China’s sanctions gambit: Formal and informal economic coercion in the second trade war

Summary

• Beijing’s response to the second trade war in the first half of 2025 has featured more forceful retaliation compared to the first US–China trade war in 2018–2020. China not only matched US tariff increases to a level that would have functionally severed economic ties, but also escalated using a range of sanctions tools, demonstrating a capacity to impose severe costs on specific US firms and industries.
• China deployed a combination of time-tested “informal” coercive instruments, such as opaque import restrictions and selective enforcement of technical domestic regulations, and newer “formal” tools, such as official sanctions listings against US defence industry firms, as well as export controls on critical raw materials. Many of these restrictions were deployed under a flexible two-step method – first establishing legal grounds for escalation, and then activating them when strategically opportune.
• Beijing’s bold use of coercive measures may have helped to quickly push Washington to the negotiating table in early May. The growing use of formal sanctions, more akin to western-style legal tools for sanctioning, might have delivered a more intelligible and credible threat to US officials and firms, helping to drive home the message that economic confrontation with China can carry steep and certain costs. Despite Trump’s initial warning that retaliation to his global “reciprocal tariffs” would be punished, it is possible that China’s retaliatory response has afforded it more rather than less leverage than refraining from
• China’s restrictions also pose challenges for third parties. Although widely interpreted as retaliation targeted at the United States, China’s new export licensing procedures on rare earths delayed the delivery of key inputs to other markets, including in Europe where some firms were forced to halt production. Rather than a coincidental side-effect, this might have been a deliberate warning to the EU and other actors not to impose further economic restrictions on China or coordinate trade measures with Washington.

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