In this week’s podcast, Trivium Co-founder Andrew Polk is joined by Trivium’s head of critical mineral and supply chain research, Cory Combs, to address the mounting confusion over whether and how China will ease off on its rare earth export curbs.
The gents discuss:
The implications behind China’s recent approval of a handful of rare earth magnet export licenses
Whether China would consider removing rare earths from its dual-use export control list – spoiler alert: it won’t
Reactions to supply chain disruptions from electronics companies, defense manufacturers, and the US national security realm
China’s most recent threat to retaliate against companies that comply with US rules targeting Huawei chips via the Anti-Foreign Sanctions Law
The fragile nature of the 90-day US-China de-escalation, and what developments might derail the détente
Strap in, we go deep in the weeds in this one.
Here’s the full transcript of the show!
00:00:07
Andrew Polk:
Hi, everybody, and welcome to the latest edition of the Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-founder, Andrew Polk, and I’m joined today by my colleague Cory Combs, who’s head of Trivium Supply Chain and Critical Mineral Research. Cory, welcome. How are you doing, man?
00:00:26
Cory Combs:
Good afternoon. It’s a pleasure to be back. Doing well. I just got back from D.C. late last night. It’s good to be back in sunny LA, but also very good to get a temperature read on what’s happening in D.C.?
00:00:35
Andrew:
Yeah, it was good to see you last week. We had a bunch of Trivium folks in town, so we had a good time. And glad to have you on the pod to bring some of the insights that you learned. So, we’re going to have an interesting discussion today. I’m having Cory on because, of course, there was the big agreement, or at least truce in the tariff war between China and the U.S. about ten days ago that was announced on Monday, I think, the 11th or 12th of May the 12th. Yeah.
Cory:
Mm-hmm, yeah.
00:01:04
Andrew:
And on the back of that, or as part of that, China agreed, sort of in principle, to also dismantle some non-tariff trade barriers, specifically the ones we’re most interested in were the items on the export controls on specific rare earths. But then there’s been some back and forth and confusion around what exactly is happening on that front. So, we’re going to talk through all of that on the rare earths piece. We touched on it a little bit last week, but this will be the main focus of discussion today. And then we’ll also talk about China’s increasingly hostile, at least rhetorically hostile reaction, to the U.S.’s guidance on companies not being allowed to use Huawei chips as part of the Trump administration’s rollback of the AI diffusion rule that also took place last week.
00:01:52
And so the Chinese were initially kind of quiet about that, but they have made more noise. And so we’re going to explore that a little bit. So, those will be the two key topics for today. But before we get into it, Cory, the usual vibe check — how’s your vibe, man?
00:02:06
Cory:
Vibe is mellow, I think. Time in D.C. is always a bit sobering. And we know what’s happening. Those inside the Beltway, I’m sure, are tired of hearing how things are going. But, for me, it was interesting, my last trip, probably five weeks ago, versus the last two weeks, not a very long period of time, right? But the mood, at least among those I was speaking with, was I think we’ve gone through several stages of grief, and we’ve gone through the resentment and then come to the acceptance phase, at least in the discussions I’ve had, when it comes to kind of the supply chain issues. And so it’s very interesting. I’m not sure it makes me more optimistic, but I think we’re more of a stable setting point for now, and hopefully we can start making some more progress now instead of taking a deeper hole moving forward.
00:02:45
Andrew:
Yeah, it’s funny that you described time in D.C. as sobering. Well, I live in D.C., and I actually find that it has the exact opposite effect. It drives me to drink because the conversation is often a little wacky, but that’s neither here nor there. My vibe is good. I actually just got back yesterday from a trip up to New York to do a presentation for the annual meeting of the National Committee on U.S.-China relations. I was on a panel there talking about the state of U.S.-China relations with a couple of other experts. It was a really good discussion. Always good to get out of town, get up to New York. A little different energy up there, much more vibrant. Got some good meals in good New York City restaurants, which we don’t have as much down here in D.C.
00:03:29
So, I’m pretty energized and back, you know, now I’m back in the sober discussions, as you put it. But before we get into the meat of the discussion, as always, we have to do a little bit of housekeeping. First, a quick reminder we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. And that includes not only policy in China and aligning with various policies, whether that be environmental policy or tech policies or data policies, or whatever else. But it also includes policy towards China out of Western capitals like Washington, D.C., London, Brussels, and others. So, if you need help on that front, please reach out to us at hq@triviumchina.com.
