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Trade Tensions

China warns US to drop AI sanction threats, calls it ‘AI hegemony’

China warns US to drop AI sanction threats, calls it ‘AI hegemony’

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AI NewsJuly 27, 2026·5 min read

China’s government has directly challenged U.S. sanctions threats against its AI companies, framing export controls as “AI hegemony” and signaling willingness to retaliate, a move that signals Beijing’s confidence in domestic model competitiveness and threatens to escalate tech-sector tensions precisely as Chinese AI systems gain measurable market share against American alternatives. For institutional investors in crypto and blockchain infrastructure, this geopolitical escalation matters because it reshapes the competitive landscape for AI compute resources, open-source model access, and the jurisdictional rules governing which systems developers can deploy.

  • Chinese AI models now account for 46.4% of routed token traffic on OpenRouter, versus 35.7% for U.S.-built models as of July 2026.
  • DeepSeek alone represents 17.6% of total traffic on the platform, while Chinese open-source models comprise 41% of all open-source downloads according to Hugging Face.
  • U.S. export restrictions on frontier models like Anthropic’s Claude Mythos 5 have created market openings that Chinese competitors are rapidly filling at lower cost.
  • 46.4% Chinese AI model share of token traffic versus 35.7% for U.S. models
  • 41% Chinese open-source models as percentage of all downloads, March 2026 study
  • $30B Moonshot AI valuation versus $852B for OpenAI, $965B for Anthropic

China’s Ministry of Commerce issued a direct warning to Washington on July 20, 2026, demanding the United States abandon threats to sanction Chinese artificial intelligence companies and pledging to deploy “all necessary measures” in retaliation should sanctions proceed.

The statement marks an explicit escalation in the ongoing U.S.-China technology competition, moving beyond diplomatic silence into open confrontation over AI export controls and intellectual-property allegations.

The Chinese government framed U.S. sanction threats as baseless and characterized them as “AI hegemony”, a term that echoes Beijing’s long-standing grievance that Western powers use export restrictions to maintain technological dominance rather than genuine security concerns.

China Rejects U.S. IP Theft Claims and Accuses American Firms of Reverse-Engineering Chinese Models

The Ministry of Commerce spokesperson dismissed allegations that Chinese labs have engaged in “distillation” of advanced American AI models, calling the charges an unfounded “smear” rooted in prejudice and lacking both factual and legal grounding.

A Ministry statement argued that Chinese AI systems launched around the same time as leading U.S. competitors already rank among the best in certain technical domains, including front-end coding, suggesting the models developed through independent innovation rather than copying.

This reframing attempts to position China as an AI innovator in its own right, not merely a follower or thief of Western technology.

More provocatively, the Chinese government turned the accusation back on the United States, noting that close to 200 American AI startups have formally asked their own government not to cut off access to Chinese open-source models, arguing that such restrictions would damage their competitiveness.

The statistic undercuts the U.S. narrative that Chinese AI systems represent an inferior or derivative threat; instead, it reveals that American developers themselves view Chinese models as essential, cost-effective tools.

The Ministry statement also asserted that innovation belongs to no single country and that U.S. firms have themselves distilled Chinese models during research and training phases.

Beijing concluded by calling on both governments to honor a consensus reached by their leaders, implying that the current escalation violates prior diplomatic agreements and suggesting willingness to de-escalate if Washington retreats from sanction threats.

Chinese Models Capture Nearly Half of Developer Traffic While U.S. Export Limits Create Market Openings

Data from OpenRouter, a developer platform that routes AI inference traffic across competing systems, reveals the scale of Chinese market penetration. Chinese models now account for 46.4% of routed token traffic on the platform, compared to just 35.7% for U.S.-built models as of July 2026.

DeepSeek alone contributes 17.6% of total traffic, making it the single largest system by that measure, while other Chinese alternatives fill the remaining gap.

