Cozen Currents: He Said, Xi Said

“President Donald Trump often cites the great personal relationship he has forged with Chinese President Xi Jinping. But before he is able to engage in his signature ‘art of the deal,’ he needs a willing negotiating partner. And Xi is well aware of that.” — Howard Schweitzer, CEO, Cozen O’Connor Public Strategies

The Cozen Lens

• The US and China are locked in a trade war that both Presidents Donald Trump and Xi Jinping seem to want to de-escalate, but a standoff over who initiates a dialogue and at what level is making it challenging to find an off-ramp.
• The upper ranks of the Pentagon may be subject to turmoil but this is unlikely to substantively affect the outlook for the defense sector.
• Elon Musk is preparing to scale back his role with the Department of Government Efficiency (DOGE), having shaken up government contracting and trimmed the size of the federal workforce. But whether DOGE’s efforts will make a long-term dent in federal spending will be determined by factors outside of its control.

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Are the US and China Really Decoupling?

Tariffs Return to Center Stage. Many hawks in the Trump administration have advocated for a strategic decoupling from China, and they view the high tariffs President Trump has imposed as the primary tool to achieve this objective.

• Trump has made it clear that China is his top foreign policy priority and his primary target for tariffs. The sustained duties against Beijing have proven to be the exception to the relief Trump offered to the rest of the world when he paused his reciprocal tariffs only days after his much-heralded “Liberation Day.” The centrality of China in the administration’s thinking is evident even in the deals it is seeking to strike with other countries, as reports have suggested that the Trump administration is prioritizing reaching agreements with Southeast Asian countries in hopes that it can isolate the world’s second largest economy.
• Decoupling from China is not a new idea to Washington. However, the Trump administration’s policies represent the most aggressive effort seen yet. The Biden administration focused more narrowly on “derisking,” which aimed to make it more difficult for China to develop advanced technologies. While Trump himself would ideally like to strike a deal with Chinese President Xi Jinping, he and the China hawks in his administration are comfortable pushing beyond derisking, with many around Trump preferring strategic decoupling over reaching an agreement.

De-Escalating the US-China Trade War. As much as many in the Trump administration may want to pursue strategic decoupling, there is an acknowledgment that the current tariffs are economically (and thus politically) unsustainable, raising the question of how to find an off-ramp.

• The most likely route for de-escalation is the resumption of dialogue between the US and China, but the two sides remain opposed on how to initiate those talks. Trump is insistent on speaking directly with Xi, while Xi wants to start the discussions at a lower level to avoid any political risk until a deal is reached and ready to be consummated.
• Trump’s demonstrated sensitivities to pressure from the financial markets and the business community and the lack of Chinese leader-initiated contact with a US president since Jiang Zemin offered condolences to George W. Bush in the wake of the 9/11 attacks suggest that China’s approach may prevail.
• Businesses adversely impacted by Trump’s tariffs are seeking exemptions for their specific import needs. Although gaining such exemptions could mitigate the impact on certain sectors, by relieving some economic pressure, they provide a path for the rest of the duties to remain in place longer. While Trump has so far been reluctant to offer many exemptions, they could become more common if he wants to limit the domestic economic impact without compromising on the leverage he feels the tariffs provide against China.
• An initial breakthrough between the US and China is likely to result in a significant reduction in the current tariff rates, with subsequent negotiations focusing on further decreases. Treasury Secretary Scott Bessent, however, suggested that it could take at least two to three years to reach a complete trade deal with Beijing. Still, Trump has stated that rates will not fall to zero, and the eventual outcome will likely result in tariffs higher than the universal 10 percent rate applicable to other countries. China is also likely to be affected by forthcoming sectoral tariffs and other future targeted duties, which will increase rates on specific goods.

Don’t Forget the Tech War. In addition to the trade war with China, the Trump administration is likely to continue and further expand the tech war that the Biden administration prioritized.

• Export controls are often the first measure thought of in the tech war and are an area where China hawks are expected to be influential in the Trump administration. The decision to impose license requirements on the sale of Nvidia’s H20 chips is the first sign of this more hawkish approach. How the administration finalizes the AI diffusion rule in the coming weeks will be another marker of how the White House is likely to handle these issues.
• The other primary tool in this tech war is the regulation of outbound investment. While the pertinent staff have yet to be nominated by Trump, his America First Investment Policy executive order outlines some potential changes to current policy, including expanding the sectors covered and what types of investments are restricted. Increasing the number of covered sectors is the most likely tweak. Still, the possibility of removing the exemption for publicly-traded securities in the current outbound investment regulation should not be dismissed entirely.

How the Defense Sector is Insulated from DOD’s Leadership Turmoil

Pentagon Chaos. Secretary of Defense Pete Hegseth is presiding over a department that is experiencing significant turmoil.

• In recent weeks, Hegseth’s chief of staff has departed the Department of Defense (DOD) and three other top officials were fired: Dan Caldwell, a senior advisor; Darin Selnick, Hegseth’s deputy chief of staff; and Colin Carroll, chief of staff to Deputy Secretary Stephen Feinberg. Hegseth has caught heat for allegedly sharing national security information in a second Signal chat.
• This raises questions about Hegseth’s future at the DOD. President Trump has stuck by Hegseth for now, though NPR reported that the White House has started looking for a replacement.
• Regardless of Hegseth’s future, the Pentagon’s planned procurement reforms are likely to be unaffected.

