Situation Report

US–China Sanctions Regime: Developments, Market Impact and European Responses (2017–2026)

By Dr. Masoud Zamani

Introduction and Scope Since the Trump administration began imposing punitive tariffs and export controls on China in 2018, the relationship between the world’s two largest economies has been characte…

Introduction and Scope

Since the Trump administration began imposing punitive tariffs and export controls on China in 2018, the relationship between the world’s two largest economies has been characterized by an escalating sanctions regime. Over two presidential terms (Donald Trump’s first term, Joe Biden’s term and Trump’s return to office in January 2025), Washington has employed tariffs, entity‑list designations, foreign direct‑product rules (FDPRs) and investment screening to restrict Chinese access to advanced technologies and to punish perceived security threats. Beijing has responded by imposing its own tariffs, placing U.S. firms on unreliable‑entity lists, freezing corporate assets and, since 2024, weaponising its dominance in critical‑minerals supply chains. This report examines the evolution of the US sanctions regime against China and China’s countermeasures, tracing the major developments since the Trump administration first brought economic coercion to the centre of US–China relations. It assesses the consequences for financial markets, global supply chains, key strategic sectors, and the broader international economy. The report also examines sanctions-evasion strategies, evaluates the European Union’s response, and outlines plausible scenarios for the next twelve months.

Methodology and Sources

The analysis draws upon U.S. Federal Register notices, U.S. Commerce Department announcements, Chinese Ministry of Foreign Affairs (MFA) orders, Reuters dispatches, legal briefings, think‑tank policy briefs (CSIS, ECFR, EUISS, CNAS, FDD, CSS), central‑bank data (International Energy Agency, Bloomberg Economics), academic studies and financial research. Multi‑lingual sources are used to capture perspectives from the People’s Republic of China (PRC), France and Germany. Financial‑market impacts are assessed through publicly available statistics, such as performance of the MSCI China and Hang Seng indices, and sectoral data from official Chinese statistics and Bloomberg Economics. Sanctions‑evasion strategies are examined using the Sanction Evasion Report 2025‑2026 and policy briefs on Iran’s evasion networks. European responses are analysed using EU regulation texts and think‑tank commentary.

Timeline of U.S. Sanctions against China (2017‑2026)

Year/Period

U.S. sanction measure

Motivation and details

Chinese responses & repercussions

2017–2018

Section 301 tariffs on ~$370 billion of Chinese goods; first wave of export‑control measures

Trump’s administration cited intellectual‑property theft and unfair trade practices. Tariffs ranged from 15–25 %, escalating through three “lists”.

Beijing retaliated with tariffs on U.S. soybeans, automobiles, chemicals and agricultural products; trade volume declined and supply chains began relocating.

2019

Expansion of Entity List targeting Huawei and over 150 Chinese tech firms; restrictions on U.S. companies selling components without licenses.

National‑security concerns and suspicion of espionage.

China denounced the bans, encouraged domestic chip development and filed WTO complaints.

2020–2022

Foreign Direct Product Rule (FDPR) expansions, adding 600+ Chinese entities and individuals for military‑civil fusion; bans on AI and surveillance chips; import bans on Xinjiang products.

Bipartisan consensus to limit technology transfer and respond to human‑rights issues.

Beijing imposed counter‑sanctions on U.S. defence contractors and lobby groups; introduced Blocking Rules and passed the Anti‑Foreign Sanctions Law.

Dec 2024

BIS rule tightened export controls on 24 types of semiconductor‑manufacturing equipment and three software tools, added 140 entities to the Entity List and introduced a new de‑minimis rule restricting items with 0 % U.S.‑content from reaching China.

To impede China’s production of advanced chips and restrict high‑bandwidth memory and supercomputers.

Beijing responded on 3 Dec 2024 by expanding export controls on gallium, germanium, antimony, super‑hard materials and graphite; it banned re‑exports and introduced extraterritorial penalties.

Dec 2024 & Dec 2025

Trump administration reimposed Section 301 tariffs and ended the de minimis customs exception; 10 % tariff applied to most Chinese goods.

Aimed to reduce the U.S.–China trade deficit and address intellectual‑property theft.

China imposed extra tariffs on U.S. coal, LNG, crude oil, cars and many agricultural products; added U.S. firms (incl. Tesla, Micron, Caterpillar) to the Unreliable Entity List and Controlled Party List; initiated anti‑circumvention probes on fibre‑optic products.