A March 16, 2026, study by Hugging Face, a major open-source model repository, found that Chinese open-source models comprise 41% of all downloads, underscoring that the shift extends beyond proprietary systems to the broader developer ecosystem.

The primary driver of this shift is cost advantage. Chinese AI inference runs substantially cheaper than U.S. alternatives, allowing developers and enterprises to reduce compute expenses while maintaining performance.

This price gap widened sharply after the U.S. imposed export restrictions in early 2026 on frontier models such as Anthropic’s Claude Mythos 5 and OpenAI’s Fable 5, limiting their availability to U.S. customers and authorized international partners.

The restrictions created a vacuum that Chinese competitors moved quickly to fill, positioning systems like Moonshot AI’s Kimi K3 as viable replacements at significantly lower cost.

Developers have publicly claimed that Kimi K3 delivers performance comparable to Anthropic’s Fable and OpenAI’s ChatGPT, further undermining the U.S. systems’ pricing justification. The competitive gap reflects not just cost efficiency but genuine technical parity in certain benchmarks, a result that has alarmed U.S. policymakers.

Valuation disparities underline the different investment contexts: OpenAI stands at $852 billion and Anthropic at $965 billion, vastly exceeding Moonshot’s reported $30 billion valuation, yet the Chinese firm is gaining market share while American leaders face potential sanctions restrictions on their own exports.

U.S. Considers Expanded Procurement Rules and Entity List Expansion to Counter Chinese AI Gains

In response to Chinese model adoption, the U.S. is likely to pursue three escalatory measures: imposing new procurement rules that restrict government and contractor use of Chinese AI systems, renewing threats to add Chinese AI labs to the Commerce Department’s Entity List, and applying public pressure on American companies that deploy Chinese models.

The Entity List already restricts hundreds of Chinese firms from purchasing U.S. goods without explicit government license, and expansion to include leading AI competitors like DeepSeek would represent a significant tightening of the tech cold war.

The threat of Entity List designation carries real weight because it would prevent Chinese AI companies from purchasing critical U.S. semiconductors, cloud infrastructure, and software tools necessary to train and operate large models. Such restrictions would directly target compute capacity and model development pipelines rather than merely limiting market access.

However, the measure’s effectiveness is uncertain: Chinese firms have already begun investing in domestic semiconductor production and alternative compute sources, and the existing U.S. export controls have already proven insufficient to prevent Chinese systems from capturing nearly half the developer market.

Public pressure campaigns targeting American companies that use Chinese models represent a softer but potentially more disruptive tactic. Such pressure could fracture developer communities, force difficult compliance choices on U.S. startups, and create liability concerns for large enterprises evaluating Chinese AI tools.

Yet the stated position of 200 U.S. startups opposing further Chinese model restrictions suggests significant internal resistance to aggressive enforcement.

The open question now facing policymakers, investors, and developers is whether U.S. sanctions or Entity List expansion will slow Chinese AI adoption or merely accelerate the bifurcation of global AI infrastructure into separate Western and Chinese ecosystems. Beijing has explicitly signaled it will retaliate if sanctions proceed, and the absence of agreement on what constitutes legitimate AI development versus intellectual-property theft, illustrated by competing claims of model distillation between U.S. and Chinese firms, leaves no clear off-ramp from escalation. Watch for the U.S. Commerce Department’s next Entity List update and whether it formally designates leading Chinese AI labs; simultaneously, monitor whether Chinese government retaliation targets U.S. AI firms’ operations or access to Chinese compute and data resources.

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EU set to slash 2026 growth forecast amid trade tensions

EU set to slash 2026 growth forecast amid trade tensions

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The European Union is preparing to substantially lower its economic growth forecasts for 2026, signaling that the region’s recovery trajectory remains far more fragile than policymakers had anticipated. Trade tensions with the United States, combined with sluggish performance across the bloc’s largest economies, are now the primary drivers reshaping Brussels’ outlook on near-term growth prospects.

