The Trade Relationship May Be Improving, but the Geopolitical Issues Remain

The September meeting produced progress on trade, but many of the issues creating longer term uncertainty around China sourcing remain unresolved.

For procurement and supply chain leaders, several deserve particular attention.

Taiwan: China continues to view Taiwan as a core national issue, while the United States continues to support Taiwan and discuss additional arms sales. Following the Trump Xi meeting, Taiwan said it had received no indication that US policy had changed.

Iran and global energy: China remains an important economic partner for Iran and a major buyer of Iranian energy. At the same time, conflict involving Iran and disruption around the Strait of Hormuz are contributing to higher energy costs and inflationary pressure. The United States has also asked China to increase refined petroleum production to help stabilize global supply.

Russia: China's continued purchases of Russian energy remain another point of tension in the broader US China relationship. For procurement, the issue matters because energy relationships, sanctions and geopolitical conflicts can quickly move commodity prices and transportation costs.

Rare earths and critical minerals: China remains a critical source of materials used in aerospace, semiconductors, electronics and other advanced manufacturing. The White House acknowledged after the summit that supply shortages involving rare earths and other critical minerals remain under discussion. No relief in sight for strategic sourcing professionals.

Semiconductors and artificial intelligence: The two governments created additional dialogue around artificial intelligence, but competition surrounding advanced technology, semiconductor access and export controls remains part of the broader relationship, and supply restrictions by both sides will likely continue.

None of these issues disappeared because tariffs on some products may decline.

So Why Does the Relationship Appear to Be Stabilizing?

The answer may be surprisingly practical.

Both countries have significant economic reasons to avoid another major trade disruption.

China continues to face weaker domestic demand and challenges in its property sector. On September 29, Beijing announced additional measures intended to support growth, housing, infrastructure and private businesses. Chinese exports also remain an important source of economic strength.

The United States has its own economic pressures. Inflation remains above the Federal Reserve's target, while elevated energy prices are creating additional inflationary pressure. 

Against that backdrop, another broad tariff escalation could create additional costs for US importers and consumers while also reducing access to an important export market for US manufacturers and agriculture.

China similarly benefits from continued access to the US market while its domestic economy faces slower growth.

What we are seeing is both countries currently have strong economic incentives to keep geopolitical disagreements from disrupting trade.

What Should Procurement Do With This China Update?

For strategic sourcing teams, the improving tariff environment is positive, but it should not fundamentally change China sourcing strategy.

China will continue to make sense for many categories because of its manufacturing capabilities, supplier base, infrastructure and economics.

At the same time, procurement teams should continue reducing unnecessary concentration risk.

That means:

• Continue sourcing from China where the total cost and supplier capabilities remain competitive.
• Develop qualified alternative suppliers in other countries for strategically important categories.
• Identify products dependent on Chinese critical minerals, electronics and controlled technologies.
• Beyond tariffs include export control and geopolitical scenarios into total cost and risk models.
• Use strategic sourcing events to determine whether China alternatives are commercially viable before a disruption forces the decision.

The objective should not necessarily be to move supply out of China. Just be ready to.

The Bottom Line

The Trump Xi meeting is encouraging for companies concerned about another immediate round of tariffs. The two countries appear willing to take steps that reduce trade friction, and both have economic reasons to keep trade flowing.

But managed geopolitical disagreement is very different from resolved geopolitical risk.

For procurement leaders, this may actually be a good time to strengthen China sourcing contingency plans. Strategic sourcing is much easier when alternative suppliers can be evaluated deliberately rather than after tariffs, export controls or geopolitical events suddenly force a supply chain change.

The tariff risk may be declining.

The underlying reasons to build a more resilient China strategic sourcing strategy have not gone away.