US-China relations have moved beyond the most dangerous phase following the April 2025 tariff peak. After the Busan summit, Beijing paused the rare earth-related export controls announced on October 9, while Washington suspended the September 29 Affiliates Rule, which expanded Entity List controls to foreign subsidiaries of restricted parents. The cost of this bilateral stabilization is being displaced onto third parties. On one axis, Washington is using stricter origin checks and tariffs on suspected transshipped Chinese goods to incorporate countries absorbing relocated Chinese manufacturing into its tariff enforcement system. On the other axis, Beijing is deploying targeted sanctions against entities facilitating the operation of Washington’s sanctions architecture. The two categories of third parties barely overlap. The countries taking in Chinese factories are usually not the ones Beijing is punishing. The entities Beijing targets are often outside these new supply-chain hubs.
This rerouting through third parties helped keep the broader trade shock limited. In 2025, US imports from China fell 28% in real terms, while US imports from the rest of the world rose 9%, leaving total US import volumes broadly unchanged. On the Chinese side, exports to the US declined 20%, but exports to the rest of the world increased 5.5%. Its trade surplus surpassed $1 trillion for the first time. If we focus on the trade data alone, decoupling has not tipped China and the US into serious disorder. Each side’s bilateral shortfall has been absorbed by flows redirected to third parties, leaving aggregate volumes broadly steady. However, the contest underneath has never been only about commerce. It is a competition over standing. A shortfall in trade can be filled, but the logic of that competition is not dissolved by filling it. The third parties drawn into this are also ground upon which both sides are contesting.
An estimated $150 billion in Chinese exports was redirected, primarily toward ASEAN, Latin America, and the GCC. Economies absorbing supply chains relocating out of China appear to be the winners of this shift, though the gains come bundled with costs. Vietnam has been forced to accept a 40% transshipment tariff and detailed supply-chain traceability requirements. In December, Mexico passed legislation imposing tariffs on 1463 product categories from China and non-FTA partners. The condition of these supply-chain gains is clear. Absorbing economies effectively serve as delivery mechanisms for US tariff enforcement. Under previous tariff frameworks, companies could circumvent trade restrictions by routing products through third countries. Tariffs imposed directly on Chinese goods were often limited in effect. Washington’s response was to shift the burden of identifying Chinese content onto the absorbing economies, making them police it on its behalf. Therefore, the advantage is borrowed. Their market share holds only as long as the tariff gap that created it.
Beijing is not playing the same game. Its retaliation moves away from reciprocal tariffs and toward targeted action against specific entities implementing US restrictions on China, reaching their US subsidiaries and third-country branches directly. In October, Beijing sanctioned five US subsidiaries of the South Korean shipbuilder Hanwha Ocean, in retaliation for Washington’s Section 301 probe into alleged unfair practices in China’s shipbuilding industry. These targets sit inside the US alliance system or its sanctions enforcement network, with little overlap with supply-chain hubs like Vietnam or Mexico. This precision capacity did not exist in the 2018-2019 trade war, back when Beijing’s primary tool was symmetric tariffs. By 2025, China has systematically built a legal architecture, mirroring the US’ approach to sanctions (export controls, the unreliable-entity regime, an anti-foreign-sanctions law). Whatever the state of the bilateral pause, this framework will not be easily dismantled.
Economies that absorb or transship Chinese manufacturing easily attract US enforcement by their position. Especially under Trump’s administration that appears to rely heavily on sanctions and demand clearer alignment from allies and partners, neutrality offers little shelter. By contrast, those that align with Washington’s sanctions and security apparatus are more likely to become targets of China’s retaliation, given that Beijing’s posture has hardened in recent years. The move that satisfies Washington places an economy within Beijing’s reach; the neutrality that avoids Beijing runs straight into Washington’s enforcement. A buffer gained on one axis is almost always paid for with exposure on the other.
Dual extraterritorial exposure is now a structural feature of the cross-border operating environment. In February 2026, after the Supreme Court overturned the IEEPA tariff framework, Trump turned to Section 122 authorities to rebuild the tariff foundation, though at a lower overall intensity. A managed-trade mechanism may reduce escalation risk, but it does not dismantle the underlying tariff and extraterritorial tools. The expansion of regional trade agreements among Japan, South Korea and the EU reflects an attempt to hedge against this exposure. But regional cooperation can buy leverage, not shelter. The assumption that third-country economies share a common interest in resisting pressure from the two powers may become increasingly difficult to sustain. Those exposed primarily to Washington’s enforcement mechanisms and those vulnerable to Beijing’s retaliation are responding to different incentives, and seeking different forms of protection. Whether this divergence ultimately produces fragmentation, new alignments, or alternative forms of cooperation, is still to be seen.
Further readings
Bown (2026) Trump’s China Trade Wars: Five takeaways from US imports in 2025
Global Trade Alert (2026) Trade Redirection of Chinese Exports During 2025
Han Kun Law Offices (2026) 中国出口管制的常态化演进：2025年政策与执法回顾
Luck (2026) Understanding the Temporary De-Escalation of the U.S.-China Trade War