The European Commission is set to release revised forecasts in the coming week that will mark a significant downward revision from previous estimates. Officials within EU institutions have publicly identified escalating U.S. tariffs and unresolved trade disputes as the most immediate obstacles to sustainable expansion.

Trade Barriers Reshape the European Outlook

The Trump administration’s tariff measures, which took effect during the previous year, continue to reverberate through European supply chains and export markets. Manufacturing-intensive sectors—including steel production, machinery, and automotive manufacturing—have been disproportionately affected by these trade barriers.

Brussels had previously projected that these external pressures would ease before 2026, allowing for a modest recovery phase. The Commission’s earlier estimates positioned growth at approximately 1.4% for that year. Current assessments suggest the new forecast will fall considerably short of that target, reflecting the cumulative weight of sustained trade restrictions and heightened investor uncertainty.

Uncertainty itself, rather than tariffs alone, has emerged as one of Europe’s most serious economic threats, as business confidence deteriorates and supply-chain planning becomes increasingly complicated.

— Economic Analysis, EU Officials

Companies across the region are now deferring investment decisions and scaling back expansion plans. The primary concerns center on market access constraints, supply chain vulnerabilities, and the unpredictability of future tariff regimes. This hesitation reflects a rational response to an environment where the rules governing trade could shift without warning.

Key Factor

Beyond tariffs themselves, economists emphasize that the pervasive uncertainty surrounding trade policy has become a critical drag on business confidence and capital allocation decisions across Europe.

The broader industrial context reveals that European manufacturers operate with significantly higher labor and regulatory costs than many competitors globally. These structural disadvantages, combined with tariff barriers, create a compounding headwind that reduces the region’s ability to compete on price-sensitive goods. Industries that once dominated global markets—from automotive components to precision machinery—now face margin compression that makes investment in new capacity increasingly difficult to justify.

Market implications extend beyond individual companies to systemic risks within the European financial system. Banks that have extended credit to manufacturing and export-dependent enterprises face potential default risks if economic contraction accelerates. Consumer confidence, which remains critical to sustaining domestic demand, will likely weaken further if unemployment begins to rise in response to business retrenchment across the continent.

Germany’s Competitiveness Crisis Deepens

Germany, the European Union’s largest economy by output, faces particularly acute challenges that extend beyond external trade friction. Despite significant increases in public spending dedicated to defense and infrastructure projects, the nation’s economic recovery has substantially underperformed expectations.

Industrial production has struggled to gain meaningful momentum. The country’s long-standing competitive disadvantages have now calcified into structural headwinds that are proving difficult to overcome through conventional policy levers.

Germany’s Council of Economic Experts recently reduced its 2026 growth forecast to just 1%, citing weak global demand and elevated production costs as primary factors. What policymakers had hoped would be Germany’s strongest post-pandemic growth year has instead become another cycle of disappointing expansion rates.

The manufacturing sector, traditionally Germany’s economic engine, continues to face pressure from higher energy costs and international competition. These structural challenges suggest that recovery will require more than temporary stimulus measures or tariff relief.

Germany’s situation represents a critical test case for European economic resilience. As the bloc’s largest economy representing approximately 27% of EU GDP, German weakness reverberates throughout interconnected supply chains and financial networks. The country’s industrial foundation—built over decades through precision manufacturing and engineering excellence—now confronts an environment where traditional competitive advantages no longer suffice. Energy costs, which increased substantially following geopolitical disruptions in Eastern Europe, remain 15-20% higher than in comparable developed economies, directly impacting production economics for energy-intensive industries including chemicals, steel, and automotive manufacturing.

France Navigates Political Uncertainty

France, the bloc’s second-largest economy, confronts a distinct set of challenges rooted primarily in domestic political dynamics rather than external trade shocks. Economic growth has proven relatively more resilient than in peer economies, yet political instability continues to erode both consumer and investor sentiment.

Analysts estimate that political uncertainty and budget tensions are reducing France’s annual growth forecast by approximately half a percentage point. Ongoing domestic political disputes have created an environment where businesses and households remain hesitant about near-term spending and investment commitments.