Dec 2024 & Dec 2025

U.S. Commerce Department added more than 130 Chinese companies to the Entity List (Oct 2024) and restricted exports of advanced chips and semiconductor equipment.

To slow China’s AI and semiconductor progress.

China strictly controlled exports of gallium, germanium, antimony and graphite; a Chinese think‑tank emphasised that China accounts for ~48 % of global antimony mining, 59.2 % of refined germanium and 98.8 % of refined gallium.

Dec 2025 & Dec 2024 (MFA orders)

China’s Ministry of Foreign Affairs sanctioned 20 U.S. defence firms and 10 executives (Dec 26 2025) and seven U.S. companies (Dec 27 2024). Assets were frozen and transactions with Chinese partners forbidden.

Retaliation for U.S. arms sales to Taiwan and the 2025 U.S. National Defense Authorization Act.

U.S. defence contractors faced asset freezes and visa restrictions; Chinese entities were barred from dealing with them.

May 2026

China’s Ministry of Commerce issued its first prohibition order under the 2021 Blocking Regulation to instruct Chinese companies to ignore U.S. sanctions on five refineries engaged in Iranian oil trade.

To demonstrate sovereignty and oppose extraterritorial U.S. sanctions.

Reuters reported that the injunction blocked U.S. sanctions on Hengli Petrochemical, Shandong Jincheng, Hebei Xinhai, Shouguang Luqing and Shengxing refineries; the U.S. sanctions had hindered their crude procurement and forced them to use alternative names.

May 2026

China invoked Order 835 (Regulations on Countering Improper Extraterritorial Jurisdiction) to block an EU investigation into Chinese security‑scanning firm Nuctech.

To assert legal authority over Chinese firms and deter extraterritorial investigations.

Signaled growing willingness to challenge U.S. and European sanctions extraterritorially.

China’s Sanctions and Counter‑measures Against the United States

Counter‑sanctions Lists

Chinese rhetoric and domestic measures

Chinese think‑tank analysts argue that U.S. export controls have “placed hundreds of Chinese tech companies such as Huawei, ZTE and SMIC on the Entity List,” causing financial distress and market contraction. They note that the new chip export ban of Dec 2 2024 added over 130 companies to the Entity List and that China responded by restricting exports of critical minerals. Experts emphasise China’s dominance in rare‑earth minerals—around 48 % of global antimony mining, 59.2 % of refined germanium and 98.8 % of refined gallium—arguing that Beijing now uses this leverage to counteract U.S. sanctions. Chinese commentaries also celebrate Beijing’s ability to weaponise supply‑chain chokepoints (rare earths, graphite) while calling for accelerated domestic innovation to reduce dependence on U.S. semiconductors.

Impact on Stock Markets and Global Economy

Performance of Chinese and U.S. Equity Markets

French financial research from RBC Gestion de patrimoine reported that Chinese equities recorded strong gains in 2025: the MSCI China index rose 31 % and Hong Kong’s Hang Seng index gained 28 %, surprising analysts who had been cautious due to U.S.–China trade tensions. The rally was attributed to improved Chinese economic data and the belief that export restrictions would eventually force Washington to moderate its approach. By early 2026, market sentiment remained cautiously optimistic; analysts expected growth of about 5 % per year during China’s 15th Five‑Year Plan.

These gains contrast with earlier episodes of market stress. The International Monetary Fund’s 2019 analysis found that U.S. companies with high sales exposure to China underperformed relative to peers after tariffs were implemented; the performance gap narrowed during the 2019 truce but widened again when tariffs increased. In the U.S., S&P 500 and Nasdaq indices experienced heightened volatility during major tariff announcements (2018–2019) and again when Trump announced new tariffs in 2025, though broad U.S. indices ultimately reached record highs because robust earnings and AI‑related stocks offset trade concerns. In China, the Shanghai Composite remained volatile in 2018–2023, but the 2025 rally signalled investor confidence that Beijing’s industrial policy (electric vehicles, semiconductors, AI) could withstand U.S. pressure.

Sectoral and Economic Effects

Sector

Impact of sanctions and counter‑measures

Data points and sources

Semiconductors & AI hardware

U.S. export controls (Oct 2024) targeted 24 types of semiconductor‑manufacturing equipment, high‑bandwidth memory chips and advanced lithography software. The Foreign Direct‑Product Rule was tightened, and 140 Chinese entities were added to the Entity List. These measures aim to block China’s access to cutting‑edge chips and restrict tools used to manufacture chips under 16 nm. The restrictions contributed to revenue drops for SMIC and YMTC and forced Chinese chipmakers to shift to domestic suppliers.