A Key Figure at the DOD. Feinberg, Hegseth’s deputy, is the most important person to watch on the issue of acquisition reform inside the five-sided building.

• Feinberg came to the DOD with an investing background and thus brings his own perspective on “Little Tech,” the universe of smaller tech firms beyond the household names. In his Senate confirmation hearing, Feinberg expressed an interest in changing business as usual with Pentagon spending and procurement. He said he would set up a “war room” in order to “go over every program, every cost, line by line.” Feinberg spoke about rethinking acquisition programs dominated by the biggest defense contractors. “DOD really has to look past the prime contractor, look into what the subs are doing and take an active role in that relationship,” he said. “And not rely on the big contractors […] simply because they win the overall general contracting bid.”
• As the Pentagon’s number two, Feinberg has a major role in running the day-to-day operations of the Pentagon. This could allow him to advance this vision. A Hegseth departure wouldn’t necessarily mean that Feinberg would leave. He could move up to run the department or, more likely, the White House could pick a new Pentagon chief with more experience in defense policy to complement Feinberg’s background with tech.

Spending Boost. A push to increase defense spending creates opportunities for the sector writ large.

• Despite chaos in the upper ranks of the Pentagon, the DOD is likely to get a substantial funding boost when Republicans pass reconciliation legislation, expected later this year. House Republicans now reportedly plan to increase their envisioned Pentagon spending boost to $150 billion, from $100 billion, which would mirror the Senate budget resolution’s higher number.
• Regardless of any changes to acquisition processes and a focus on Little Tech, higher mandatory spending for DOD would offer benefits for smaller and larger defense contractors alike.

DOGE at 100 Days and Beyond

100 Days of Cost Cutting. For nearly 100 days, Elon Musk and his team at DOGE have courted controversy and government efficiency by firing tens of thousands of federal workers, canceling thousands of contracts, and drawing up plans to reduce the federal government’s physical footprint.

• Federal workers have borne the brunt of DOGE’s work to streamline the federal government. The agency was the brains behind the federal employee buyout program via which at least 75,000 workers are expected to depart the government by September. In related moves, DOGE effectively shut down the US Agency for International Development and dramatically limited the scope of work at the Consumer Financial Protection Bureau. In total, the outplacement firm Challenger, Gray, and Christmas estimates that “….280,253 planned layoffs of federal workers and contractors impacting 27 agencies…” have occurred over the last two months.
• Beyond federal workers, federal contractors have been among the hardest hit by DOGE’s efficiency efforts. Working in tandem with the General Services Administration (GSA), DOGE has canceled thousands of government contracts including those assigned to some of the largest contracting incumbents in DC. Fortune reported earlier this month that DOGE had canceled more than 120 contracts with Deloitte while Bloomberg and Yahoo reported that Oracle, Leidos, and IBM are among the many other prominent firms seeing their contracts cut. In a related move, the Wall Street Journal reports that GSA has pushed firms to justify their existing contracts, asking for cost saving proposals where possible.
• Looking to the future, DOGE reportedly plans to continue its government efficiency operations even as Musk publicly signals that he will scale back his role at the agency. Beyond the initiatives that are already in motion, DOGE is expected to play a helping hand in the Office of Management and Budget’s work with federal agencies to repeal Biden-era regulations, among other initiatives.

The Future of Government Efficiency. Even as DOGE dramatically reduces the size of the federal workforce and the governments’ contracts, its efforts so far are set to come up well short of Musk’s original $2 trillion savings target.

• Musk has repeatedly revised DOGE’s savings target down from the $2 trillion promise he made on the campaign trail in 2024, first to $1 trillion in January and then to as low as $150 billion in a meeting with Cabinet officials this month. That number is roughly in line with the $160 billion in savings that DOGE claims to have generated on its website.
• But while DOGE suggests it has already exceeded Musk’s new savings target, analysis of Treasury receipts by the Wall Street Journal found that federal spending actually increased by more than $150 billion in the first quarter of 2025. That’s in part a function of an increase in the number of Social Security, Medicare, and Medicaid beneficiaries this year as well as a related increase in the interest the government owes on its debt. Further compounding the issue is that outside analysts generally believe DOGE’s claimed savings to be a significant overestimate of what the agency has actually accomplished. Jessica Reidle, a senior fellow at the Manhattan Institute, estimated to Reuters last week that DOGE had saved roughly $5 billion to date, magnitudes lower than the claimed $160 billion.
• Still, although DOGE itself may not achieve its cost cutting goals, GOP lawmakers in Congress have the tools necessary to pick up the slack. The Trump administration is planning to unveil its FY26 budget in the coming weeks that will propose billions in cuts to social safety net programs according to the New York Times. While the administration’s budget blueprint will largely serve as a messaging document, GOP leadership in Congress is hoping to codify some of those planned cuts during government funding negotiations this fall.

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