Political instability and budget tensions are reducing growth momentum, even as underlying economic activity shows greater resilience than observed in comparable European economies.

— Market Analysts, European Economic Assessment

The contrast between France’s relative economic stability and its political challenges illustrates a broader pattern across the EU: growth is being constrained not solely by external factors, but by a complex interplay of domestic and international pressures.

France’s experience underscores how institutional stability and policy predictability function as economic assets. When political consensus breaks down, long-term investment decisions suffer even when underlying business conditions remain viable. This dynamic affects sectors dependent on stable regulatory environments, including infrastructure development, renewable energy deployment, and technology-intensive manufacturing operations.

Structural Headwinds Across the Region

Beyond trade tensions and country-specific issues, policymakers throughout Europe are sounding alarms about deeper structural risks that could constrain growth over the coming years. Rising energy costs remain a persistent competitive disadvantage, particularly for energy-intensive industries.

Demographic pressures—including aging populations and declining workforce participation—threaten long-term productive capacity across much of the continent. Additionally, the widening innovation gap between Europe and leading technology hubs in the United States and parts of Asia raises questions about future competitiveness in high-value sectors.

Structural Challenge

Energy costs, demographic shifts, and declining innovation investment relative to competitors represent long-term structural risks that monetary policy cannot directly address.

These challenges exist independently of cyclical factors like tariffs or political uncertainty, suggesting that Europe’s growth challenges extend well beyond the current period of trade friction. Addressing them will require sustained policy commitment across multiple dimensions—from energy transition to education and research investment.

The market implications of these structural shifts are profound. Investors increasingly recognize that European assets may underperform for an extended period, potentially triggering capital reallocation toward higher-growth regions. This trend could increase borrowing costs for European governments and corporations precisely when investment is most needed to address competitiveness gaps. The demographic reality—with median ages exceeding 43 years across much of continental Europe—creates a shrinking consumer base for some sectors even as healthcare and age-related services experience growing demand.

Monetary Policy’s Limited Reach

The European Central Bank has responded to economic weakness by reducing interest rates multiple times throughout the year, aiming to ease credit conditions and encourage investment activity. Lower borrowing costs are intended to stimulate demand and provide relief to both businesses and households.

However, ECB officials have candidly acknowledged that monetary policy operates within significant constraints when confronting external trade pressures. Rate cuts cannot directly eliminate tariff barriers, resolve geopolitical tensions, or restore business confidence in trade policy stability.

This recognition reflects a sobering reality: the central bank’s traditional tools, while necessary, are insufficient to address the full range of challenges currently constraining European growth. Policymakers will need to coordinate fiscal measures, trade negotiations, and structural reforms to meaningfully alter the trajectory of regional economic expansion.

The path forward requires action on multiple fronts simultaneously. Trade negotiations must aim to reduce barriers and restore predictability. Fiscal authorities must target investments that enhance competitiveness and address demographic challenges. And structural reforms must modernize Europe’s economies for competition in emerging sectors.

The revised 2026 forecasts will provide the most concrete evidence yet of how significantly external pressures and internal weaknesses have reshaped European economic prospects. When released, these figures will likely prompt urgent discussions about policy coordination and the need for coordinated action across member states. The downward revisions will also influence financial markets, potentially affecting euro valuation, equity indices, and credit spreads for European debt instruments. Investors will scrutinize whether the revised forecasts trigger substantive policy responses or merely confirm a prolonged period of modest growth that falls short of historical norms.

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US and China expected to extend tariff truce by 90 days

US and China expected to extend tariff truce by 90 days

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Beijing and Washington plan to tack another 90 days onto their trade war truce as the two countries prepare to begin another round of negotiations in Stockholm on Monday, the South China Morning Post (SCMP) reports, citing sources familiar with the matter.

