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China has returned to trade talks with the United States this week holding, from its perspective, a strong hand: Its economy is bearing up better than many people - including President Donald Trump - expected. It has watched as Trump's unconventional trade policy has suffered some legal setbacks. And it has a geopolitical ace card: It is controlling the export of much-needed rare earths.
This shows how the Trump administration underestimated Beijing's ability to withstand the pain of tariffs, according to analysts both inside and outside China. The tariffs reached a minimum of 145 percent before a temporary truce was declared in Geneva last month.
"Back in February, the mainstream narrative in the U.S. was, ‘Oh, the Chinese economy is bad, so if the U.S. is going to use tariff stick, China would have no choice but to surrender,'" said Wu Xinbo, dean of the Institute of International Studies at Fudan University in Shanghai.
Now, Washington appears to be acknowledging that "China was better prepared for the trade war in the first stage," Wu said.
Underscoring the sense that Beijing just has to wait out the U.S. president, some state-affiliated media outlets and Chinese commentators have seized upon a new phrase being applied to Trump - "TACO," or "Trump Always Chickens Out," a Wall Street acronym that suggests the president often talks tough on tariffs but ultimately backs down.
The U.S. and Chinese delegations, led by Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng, began a second day of talks in London on Tuesday, after a reset phone call last week between Trump and Chinese leader Xi Jinping.
"China's not easy," Trump said Monday after the first day of talks. But, he added: "I'm only getting good reports."
The Trump administration had previously accused Beijing of reneging on the deal reached in Geneva, where both countries agreed to a temporary tariff reprieve and to drop nontariff barriers.
At the top of Washington's concerns: China's continuing restrictions on rare earths, which are needed to manufacture products as varied as cars, fighter jets, iPhones and medical machines.
"China showed the leverage that they have in the area of rare earths," said Bert Hofman, a professor at the National University of Singapore's East Asian Institute and former World Bank country director for China.
The inclusion of export controls, in addition to tariffs, in this year's trade war has been "positive" for China's positioning in negotiations, Hofman said, and is mirrored in the negotiating teams in London this week. Commerce Secretary Howard Lutnick and his Chinese counterpart, Wang Wentao, both of whom oversee export controls, have joined the talks.
China accounts for 70 percent of the world's rare-earth mining and more than 90 percent of the processing. It put strict controls on the raw materials in April, after Trump began imposing sky-high tariffs on all Chinese goods.
Trump administration officials accused Beijing of "slow-walking" on its side of the deal, saying this was counter to the spirit of the Geneva agreement.
But just before this week's talks, China's Commerce Ministry said it had approved some applications for licenses to export rare earths, although it did not specify the identity or number of the applicants.
Many analysts expect China to maintain the export controls - which apply not just to the U.S., but also to all nations - and green-light exports selectively to favored trading partners.
"The process of approval can be slowed down depending on the state of the [U.S.-China] relationship," said Wu, of Fudan University.
For all its bravado, Beijing does not hold all the cards.
Economic growth remains weak in China and statistics published this week showed a precipitous 34 percent decline in exports to the U.S. amid the tariff war, although an increase in sales to Europe and Southeast Asia saw overall export numbers rise.
China is vulnerable to the Trump administration's controls on high-tech exports, especially when it comes to the most cutting-edge semiconductors, which are needed for advanced artificial intelligence systems and which China has not been able to domestically produce.
In recent weeks, Washington has warned companies against using advanced Chinese chips, specifically Huawei's Ascend AI chips, saying they "were likely developed or produced in violation of U.S. export controls."
The Trump administration also paused the export of some critical U.S. technologies, including those related to jet engines and semiconductors, according to the New York Times.
"China could get hit pretty hard by further export controls in the semiconductor space," said Kyle Chan, an expert on Chinese industrial policy at Princeton University. "There's still a lot further to go and a lot more damage that could be done."
In a development that analysts called "remarkable," the People's Daily, the mouthpiece of the Chinese Communist Party, featured an interview with Huawei founder Ren Zhengfei on the front page.
"It just goes to show the significance of Huawei as an entity for the Party-state," wrote Manoj Kewalramani, author of the Tracking People's Daily newsletter.
In the prominent interview, Ren said that the U.S. "has exaggerated Huawei's achievements." But he brushed aside any questions about difficulties in the Chinese chip sector, saying that China will "definitely break through all blockades and achieve great rejuvenation."
But the difference between China's rare-earth controls and the U.S.'s chip controls is all about timing, Chan said.
The immediate impact of rare-earth controls is "exceptional," he said.
"Auto executives are complaining today about a looming shortage, and about not being able to complete cars," he said.
By comparison, if the Trump administration institutes more controls on what chips can be sold to China, that could degrade China's capabilities and constrain its ability to become a future AI leader. But there are at least some alternatives and stopgap measures China can lean on, Chan said.
Many in the Trump administration thought that China's fragile economy would make it vulnerable to the tariffs and force it to give in to Trump's demands. Even before the trade frictions, Beijing was grappling with a property crisis and weak consumption, and Trump has boasted about China "getting absolutely hammered" by the trade war.
But Beijing has seemingly been able to manage the economic fallout of the trade frictions up until this point, said Hofman, of the National University of Singapore. This is, in part, because of measures to stimulate the economy, stoke domestic demand and find different markets for Chinese companies' exports.
"Looking at the Chinese reaction thus far, whether there actually will be a big [economic] impact or not, I think the Chinese will not be led by that," Hofman said. "They fully well knew that this would have some impact on the domestic economy, and they decided to push back."
Still, Beijing and Washington seem eager to de-escalate the tensions during this week's talks.
Xinhua, China's state news agency, underscored the mutual benefit of U.S.-China trade in an article published Tuesday, and struck a poetic concluding note.
"China-U.S. relations are currently at an important critical juncture. Both sides need to adhere to the principles of mutual respect, peaceful coexistence, and win-win cooperation," the article said. "An early summer breeze brushed through London, and the world is watching with anticipation."
(COMMENT, BELOW)