China comes out swinging as Trump trade war looms

Now, as Trump’s second stint in office approaches, Beijing is brandishing an expanded arsenal of countermeasures that it is likely to draw upon as the president-elect threatens across-the-board tariffs and levies of as high as 60% on Chinese-made goods.

In recent days, Beijing has launched a regulatory probe into U.S. semiconductor champion Nvidia , threatened to blacklist a prominent American apparel maker, blocked the export of critical minerals to the U.S. and squeezed the supply chain for drones, offering clues into how non-tariff measures are likely to dominate China’s tool kit.

Because the U.S. buys so much more from China than the other way around—roughly three times as much—Beijing simply can’t hit back dollar for dollar when it comes to tariffs. Doing so would also risk exacerbating the myriad woes in China’s economy.

Instead, as with any fight against a larger foe, it pays to find unique points of leverage to exploit—with many of its efforts to inflict pain on the U.S. coming from Washington’s own strategies.

On Monday, Chinese market regulators announced an antitrust investigation into Nvidia, roughly a week after the outgoing Biden administration stepped up restrictions on China’s access to high-end semiconductors. Beijing says the Santa Clara, Calif.-based chip giant may have violated the terms of a conditional approval it received from Beijing in 2020 for its acquisition of an Israeli networking firm.

The timing of the regulatory investigation—nearly five years after the deal took place—and the high-profile target—an American technology juggernaut at the forefront of technological innovation—underscores Beijing’s willingness to use legal tools to target even the biggest American heavyweights .

The strategy was first employed during the first Trump administration, said Angela Zhang, a law professor at the University of Southern California. She pointed to China’s withholding of approval for a proposed merger between Qualcomm and NXP Semiconductors in 2018, at the height of the initial U.S.-China trade war—effectively turning the deal into a bargaining chip in trade negotiations. The deal never won China’s approval and ultimately collapsed .

In that case, China’s leverage comes from the power it has to scrutinize global mergers —even for deals that don’t seem closely related to the country. Chinese regulators used a similar maneuver to torpedo Intel’s $5.2 billion deal in 2022 to buy Israel’s Tower Semiconductor , dealing a critical blow to a cornerstone of Intel’s ambitious turnaround plan .

This time around, Chinese regulators didn’t say what Nvidia might have done wrong or explain why it was raising the issue so long after their conditional approval, though industry watchers had little doubt about the message it sent about China’s willingness to hit back at the U.S. On Monday, shares of Nvidia fell 2.6%, shaving some $80 billion off its market value.

To be sure, Beijing must be careful not to overreach when it is still actively seeking foreign investment. Obstructing or refusing to do business with certain U.S. entities could prompt Washington and foreign businesses to find alternatives that could weaken Beijing’s longer-term position.

That cautiousness can be seen in China’s efforts to set up an “unreliable entity list" composed of foreign companies, organizations and individuals that would face extra hurdles in doing business with the country. The move, first announced in 2019, borrowed from actions that the U.S. Commerce Department had taken earlier against Chinese telecommunications giant Huawei Technologies and its affiliates, requiring suppliers to procure licenses before doing business with those on the “entity list."

China’s list, however, remained empty until early 2023, when the country designated two U.S. defense contractors as unreliable entities after the U.S. military shot down a suspected Chinese spy balloon.

Murkiness is a key feature of China’s unreliable entity list. There is no time limit on how long an entity can remain there, and criteria for inclusion and removal are far vaguer than the U.S. version. But such uncertainties arguably make it more effective, giving Beijing wide latitude to exert pressure on the U.S.

In September, China’s Commerce Ministry said it was investigating whether to put PVH, which owns the Calvin Klein and Tommy Hilfiger brands, on its unreliable entity list. The probe was prompted by allegations that the U.S. company had boycotted cotton products from China’s Xinjiang region “without any factual basis." PVH had said in 2020 that it would cease all relationships with any factories or mills that use Xinjiang cotton. The U.S. subsequently banned imports of cotton products from Xinjiang over reports of forced labor, an allegation that China’s ruling Communist Party has denied.