This third round of high-stakes negotiations represents the latest attempt by the two countries to stabilize one of the world’s most important economic relationships. It builds on previous talks in Geneva and London, which were aimed at checking the rapid advance of tariffs and laying a foundation for a broader de-escalation of trade tensions.

According to the SCMP article, the US and China will commit not to levy new tariffs or take aggressive actions during the 90-day proposed extension. The announcement indicates that both sides want to keep talking and avoid a fresh flare-up in the tensions roiling global markets for years.

The White House has not publicly confirmed the planned truce extension, and the US administration was not immediately available for comment.

Beijing demands tariff review on fentanyl chemicals

A key new hiccup to these talks is that they extend far beyond traditional trade issues: They also involve threats to restrict exports of fentanyl, a potent and deadly synthetic opioid.

The Chinese delegation will also demand during the discussions with US officials that the Trump administration remove tariffs on components of a chemical used to make fentanyl, according to people familiar with the matter.

The synthetic opioid has been a leading driver of overdose deaths in the United States. America has blamed Chinese suppliers for adding to the crisis by shipping out precursor chemicals. In retaliation, tariffs were placed on certain chemical imports that were suspected to be in the fentanyl supply chain.

Beijing, though, says that these tariffs set back the cooperative fight to reduce illegal drug flows. Chinese officials are also likely to argue for a more collegial approach, including technical collaboration and intelligence sharing, rather than punitive tariffs.

Although the fentanyl crisis has been a significant focus for the US regarding domestic policy, it is uncertain whether the Biden trade team would agree to modify the tariff approach in the space at a time of domestic election, including amid widespread frustration with Chinese policies.

US and China pause new tariffs for 90 days

If the 90-day cease-fire that was reported comes to pass in Stockholm, it would mark a deliberate halt in one of the longest trade wars of modern times.

The US and China have levied tariffs on more than $700 billion worth of each other’s goods since 2018. The trade war disrupted supply chains worldwide, affected the agriculture and technology industries, and changed how global multinationals arrange their operations.

An interim pause, analysts say, would give businesses that have been ensnared in the crossfire for years a chance to breathe. It would also allow both sides to work on thornier long-term issues like intellectual property protection, digital trade, and forced technology transfers.

The 90-day period is not a permanent solution but a window of opportunity. Its success will depend largely on the political will of both the United States and China to move the negotiations forward or risk renewed tensions.

The timing of the Stockholm meetings is also crucial. The United States is heading into a ferocious election cycle, and neither side may want to appear as if it is soft on trade, for China, where a slowing economy and increasing pressure from domestic industries are probably fueling a more practical approach to diplomacy.

Although there is optimism about the meeting, experts warn that many core structural issues have yet to be resolved. The truce over tariffs might help defuse tensions, but it is anything but a permanent solution.

What unfolds this week in Stockholm could decide whether the world’s two biggest economies are on a path to rekindled cooperation — or merely deferring the next round of confrontation.

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ECB keeps its nerve as Trump ramps up global trade tension

ECB keeps its nerve as Trump ramps up global trade tension

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The ECB is refusing to blink. Even as Donald Trump threatens to slap a 30% tariff on imports and crank up global trade tensions, the European Central Bank decided Thursday it wouldn’t react just yet.

They’re locking rates at 2% and postponing any cut in borrowing costs. The move comes right before their seven-week summer break, with policymakers clearly choosing to wait and see if Trump’s threats actually turn into pain before they make a move.

The logic is simple: don’t rush. A lot of officials are about to disappear on holiday. They’d rather keep repeating that inflation is on target, park any panic until the next batch of economic projections is available for the September 10–11 meeting, and deal with it then.

That means no new action now, but no denial either that things are getting ugly. The euro’s getting stronger, which is hitting exporters and dragging down inflation forecasts. France’s messy budget problems are adding more heat at the worst time.

ECB watches data, ignores panic

Behind closed doors, the ECB knows the pressure is building. A rate cut in September is clearly back on the table, even if they keep hiding behind the usual “meeting-by-meeting” line.

