled to meet for the first time this year, escalating a confrontation that threatens to disrupt global supply chains.

China set boundaries on new US tariffs while warning Washington against sanctioning Chinese artificial intelligence companies, according to a statement from the foreign ministry on Tuesday. The move comes weeks before the next scheduled meeting between Trump and Xi, with both sides signaling limited room for compromise on trade and technology issues.

"We are drawing a clear line on what is acceptable in bilateral trade and technology competition," a Chinese foreign ministry spokesperson said at a briefing in Beijing. "Sanctions against Chinese AI companies will be met with reciprocal measures."

China's AI industry surpassed 1.2 trillion yuan ($165 billion) in 2025, with the country accounting for 90% of global humanoid robot production, according to the Ministry of Industry and Information Technology. President Xi Jinping used this month's World AI Conference in Shanghai to announce the creation of the World Artificial Intelligence Cooperation Organization, calling for a "people-centred approach" to AI governance and opposing any monopoly on AI development.

The current average US tariff on Chinese goods remains elevated after multiple rounds of escalation since the trade war began in 2018. The previous major tariff increase reduced bilateral trade by tens of billions of dollars over the following quarters, according to US Census Bureau data. Markets now price in a heightened probability of additional trade restrictions, with options skew on technology-heavy indices widening as investors hedge against downside risk.

What's at Stake for Markets

The confrontation threatens to disrupt supply chains across semiconductors and consumer electronics, sectors where China plays an outsized role in both production and consumption. The S&P 500 and Nasdaq face downside risk from any escalation, given the exposure of US technology companies to Chinese revenue streams and manufacturing dependencies. Asian markets, particularly those in export-dependent economies such as South Korea and Taiwan, are also vulnerable to a renewed trade shock.

The last time Washington and Beijing engaged in a similar escalation cycle in 2019, the S&P 500 fell as much as 6% over a three-month period while the offshore yuan weakened more than 3% against the dollar. A repeat scenario could see similar or larger moves given the additional layer of AI-related sanctions now in play, which target a sector that has become central to both countries' economic strategies.

The AI Technology Front

China's warning on AI sanctions adds a new dimension to the bilateral technology rivalry. The US has increasingly targeted Chinese AI and semiconductor companies with export controls and investment restrictions, citing national security concerns. Beijing's response signals that it views AI as a core strategic industry and will retaliate against any measures that threaten its competitive position in the sector.

The Trump-Xi meeting, expected within the next several weeks, will determine whether the two economies can de-escalate or face another round of tit-for-tat measures. Analysts will watch for any signs of a framework agreement on technology competition, though expectations remain low given the structural nature of the rivalry. Any failure to reach a modus vivendi could push both economies toward deeper decoupling, with implications for global trade architecture that extend well beyond the bilateral relationship.

This article is for informational purposes only and does not constitute investment advice.