Trump Heads to Beijing With a Strong Hand

Walk softly and carry a big stick. And remember to cut off China's oil at the Straits until everyone kisses the ring.

Trump Heads to Beijing With a Strong Hand

Slanted media insist Xi holds all the cards, but the U.S. could get concessions if it presses its advantage.

By Thomas J. Duesterberg, WSJ

May 11, 2026 2:52 pm ET

With an assist from anti-Trump commentators, Xi Jinping will enter this week’s summit in Beijing bolstered by a media narrative of impregnable Chinese economic strength and chokeholds over a beleaguered rival in Washington.

In reality, President Trump holds cards that could seriously undermine Mr. Xi’s economic and political plans. The Trump team has been signaling a strategy to stabilize the relationship, particularly through a “managed trade” agenda. But, at a minimum, Mr. Trump should demand that China ratchet back its support for Iranian and Russian autocracies as the price for a bilateral truce.

China’s economy is weakening and dependent on Western economies to achieve its modest goals for growth. Demographic decline, high youth and rural unemployment, the near-bankruptcy of at least one-third of local governments, unsustainable debt levels, a Third World social-welfare system, and chronically poor or negative returns on capital investment are all reasons that China this year has the slowest official growth outlook in decades. Compounding the problem is the country’s dependence on foreign oil and gas, food and minerals.

China’s growth model relies on exports. The country produces more steel, automobiles, solar panels and other subsidized manufactured goods than its own consumers can absorb. Its huge global goods trade surplus of more than $1 trillion annually accounted for more than half of the country’s reported growth in the last two years.

Domestic demand is stymied by a dysfunctional social-welfare system, slow wage growth and high costs for healthcare and education. Consumption is typically about 40% of China’s total gross domestic product, compared with 70% in the U.S. and 60% in Japan. It has contributed little to Chinese growth in recent years.

The country’s current source of growth faces significant headwinds. In reaction to China’s exporting of its overproduced goods—often at subsidized prices—the U.S. since Mr. Trump’s first term has led much of the developed world to raise barriers to Chinese imports.

The other key to China’s economic model is a closed financial system. Beijing has yet to honor its commitment to allow foreign competition in its financial system—one condition of its admission to the World Trade Organization in 2001. Beijing maintains that it has fully complied with all WTO obligations. Importantly, the Communist Party maintains control over the ability to send capital outside the country. Beijing requires all foreign currency earned through trade or investment to be turned over to the state banking system, so that the government can control both movement and prices in its foreign-exchange markets. Such tight control facilitates maintenance of a narrow band of exchange value of the yuan vs. the dollar and effective control over the exchange value against all currencies.

Beijing keeps the yuan strong enough against the dollar that China can afford commodities, such as oil, minerals and advanced technology goods, in global markets that are normally priced in dollars. Authorities also can depreciate the currency to bolster exports. The yuan has fallen by 40% against the euro since 2020, facilitating a major turnaround in the trade balance with European economies. Many commentators now openly accuse Beijing of currency manipulation, although the U.S. Treasury has avoided adopting that designation in its semiannual reviews of foreign currency practices.

To manage rapid increases in public debt, which grew by 153% after the 2008-09 financial crisis, China has been printing money at a rate six times as fast as even the U.S. across the start of this century. The International Monetary Fund estimates that total Chinese government “social financing,” including areas like the pension and healthcare funds, is around 13% of GDP with no clear decline in sight. To deal with debt and faltering returns on investment, China in effect rolls over existing debt and recapitalizes its banks with injections of liquidity in the money supply. The closed financial system allows Beijing to suppress the inflation that normally occurs with such increases in the money supply.

If Mr. Trump were to confront Mr. Xi with additional tariffs and work to convince allies to align with U.S. levies, it would affect China’s predatory, mercantilist growth model. Further, imposing sanctions on Chinese banks, including those in Hong Kong controlled by Beijing, for laundering proceeds from illicit drugs and facilitating the avoidance of sanctions on Russian and Iranian oil and military supplies—as the U.S. government alleges—would multiply the damage to Mr. Xi’s economic model. (China denies that these activities occur.) Labeling China a currency manipulator would add to international pressure on its closed banking system. The purpose of the IMF is in large part to bring nations together to combat such practices.

Demanding that China open its financial system to the rest of the world under WTO rules of reciprocity would also undermine the financial schemes that facilitate China’s growth of debt, control over inflation, and currency manipulation. Closing off access to Western financing for reasons of reciprocity and failure to meet required accounting standards would add to the effect of forcing China to allow open financial competition.

These are some of the tools Mr. Trump could use if Mr. Xi, as expected, remains intransigent in protecting his mercantilist model. Earlier this month, Mr. Xi openly ordered Chinese companies to defy U.S. sanctions on trade with Iran and Russia. The defensive failures of Chinese equipment in Venezuela and Iran, along with awareness of limited Russian success in Ukraine, add to the potential pressure of increased tariffs and sanctions on Mr. Xi. He may be able to substitute for discounted Iranian, Venezuelan and Russian oil, but having to pay market prices would further stress the domestic economy.

If Mr. Trump doesn’t want to go so far as to undercut China’s mercantilist model, he at least ought to dissuade Mr. Xi from supporting Russia, Iran and other authoritarian regimes. Even if the president prizes stability in U.S.-China relations above these other ends, any agreement should come as a result of Mr. Trump’s willful forbearance of actions that could cripple Beijing in its weakened state.

It shouldn’t result from defensive action the U.S. takes on the basis of the false narrative of the Middle Kingdom’s inevitable dominance.

Mr. Duesterberg is a senior fellow at the Hudson Institute.