BIS (2024) and Eversheds analysis.

Critical‑minerals supply (rare earths, graphite, gallium, germanium, antimony)

China introduced export controls in 2024–2025 on gallium, germanium, antimony and graphite, halting exports to some countries and banning re‑exports. A German policy brief notes that China accounts for 60 % of global rare‑earth mining and 92 % of processing. These restrictions caused disruptions in strategic sectors worldwide (electronics, renewables, aerospace) and exposed vulnerabilities in countries reliant on Chinese supply.

Chinese announcements & CSS (ETH Zürich) policy brief.

Energy & petrochemicals

U.S. sanctions on Chinese refiners for purchasing Iranian oil prompted Beijing to issue a prohibition order that nullified compliance. Reuters reported that U.S. sanctions hindered the refineries’ ability to receive crude and sell products under their own names. Despite sanctions, China continues to buy roughly 90 % of Iran’s exported oil and 25 % of its non‑oil goods via covert networks.

Reuters and FDD policy brief.

Real estate vs technology

The collapse of property developers reduced the contribution of real estate to China’s GDP from 25 % in 2018 to an estimated 16.6 % in 2026, while technology‑linked sectors’ contribution is projected to rise from ~11 % in 2018 to 18.3 % in 2026. The shift lessens the systemic risk of real estate defaults on the stock market and supports the argument that tech‑oriented policies have offset sanctions impacts.

RBC & Bloomberg Economics analysis.

Stock‑market and macroeconomic transmission channels

  1. Investor sentiment and expectations – Tariff announcements and export‑control news produce immediate volatility. Event‑study analyses show that U.S. companies with high China exposure suffer stock price drops upon sanctions, while Chinese indices react negatively but often rebound as domestic stimulus measures offset external shocks. Conversely, announcements of rare‑earth export controls can lift Chinese mining stocks but depress shares of Western defence and green‑tech firms reliant on those minerals.

  2. Supply‑chain disruptions and price increases – Controls on semiconductor equipment and rare earths raise production costs for downstream industries. The EUISS noted that China’s 2025 export controls caused shortages of permanent magnets and rare earths, creating crises in Europe’s automotive, wind‑turbine and machinery sectors. These shortages contribute to inflationary pressures and prompt stock rotation toward companies with diversified supply chains.

  3. Monetary policy and macroeconomic spillovers – The IMF estimated that a full escalation of tariffs could subtract 0.3 % from global GDP, with half of the impact stemming from reduced business confidence. Central banks consider these spillovers when setting interest rates, leading to market volatility.

Sanctions Evasion Strategies

Sanctions have generated a flourishing ecosystem of evasion. Chinese actors play a central role in several networks:

  1. Iran oil‑for‑infrastructure network – A policy brief from the Foundation for Defense of Democracies describes a covert payment system in which Chinese buyers purchase Iranian oil and deposit payments with Chuxin, an obscure Chinese conduit. Funds are then transferred to Chinese contractors working on infrastructure projects in Iran insured by Sinosure. Western officials estimate that US $8.4 billion in oil payments flowed through this network in 2024.

  2. Cars‑for‑metals barter trade – Chinese automakers (Chery, Dongfeng, JAC) export semi‑knocked‑down car kits to Iran and accept shipments of Iranian copper and zinc instead of cash. Iran exported about US $1.6 billion of copper and US $900 million of aluminium in 2023, part of which financed Chinese manufacturers. These barter networks bypass the dollar system and rely on state‑backed firms in China’s industrial heartland.

  3. Transshipment hubs and “shadow fleets” – The Sanction Evasion Report 2025‑2026 notes that thousands of small trading firms in Hong Kong, the United Arab Emirates, Turkey and China act as procurement cut‑outs between Western suppliers and Russian defence buyers. China and Hong Kong are described as the most important transshipment hubs for restricted semiconductor components and electronics. Third‑country hubs in Kazakhstan, Kyrgyzstan, Tajikistan, India and Southeast Asia provide logistical and financial support, with trade data showing spikes in re‑exports from the UAE to Russia after China reduced direct supply. Parallel import legalisation in Russia further enables goods to flow through intermediary markets.

  4. Gray‑market electronics and online marketplaces – Grey‑market distributors in Hong Kong and southern China supply microelectronics that end up in Russian missiles and drones; recovered components have been traced back to Western manufacturers after passing through multiple layers of intermediaries. Compliance gaps allow dual‑use components to be purchased legally and then re‑exported.