President Christine Lagarde didn’t flinch in her statement Thursday, repeating that “risks to growth are tilted to the downside,” as flagged by Morgan Stanley economists in their preview titled Ready for the Beach. The coming week will pour in the data the ECB needs to weigh that risk.

On Tuesday, their own bank lending survey drops. Wednesday follows with a consumer confidence report, and Thursday will deliver purchasing manager indexes from all across the region, conveniently right before policymakers log off. Germany’s Ifo business confidence and Italy’s economic sentiment numbers wrap the week up on Friday.

Outside the euro area, more inflation data will fly in from Japan, Brazil, and others, while Bank of England chief Andrew Bailey will testify to UK lawmakers about financial stability.His appearance comes just as the UK drops public finance data on Tuesday and faces PMI figures and retail sales later in the week.

Global markets brace as central banks diverge

Over in the US, the economic calendar is light.A Wednesday housing report is expected to show barely any change in the sale of existing homes.

Numbers have been flatlined near a 4 million annualized rate, just slightly better than the 2010 post-crisis low. Thursday brings a report that might show a modest bounce in new home sales, after a brutal drop in June.But the truth is the US housing market is still locked in place.High mortgage rates and unaffordable prices are keeping buyers out.

Meanwhile, Canada’s economic mood gets measured through business and consumer surveys this week. They’ll give insight into inflation fears and investment trends. Retail sales data for May and June could also confirm that shoppers are retreating, especially after tariffs spiked car purchases earlier in the year.

In Asia, everyone’s scrambling to make sense of global trade chaos. South Korea opens the week with export data, followed by confidence and retail numbers. China will keep loan prime rates steady for the second straight month.

Over in Africa, South Africa will show June inflation is likely up to 3.1% from 2.8%, thanks to meat prices. In Nigeria, the central bank will likely keep rates frozen at 27.5%, for the third straight time, with inflation still hot at 22.2%.

In Latin America, Argentina releases its May GDP-proxy Monday. April saw a 1.9% monthly jump and 7.7% year-over-year, helped by President Javier Milei’s move to loosen currency controls tied to a $20 billion IMF deal. Analysts now expect Argentina’s second-quarter GDP to grow 8%, and third quarter by 4.2%, according to Bloomberg.

Mexico is under pressure too. The Tuesday GDP-proxy print will follow April’s surprise strength, and inflation eased in June, finally, and the central bank has hinted it may now slow its easing plans.

Brazil will close the week with its mid-month inflation report, likely down for a third straight time, driven by sky-high borrowing costs. But expectations for 2025 inflation are still above target.

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White House calls Canada a challenging partner ahead of trade deadline

White House calls Canada a challenging partner ahead of trade deadline

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The White House is putting pressure on Canada as trade tensions between the two countries rise. Speaking at a press briefing on Thursday, White House press secretary Karoline Leavitt called Canada “a pretty difficult partner” in ongoing negotiations.

Leavitt said the trade team remained engaged in conversations with Canada, but described the northern neighbor as difficult to deal with.

Her remarks include new tariffs on Canadian goods set to take effect in just over a month. Canada and the US have had one of the most reliable trade relationships for decades, but recent events indicate this could change.

According to the US Trade Representative, bilateral trade between the two countries amounted to over $762 billion last year. Canada sends more than 75% of its exports to the United States.

And the Trump administration is indicating that the relationship will be tested.

Trump hits Canada with new tariffs

Earlier this month, President Donald Trump announced a 35% tariff on their northern neighbors, which surprised business leaders and government officials on both sides of the border.

The new tariff is part of a sweep of a broader trade policy that has seen the Trump administration slap new levies on dozens of countries.

Trump has already levied a 30% tariff on goods from Mexico and from all 27 of the European Union countries earlier this month. They follow a 50% tariff slapped on Brazilian copper products and penalties on more than 20 other countries.