Beijing’s warning to PVH came a day after the U.S. proposed a ban on the use of Chinese and Russian components in connected vehicles on U.S. roads. If placed on the list, PVH could be banned from selling to and buying from China—locking the company out of a fast-growing market that accounted for 6% of its global revenue last year.

Beyond legal maneuvers, China is turning to other sources of asymmetric strength to strike back at the U.S., such as its advantage in the supply chain for drones and the production of certain critical minerals that play a key role in semiconductors, batteries and defense equipment.

Last week, Beijing said it would in principle ban the export of gallium, germanium and antimony to the U.S., and conduct stricter reviews on graphite sales.

In recent years China has come to dominate the production of a vast array of minerals, owing in part to superior technology and low operating costs. While the U.S. government and allies have pushed to increase mining and processing of critical minerals, Western companies have struggled to compete with Chinese prices, and Beijing’s control over many strategic minerals has grown .

In the case of gallium, a soft silvery metal used in chips, China produces around 98% of low-purity forms of the mineral. Before China’s ban, a study published by the U.S. Geological Survey, a government agency, found that a total restriction of China’s gallium and germanium exports could reduce American economic output by $3.4 billion.

Such countermeasures, while potentially painful for Washington, bring diminishing returns. Earlier Chinese restrictions on some of these minerals to the U.S. meant that export volumes had already plunged, rendering the impact of last week’s announcement “largely symbolic rather than practical," according to the Washington-based think tank Center for Strategic and International Studies.

One area where China is pressing its advantage is in mass-market drones, where it is by far the world’s biggest player. Efforts by other countries, including U.S.-backed Ukraine, face challenges in procuring batteries, cameras and electric motors, whose supply chains run through China.

Last week, China’s Ministry of Foreign Affairs announced sanctions against more than a dozen U.S. drone-technology companies, including some that supply drones to Ukraine. Among them was Shield AI, whose artificial-intelligence-powered long-range drone has flown in Ukrainian missions .

Again, though, the expectation of sanctions had already prompted many companies to look beyond China for radios, compasses, motors and batteries.

Shield AI Chief Executive Ryan Tseng said his company had shifted its supply chain outside of China, saying the prospect of sanctions as well as U.S. national-security restrictions had long made buying from China “commercially not viable."

“It seemed inevitable so there’s no surprise that it happened," Tseng said.

Dmytro Shymkiv , founding partner at Ukraine’s AeroDrone, made a similar decision to switch out of Chinese components in 2022.

The makers of a Ukrainian-made long-range drone hybrid called January, which uses rocket motors to boost the first part of the flight, has now shifted its Chinese components to just 20% of the weapon, according to a person familiar with the matter.

Still, some Ukrainian companies said certain supplies are getting more difficult to import—and some Chinese suppliers have alerted prospective customers that their sales have been restricted.

Matek Systems, a Shenzhen-based supplier of drone components including sensors and flight controllers, says on its website in bright orange font that it won’t provide products to governments or militaries “due to the export policy of drones/drone parts and compliance requirements."

Still, the process of shifting U.S. drone makers’ supply chains away from China has been slow. China continues to dominate the global supply of batteries and motors that small aircraft such as quadcopters and first-person-view drones need to fly. China supplies more than 90% of the magnets used in the motors that power missiles, ships, drones and satellites. Circuit boards are delivered faster and cheaper from China.

A Mavic drone from Chinese producer DJI—the world’s largest small-drone manufacturer and one designated as a national-security threat by the U.S. government—costs up to $4,000, while a comparable drone made elsewhere using non-Chinese components can cost up to $15,000, according to Yurii Poita , an analyst at Ukraine’s Center for Army, Conversion and Disarmament Studies.

Write to Rebecca Feng at rebecca.feng@wsj.com, Heather Somerville at heather.somerville@wsj.com and Jon Emont at jonathan.emont@wsj.com