  5. Alternative payment systems – China and Russia increasingly rely on CIPS (China’s Cross‑Border Interbank Payment System) and currency settlements in yuan, rubles and rupees to avoid the dollar system. Cryptocurrencies and peer‑to‑peer networks are also used【919374735994058†L520-L523】 (not quoted here due to length but summarised).

These strategies illustrate how sanctions pressure spawns new financial and logistics channels that erode the effectiveness of unilateral measures. They highlight the need for coordinated enforcement and monitoring across jurisdictions.

European Union Responses and Policy Measures

  1. Anti‑Coercion Instrument (ACI) – Adopted in December 2023 (Regulation 2023/2675), the ACI gives the EU a legal framework to respond to economic coercion. It defines coercion as pressure by non‑EU countries using trade or investment measures and sets procedures for determining coercion, engaging with the coercing country and, if necessary, adopting response measures (tariffs, trade restrictions, procurement bans). Response measures are tailored to restore trade flows and are terminated once coercion ends.

  2. Supply‑chain resilience laws – The European Chips Act aims to double Europe’s semiconductor production share to 20 % by 2030 and allocates €43 billion in subsidies; pilot lines and first‑of‑a‑kind facilities are being rolled out. The Critical Raw Materials Act (CRMA) requires the EU to extract at least 10 % of its consumption of strategic raw materials, process 40 % and recycle 25 % by 2030. These measures seek to reduce dependence on China’s rare‑earth supply, which remains vulnerable to export controls.

  3. Reaction to Chinese export controls – EU‑based think‑tanks warn that China’s 2025 export controls on rare‑earth materials created inventory shortages in Europe’s automotive, wind‑turbine, defence and machinery sectors. The EUISS brief notes that the U.S. reached a deal with China to pause the second wave of controls at a Trump‑Xi summit but Europe was excluded, leaving its industrial base exposed. EU analysts call for activating the ACI, developing a doctrine of economic deterrence and coordinating supply‑chain diversification with the United States. The CSS policy brief underscores that China’s export restrictions highlight Europe’s vulnerability and emphasises the need for diversified supply chains.

  4. Joint U.S.–EU coordination – Proposals from think‑tanks like the Atlantic Council (not accessible in full) recommend launching a U.S.–EU platform to coordinate the de‑risking of critical minerals and synchronise export controls. European officials also discuss using the ACI in concert with G7 measures to deter future coercion.

Scenarios for the Next 12 Months (June 2026–June 2027)

Scenario

Likelihood & Drivers

Expected developments

Secondary effects

Partial De‑escalation & Managed Trade

Medium probability. The May 2026 Trump–Xi summit delivered only a fragile détente, but both sides face economic headwinds. China needs stable export markets amid domestic growth challenges, while the U.S. must curb inflation and avoid hurting strategic sectors.

Trump may postpone or reduce some tariffs in exchange for Chinese purchases of U.S. agricultural products and Boeing jets. China could temporarily relax rare‑earth export controls or grant export licenses, as occurred after the 2025 pause. Washington may defer new FDPR expansions and allow selected chipmakers to supply mature‑node equipment to China.

Global stock markets would likely rally, led by Chinese equities. Commodity prices may ease as rare‑earth supply normalises. However, unresolved issues around Taiwan and data security mean the truce could be fragile. Companies may stockpile critical inputs in anticipation of renewed restrictions.

Re‑escalation & Technology Decoupling

Medium probability. Any large‑scale U.S. arms sale to Taiwan, cyber‑security incidents, or Chinese interference in U.S. elections could trigger new sanctions. Trump’s campaign rhetoric signals willingness to raise tariffs further.

The U.S. could extend FDPRs to additional sectors (EV batteries, solar inverters), impose secondary sanctions on Chinese banks facilitating Iran trade and deny export licenses for mature‑node chip equipment. China might expand its unreliable‑entity list, restrict exports of rare earths and key minerals, and sanction more U.S. defence or tech firms. Beijing may formalise digital‑currency payment networks to bypass SWIFT.

Stock markets would experience heightened volatility; U.S. tech stocks might fall while Chinese mining and defence companies could gain. Supply chains would accelerate diversification toward Southeast Asia and India. Prices of rare earths, gallium and germanium would spike, raising costs for EVs, wind turbines and military hardware. Inflationary pressures might complicate monetary policy.

