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China closed 2025 with a trade surplus approaching $1.2 trillion. Between April and December, the actual cost increase on Chinese goods reached 39-47 percent, representing one of the highest tariff rates America has ever imposed. Chinese exports still rose 5.5 percent to $3.77 trillion.
Only about $160 billion of that massive surplus—roughly 13 percent—showed up in China’s foreign currency reserves as dollars. Beijing increasingly used its own currency to avoid U.S. financial pressure.
When tariffs fail to reduce the trade gap, what other tools does Commerce have? Treasury can label countries as manipulating their currency. Commerce can restrict what gets exported. Extra tariffs to offset government help to exporters. Outbound investment screening. Coordinated international pressure. Potential restrictions on alternative payment systems.
The tariff approach that worked after World War II may no longer function as designed when countries use their own currencies, when governments use their own export controls, and when American manufacturers depend on Chinese parts.
How Tariffs Worked—and Didn’t
The logic was straightforward: make imports expensive, people buy less. Domestic alternatives become more competitive. The trade deficit shrinks.
The Trump administration’s 2025 tariff campaign proceeded from this reasoning, progressively increasing rates throughout the year. Yet the overall U.S.-China bilateral trade deficit barely moved.
Through September 2025, the merchandise trade deficit with Beijing stood at $160.5 billion, compared to approximately $290 billion for the same nine-month period in 2024.
Chinese companies shifted sales to other countries instead of stopping exports. Exports to Southeast Asia surged nearly 14 percent year-over-year in 2025, a region that supplies consumer goods to American markets. China-Africa trade grew 21.6 percent in the first half of 2025. Total EU-China bilateral trade rose 5.4 percent, though EU imports from China specifically declined 2.1 percent in January-November 2025. These shifts in trade patterns more than compensated for lost U.S. sales, allowing Beijing to achieve its record trade surplus because American tariffs fragmented rather than eliminated global commerce flows.
Goods and components remain inputs for manufacturing in third countries that then export to the United States. American retailers simply shifted purchases to competitors operating in other jurisdictions.
Tariffs moved purchases to other countries instead of reducing overall imports. Because much trade increasingly bypassed the U.S. dollar entirely—settling in yuan rather than dollars—Chinese exporters didn’t need to exchange their earnings for dollars or move them through systems where American financial leverage could apply.
When only 13 percent of the record trade surplus accumulated in foreign currency reserves, the implications became stark: even if tariffs successfully reduced American purchases, they couldn’t fix the trade imbalance without other tools to back them up.
Currency Manipulation and Yuan Weakness
The United States, European Union, and emerging market economies all agree that the yuan is too weak and needs to strengthen.
By most measurements, Beijing meets criteria for currency manipulation. The country operates sophisticated capital controls that limit yuan convertibility at the border. It maintains extensive state oversight of its central bank’s reserve accumulation. And it maintains a significant bilateral trade surplus with the United States.
Yet Treasury hasn’t designated the country as a currency manipulator since the administration’s formal currency manipulation reports began in 2020.
Declaring Beijing a currency manipulator would require formal negotiations. Beijing could argue the U.S. is breaking trade rules with its tariffs. Forcing the yuan up when prices are falling and people aren’t buying could crash the economy in ways that could prove counterproductive for American interests.
China experienced negative overall inflation in six of the past twelve months as of early 2026, with food price deflation occurring in nine months of 2025. If prices keep falling, people delay buying because they expect things to get cheaper. A stronger yuan would make this worse by making imports cheaper for buyers and pricing exports less competitively.
Some forecasters, including Morgan Stanley analysts, predicted appreciation to 6.85 yuan per dollar in early 2026. This modest increase may mean Beijing recognizes international pressure is becoming a political problem, or it may mean Beijing wants more countries to use and trust its currency by ensuring the currency appreciates rather than depreciates.
Export Controls and Technology Blacklists
Commerce has a separate tool that works alongside tariffs with proven effectiveness: export controls and blacklists of companies. This works through different laws that block sales of sensitive technology unless the government approves. When applied strategically, these tools can impose costs exceeding tariff increases.
The U.S. maintains a blacklist of hundreds of foreign companies and people considered security threats. Once listed, any sale of controlled technology to that company needs government approval, making it risky and expensive for companies to do business with them.
Semiconductor manufacturers, particularly Semiconductor Manufacturing International Corporation (SMIC), the country’s largest chip fabricator, were added to the blacklist in 2020. Any sale of sensitive technology to SMIC now needs approval and will likely be rejected unless the government specifically approves.
The power of this tool became clear in a January 2026 enforcement action against Exyte Management, a German engineering firm. The company’s Shanghai office had sold about $2.8 million in chip-making equipment to SMIC between March 2021 and March 2022 through 13 separate transfers.