00:04:12
That’s hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more great Trivium content, check out our website, again, triviumchina.com, where we have a bunch of different subscription products, both free and paid. You can find whatever kind of China policy intelligence that you need there. We have a bunch of different products, so you’ll find something that fits the bill for you. And finally, as always, tell your friends and colleagues about Trivium, generally, and about the podcast in particular. And while you’re at it, leave us a rating — like and subscribe, all of that stuff. Helps us get the word out, grow the business so we can do more great work. All right with that, Cory, let’s get into it.
00:04:56
Cory:
Absolutely.
00:04:58
Andrew:
Of course, as I already discussed, the big news around the tariff détente included some of these non-tariff barriers, specifically, there were some moves by the Chinese to say some companies that we put on the unreliable entity list, we are going to either take those off or suspend those listings for 90 days, or at least suspend punishments. And then they said that they would roll back the or at least some… I don’t want to say a rollback, actually. We’ll get into that. They will address the issue of not sending rare earth elements, specific rare earth elements, and, in particular, rare-earth magnets to U.S. purchasers. And the waters were muddied a little bit because the announcement was made on Monday. And then on Tuesday, Reuters scoops that China has granted export permits for domestic producers of certain rare-earth magnets.
00:05:51
Really? That report kind of went a long way to buoy market hopes that China would fully roll back its dual-use controls on seven rare earth elements and associated magnets that they announced initially on April 4th as part of this détente, fully roll it back. So, I’m not going to lay out all the details because I want you to do it. First, talk to us just about how you’re viewing, what your read is currently on how rare earths and rare earths shipments from China were affected by the Geneva talks.
00:06:23
Cory:
Right. First of all, is that the market has been, I’ll be very blunt, overly optimistic. There’s been a lot of reading in the signals that is not really anchored in Chinese policy and is kind of an overreach or an overstretching of the interpretation of what China actually agreed to in the détente. So, not to be kind of too pessimistic to start with, but I think it’s essential that we start with kind of the ground reality. The operative language in the, and this is from the English, this is from the White House statement. So, this is, if anything, the more optimistic phrasing. But the operative language is really one clause in the détente agreement. And that is I’m just going to cite it is very short. China will agree to adopt all necessary administrative measures to suspend to remove non-tariff countermeasures issued since April 2nd.
00:07:05
Right? Now, there are a couple things there. First of all, the easy one is that any export control prior to April 2nd is explicitly not part of this discussion. And I do want to make that clear because I have had a couple clients who asked, “Hey, so are we looking at a rollback of tungsten and these others?” No, they’re categorically not part of all this. The operative question here is really the seven rare earths, mostly heavies plus Samarium, which again go into all those magnet components. We talk about critical to defense as well as many commercial interests and applications. So, the big question here then was, what does it mean to adopt all necessary measures to remove non-tariff countermeasures? If you’re really optimistic, that means removing rare earths from the dual-use list.
00:07:46
And that would inherently remove them from licensing requirements. But that is not my read at all. The read that I have is that, first of all, what Beijing did from a legal standpoint was recognize dual-use goods as legitimately dual-use, which has not always been a fair claim in the case of some graphite minerals from back a couple of years ago. But in in this case, they are genuinely dual use, and that’s not really subject to any disagreement internationally. The real question is whether or not China weaponizes the license application process. And so, what that would mean was, basically, in my view, identifying the dual-use goods as dual-use, and therefore subjecting to license requirements is not itself the retaliation.
00:08:24
The retaliation would have been to selectively reject license applications that would send material to U.S. buyers. So, theoretically, and we’ll get to why I say theoretically because the data is not out, but, theoretically, that means prior to the détente, we would not have seen any exports approved to the U.S.. And given the détente, we do expect to see some exports to the U.S. of these materials. Now, this is where the waters get really muddy. So, if you believe my analysis so far, which I’ve been very…
00:08:55
Andrew:
I do.
00:08:56
Cory:
It’s a strong assessment for now, so I appreciate that. Thank you. We do not expect Beijing to remove the export controls entirely. What we do expect is that they will not selectively weaponize them to just categorically reject U.S. applications or applications for goods to go to the U.S. That’s the difference. The license process would stay in place. But the real question now is how do you test whether or not Beijing is holding up its end of the bargain? And this is why the Reuters report, really, it’s perfectly fine as a report, there’s nothing actually to critique about the report itself, but the interpretation, I think, was a little off. What a lot of people read was after the détente, Beijing approved licenses.