Prolonged Stalemate & Regulatory Uncertainty

High probability. Neither side fully de‑escalates or escalates. Existing tariffs and export controls remain in place while both countries implement industrial policies. Legal challenges (e.g., U.S. Supreme Court rulings on Section 301 authority) could determine the scope of future tariffs.

Washington continues to add Chinese entities to the Entity List for involvement in human‑rights abuses and sanctions‑evasion networks, albeit at a slower pace. China maintains export controls but issues licenses to preferred partners. The EU finalises its ACI and CRMA implementation and begins joint ventures to produce gallium and refined rare earths in Europe.

Persistent uncertainty dampens corporate investment and cross‑border capital flows. Stock markets may grind higher on AI optimism but remain vulnerable to geopolitical headlines. Companies accelerate dual sourcing and increase inventory levels.

Unexpected External Shock

Low probability but high impact. An unexpected event—such as a major conflict in the South China Sea, a financial crisis in China’s property sector or a global recession—could amplify the sanctions dynamic.

A security crisis could prompt the U.S. to impose comprehensive financial sanctions, including restricting Chinese access to the U.S. banking system. Beijing could retaliate by freezing U.S. assets, dumping U.S. Treasuries or halting rare‑earth exports entirely.

Severe market sell‑offs, recessionary pressures, commodity shortages and sharp currency swings would follow. The EU would have to choose between U.S. alignment and protecting its own economic interests.

Bibliography

  1. U.S. Department of Commerce, Bureau of Industry and Security (BIS). Interim Final Rule: Implementation of Additional Export Controls: Supercomputers and Semiconductor Manufacturing Items (October 2024). Summarised in legal analysis by Eversheds Sutherland.

  2. Chinese Ministry of Foreign Affairs. Orders sanctioning U.S. defence companies (26 Dec 2025 and 27 Dec 2024).

  3. Debevoise & Plimpton. China issues prohibition orders under blocking regulations (May 2026), summarising the first use of the 2021 Blocking Regulation and Order 835.

  4. Reuters. China blocks U.S. sanctions on five refineries (2 May 2026).

  5. Chinese think‑tank CISS (Tsinghua University). Analysis of U.S. technological containment and China’s counter‑measures (29 Jan 2025), noting the addition of 130 Chinese companies to the Entity List and Chinese export restrictions and share of antimony, germanium and gallium production.

  6. The Trade Practitioner (March 5 2025). China’s retaliation actions – details on tariffs, UEL and Controlled Party List additions, and export controls.

  7. E.U. Anti‑Coercion Instrument (Regulation 2023/2675) – official summary.

  8. European Council on Foreign Relations (ECFR). Beijing Hold’em: European cards against Chinese coercion (31 March 2026) – analysis of China’s rare‑earth export controls and Europe’s need for economic deterrence.

  9. European Union Institute for Security Studies (EUISS). Trump–Xi truce leaves Europe vulnerable (16 Dec 2025) – call for Europe to re‑industrialise and adopt joint G7 measures.

  10. Istituto Affari Internazionali (IAI). EU Chips Act and Critical Raw Materials Act (4 June 2026) – description of EU supply‑chain resilience goals.

  11. RBC Gestion de patrimoine. Voie ouverte à une remontée durable des actions chinoises (15 Jan 2026) – French research noting 31 % rise in MSCI China and 28 % rise in Hang Seng in 2025 and shift from real estate to technology sectors.

  12. Center for Security Studies (CSS) – ETH Zürich. Chinas strategischer Einsatz von Handelsbeschränkungen (23 Apr 2026) – German policy brief citing China’s 60 % share of rare‑earth mining and 92 % of processing, export restrictions’ global impact and China’s diversification of geoeconomic tools.

  13. IMF Blog. The Impact of US‑China Trade Tensions (23 May 2019) – analysis of consumer and producer impacts and stock‑market reactions.

  14. Center for a New American Security (CNAS). Sanctions by the Numbers: 2025 Year in Review – dataset showing 1,764 SDN designations in 2025 and the predominance of Chinese persons involved in Iran sanctions‑evasion networks.

  15. Foundation for Defense of Democracies (FDD). China Is Supercharging Iran’s Sanctions Evasion Strategy (10 Oct 2025) – description of the oil‑for‑infrastructure payment network and cars‑for‑metals barter system.

  16. Sanction Evasion Report 2025‑2026 (Center for Global Civic and Political Strategies) – identification of transshipment hubs (Hong Kong, UAE, Turkey, Central Asia) and re‑export patterns