White House officials say the tariffs are essential to safeguard US workers and industries from what they describe as unfair trade practices.

Leavitt added that the tariffs aimed to put American jobs and companies first, emphasizing that the administration was not afraid to take a stand defending its position.

Trump has begun notifying key trading partners, including Canada, of impending tariff hikes set to take effect on August 1. Canada is among roughly two dozen countries, including the European Union, Japan, and South Korea, that have received formal letters outlining the new tariff rates they will face.

Europe looks for talks as Canada stands ground

Canada may fight against the Trump administration’s trade calculus, but others seek compromise.

Leavitt praised the European Union for its willingness to find common ground, saying the bloc was actively looking at reducing both tariff and non-tariff barriers—measures that, she noted, the US had long argued were harmful to American workers and companies.

Ursula von der Leyen, the president of the European Commission, has so far managed to refrain from immediate retaliation. She has yet to announce any countermeasures, a step many view as an indication of a willingness to negotiate.

Canada, however, has taken a less ambiguous position. Prime Minister Justin Trudeau has not commented publicly on Leavitt’s remarks so far, but trade officials in Ottawa have described the new US tariffs as “unjustified” and “economically damaging”.

Leavitt said the US position was clear, stating that all the letters sent to other countries represented the deals on offer. She added that if other nations wanted legitimate conversations on anything further, the administration and the president’s trade team were ready—but emphasized that the US was not backing down.

The trade relationship between the United States and Canada is at a turning point. With an August 1 deadline quickly approaching, companies on both sides are bracing for what could be a seismic shift.

The new tariffs will likely impact auto parts, agricultural products, lumber, and aluminum.

Economists say that trade disruptions could cause consumer prices to rise, job losses, and slower growth, particularly in border areas where supply chains are highly integrated.

Analysts from both countries noted that the US and Canada have very closely connected economies, warning that a trade war could cause real harm, especially when inflation and global instability are already putting pressure on markets.

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China braces for sluggish Q2 under weight of U.S. trade tensions

China braces for sluggish Q2 under weight of U.S. trade tensions

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China’s economy slowed in the second quarter after a strong start to the year, hit by ongoing trade disputes and a prolonged property slump. This slowdown may push authorities to introduce new measures to keep growth on track.

To date, the globe’s second‑largest economy has avoided a big downturn, supported by a tentative trade agreement with Washington and the buffer of current policy measures. However, the sentiment among investors has turned cautious for the latter half of the year.

This is  marked by slow exports, persistent price declines and subdued consumer confidence.

Forecasts suggest Tuesday’s release at 2 am GMT will reveal 5.1% annual growth in Q2, down from 5.4% in Q1, according to the latest Reuters consensus.

“While growth has been resilient year‑to‑date, we still expect it to soften in the second half of the year, due to the payback of front‑loaded exports, ongoing negative deflationary feedback loop, and the impact of tariffs on direct exports to the U.S. and the global trade cycle,”said analysts at Morgan Stanley.

They added that “The third‑quarter growth could slow to 4.5 percent or lower, while Q4 faces unfavourable base effect, putting the annual growth target at risk.”

Beijing may announce more spending

Morgan Stanley anticipates that Beijing may roll out an extra fiscal package ranging from 500 billion to 1 trillion yuan starting towards the end of Q3.

June customs figures indicated a rebound in inbound shipments and a modest uptick in exports, driven by a rush to beat an early‑August tariff ceasefire deadline with the United States. Other June metrics on factory activity and consumer spending are forecast to decelerate further.

Quarter‑on‑quarter, the Reuters survey predicts GDP will have risen by 0.9% in Q2, after a 1.2% gain in Q1. Furthermore, analysts expect growth to moderate to roughly 4.6% in 2025, falling short of official ambitions, and slip to around 4.2% in 2026.

Investors are turning their attention to the late‑July Politburo session, anticipating cues on future policy moves and potential new economic support.