Exyte claimed it didn’t realize it needed permission to sell to blacklisted companies inside the country. The Commerce Department fined the company $1.5 million and threatened to ban it from exporting. The settlement language emphasized that “in-country transfers within China remain subject to the regulations when U.S.-controlled items are destined for Entity List parties, even absent cross-border movement.”
Commerce can control deals happening in other countries if U.S. technology is involved.
Commerce can add more companies to the blacklist, limiting what technology can be sold. The Commerce Department made it harder to get permission to sell advanced chips in early 2026, modifying the review framework in ways that analysts suggested would make approvals less likely.
Congress passed the Remote Access Security Act on January 12, 2026, with overwhelming bipartisan support (369-22), which would let Commerce block access to sensitive technology through cloud services. Companies have used cloud services to circumvent current restrictions on advanced semiconductors and artificial intelligence technologies.
Export controls are more likely to survive legal challenges than tariffs because courts treat them as national security decisions.
Countervailing Duties and Subsidies
A third tool is special tariffs designed to offset government help to foreign exporters. If the government helps foreign exporters and this hurts American companies, the U.S. can add extra tariffs.
Beijing presents a complex case because much of its export success derives from state support. Banks have given cheap loans to state-owned exporters. Local governments offer tax incentives and subsidized land to export industries. State companies sell at below-market prices to help exporters. Proving how much each subsidy is worth and that it actually increased imports is difficult.
Some analysts argue that the weak currency should count as an illegal subsidy. The Trump administration has been more aggressive in using these laws, but applying this would anger allies like the EU who also keep their currencies weak.
The U.S. is investigating whether products get illegal subsidies. Commerce is reviewing whether solar panels, steel, and chips get illegal subsidies, with decisions in early 2026 potentially laying groundwork for expanded enforcement. Subsidy tariffs are more likely to hold up in court than regular tariffs and carry less retaliation risk than general tariffs that many countries characterize as punitive.
BRICS and Alternative Payment Systems
The U.S. doesn’t have a coordinated international approach to address the trade surplus. The WTO’s appeals process has been blocked since 2017 and can’t resolve disputes. The IMF can advise countries about their currency but has no enforcement power.
International consensus on the need for yuan appreciation is unusually strong. The EU, developing countries, and the U.S. have agreed that Beijing should import more and export less, which means making the yuan stronger. This agreement reflects that the huge surplus hurts American, European, and developing country companies.
Belt and Road and BRICS partnerships are building alternatives. BRICS is creating ways for countries to move money without using dollars, explicitly aiming to facilitate settlement in non-dollar currencies.
These systems are still new and face real problems, but they could weaken America’s ability to enforce rules. The main obstacle is that the U.S. controls the payment systems countries use. If countries stop using dollars and U.S. payment systems, America loses control over international dealings. This is why export controls and blacklists may become more important: they block supplies instead of controlling money.
Outbound Investment Screening
A fourth tool blocks American investment, reversing the traditional approach. Historically, the U.S. has blocked foreign companies from buying American defense and tech companies. In December 2025, Congress passed a law letting Treasury block American investment in AI and chip companies.
The law requires Treasury approval for American investments in chips, AI, and quantum computing. This creates costs and discourages American investment in tech companies. American investors must now get Treasury approval for tech deals.
Legal Obstacles
These tools face legal and diplomatic problems, which is why policymakers still rely on tariffs despite their failures.
Export controls come from national security powers, but using them for other reasons could be ruled unconstitutional. The new investment blocking law might also be ruled unconstitutional.
Calling Beijing a currency manipulator would anger other countries and give them ammunition to say U.S. tariffs are illegal. This could anger allies like Germany who also benefit from surpluses.
All these tools address symptoms, not the root cause: high savings rates. Beijing has a surplus because people save too much and don’t spend enough. Until people spend more and buy more foreign goods, the surplus won’t change.
What Comes Next
The surplus despite tariffs suggests the U.S. will shift strategies. Instead of tariffs, policymakers are using export controls, investment blocks, and international pressure on the yuan. New laws on cloud computing and investment blocks suggest Congress knows tariffs alone won’t work.
This reflects that tariffs don’t work well with how modern operations operate. When countries use yuan instead of dollars, the U.S. loses financial leverage. When companies route exports through other countries, tariffs don’t work well. When American manufacturers depend on parts, tariffs raise their costs too.
Businesses and consumers will face real costs. Companies doing business now face tariffs, export controls, investment blocks, and restrictions on cloud services. Companies should focus on preparing for export controls and investment blocks, which may matter more than tariffs. Complying with all these new restrictions could cost more than tariffs.
For allies like the EU, America’s new approach creates both opportunities and risks. If allies pressured Beijing to strengthen the yuan, it might work better, but Beijing could retaliate by cutting exports. This agreement could break down if any major ally faces a recession.
The surplus shows the global system is fundamentally shifting. The old tariff system doesn’t work when countries use different currencies and control what they sell. Commerce has these tools, but it’s unclear if they’ll work together.
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