According to the survey, experts foresee a 10‑basis‑point reduction in the People’s Bank of China seven‑day reverse repo rate, and a comparable decrease to the loan prime rate, sometime in Q4.

Job market makes output cuts risky

So far this year, authorities have stepped up public works funding and expanded household subsidy programs, while the central bank in May trimmed borrowing costs and pumped cash into markets to offset trade‑related headwinds.

However, experts warn these measures might not be enough to stop the ongoing price drops. June’s producer price index plunged at a rate unseen in roughly two years, underlining persistent deflationary trends.

Observers expect officials to step up cuts to excess factory production and look for new ways to encourage domestic spending.

Analysts say it’s tricky to cut excess output without triggering major layoffs in a weakening job market.

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South Korea approves $23.3B extra budget to counter US tariff risks

South Korea approves $23.3B extra budget to counter US tariff risks

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The Parliament of South Korea approved a 31.8 trillion won ($23.3 billion) supplementary budget on Friday.

The action is part of President Lee Jae Myung’s scramble to breathe life into a slowing economy and shield vital industries as trade tensions with the United States threaten to upend commercial ties.

The supplementary budget, which was passed after bitter debates and a boycott by the opposition, is greater than the government’s proposal of 30.5 trillion won. Legislators tacked additional funding for direct cash handouts and emergency aid to distressed industries.

The Finance Ministry said the new number shows the importance of falling back on more efficient support measures in light of the double risk of a slowdown in the country and international shocks.

The new relief bill is arriving at a critical time. Seoul and Washington have a deadline of July 9 to resolve closing differences on the revised US-Korea Free Trade Agreement. US President Donald Trump has warned he may impose duties on imports from major trading partners, including South Korea, should the talks fail to bear fruit.

Any move toward a reciprocal tariff increase from 10% to 25% would also seriously blow up Korean exports, such as automobiles, batteries, and semiconductors, propelling the economy.

President Lee moves to close revenue gap with stimulus budget

That bill contains a 10.3 trillion won fund to compensate for shortfalls in tax revenue. The government has been hit with lackluster corporate tax collections amid poor earnings in key sectors such as manufacturing and retail. Consumer demand is also down, putting yet more pressure on public finances.

The government will fund that mostly through borrowing. The figure will mostly be for new sovereign bond issuance, spending cuts, and reallocating existing budget lines.

Low-income families and struggling businesses will receive cash coupons and targeted relief. Additional money has also been allocated for industrial innovation, export assistance, and the creation of jobs.

Despite a boycott of the legislation by opposition lawmakers who said the package lacked long-term vision and was not transparent, the ruling party forced the bill to pass parliament. However, the passage was a major early victory for President Lee, who was sworn in only last month after a snap election win.

South Korea races to avoid US tariffs

An impending trade cliff is spurring the urgency. A temporary deal that has largely kept Korean exports outside the reach of plumped‐up American tariffs expires soon. Without a new agreement, the tariffs would automatically rise to 25% on the targeted goods.

President Trump has indicated that he may start sending unilateral tariff notices to US trading partners as soon as this weekend. That could give Seoul little time to respond or negotiate concessions. South Korea’s trade minister, Yeo Han-koo, is flying to Washington in a last-ditch diplomatic effort to ward off a worst-case scenario.

“It’s still not clear to each side what the other side wants,” President Lee said, calling the trade talks frustrating and opaque. Failing to do so could come at a heavy cost for Korean exporters regarding near-term losses, diminished competitive standing globally, and possible layoffs.

With more than 40% of GDP based on exports, Korea is extremely exposed to external shocks. If duties increase overnight, many industries, ranging from the automotive and electronics sectors to steel and shipbuilding, may lose their margins. Market analysts caution that any short-lived disruption could put a chill on GDP growth for the year and rattle investor confidence.

And the political stakes are high, too. Running for president, Lee made economic reform and inclusive growth his platform. An inability to contain the fallout from tariffs imposed by the United States could undermine his administration’s credibility early in his tenure.

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