00:09:34
Andrew:
Correct? Right.
Cory:
What it really said was several weeks before the détente is approved, these license applications came through, it took several weeks to approve, and, coincidentally, right after the détente, they got through. These are not a signal. These were in the process before a détente was even drafted. So, I want to make that very clear. And since then, we don’t really have any evidence. Now, again, we have strong reason to believe that Beijing will be a lot looser than I would have been after a détente, but you can’t really read into the approvals to Southeast Asia and European clients, including the likes of BW. That’s really not relevant as a signal here.
00:10:07
Andrew:
Yeah. Why don’t you get into, just to touch on quickly… You mentioned that, or you didn’t mention it here, but I’ve seen you in your writing talk about the fact that the four approvals, licensing approvals that were made also were not to U.S. entities. Correct? So, not only was the timing not make sense, it wasn’t that suddenly we have this agreement in Geneva and immediately China approved some licenses. So, that doesn’t add up. But then also it doesn’t indicate necessarily that they’re truly rolling back their moves against the U.S. because these licenses weren’t even for U.S. companies.
00:10:41
Cory:
Exactly, right. Now, again, I want to be clear, I am optimistic that the détente will improve trade flows. We just don’t have any evidence yet. So, yeah, now, the other kind of quick caveat I’m making, and we can focus on this more later, but one key thing is that assuming that rare earth and related magnet materials remain on the control list, there was one piece that would never, in principle, never be loosened up, and that is exports to defense contractors. Now, this is a big thing because a lot of the U.S. exports, direct imports, I should say, of material goods go to the likes of Raytheon or Lockheed and their direct suppliers. Under the rules of dual-use goods, that’s not going to be approved. Now, if you’re going to your kind of consumer electronics companies and computer companies, that’s all well and good. So, that’s the stuff we expect to be loosened up. But don’t expect your defense contractors to be getting these Chinese materials.
00:11:30
Andrew:
Yeah. Well, let’s actually spend a little bit of time on that. But first, I mean, I spend time on it now, but with the caveat of one other question is I’ve seen you explain your thinking on why exactly the dual-use restrictions or the licensing requirements will not be fully rolled back. There’s several reasons for that in your view. Right? So, walk us through. And we should say, maybe it’s part of that, explain like there’s sort of two lists here. There’s the list that the dual-use list. Right? That actually says these specific critical minerals, rare earths, others, are subject to dual use controls. And then there’s a list of actual buyers and sellers, right? That companies can get a license to export to a specific buyer in the rest of the world. And those are two separate lists. Correct? So, walk us through that a bit so that everybody’s got that clear. And then walk us through why you don’t think that first list that I talk about, specifically the dual-use controls, will be fully rolled back.
00:12:33
Cory:
Great. An excellent clarification to make — 100%. So, the first and kind of primary list is dual use item subject export control. And that just means the two categories to that list, one is restrictions, which just means, hey, this is a dual use good. And Beijing has to approve the export that go to a particular end user before it’s allowed to go through. Theoretically, this is on the gold of things like uranium export controls. Like, every country that produces this stuff makes sure it doesn’t go to Iran, basically. Now, this is obviously an extension of that, but that’s kind of the style of control there. And, obviously, the question of weaponization is how far does that go to less sensitive materials.
00:13:07
Now, the other list is effectively a sanctions list for specific companies, namely mostly defense contractors, as you said. So, we’re really talking about whether the goods get removed from the dual-use items list, basically. And the other side is if we saw escalation, there is a possibility on that list goods going from restriction, which means a license is required, to prohibition, which means there’s no license, saying it just doesn’t happen. Or we’re still at restriction phase. So, hopefully, we either stay there, I would say stay there or get removed, but I don’t think we’re getting it removed. So, why wouldn’t it be removed? Basically, there isn’t much incentive. I think there’s a lot of disincentive. So, with gallium and germanium, they actually got… these are historical controls from a couple years back when these issues started to roll out, and we saw them at one point escalated from restriction to prohibition.
00:13:54
So, one way to de-escalate would be to move those down to prohibition, back down to restriction where you could see more exports approved. It is categorically different to suggest restriction to not on the list at all. That is a much bigger shift. And I think there are three reasons why I really just don’t expect to see that, in the case of birds. Strategically speaking, I just don’t see the benefit. Why remove the lever of control altogether? As it stands, to the extent that Beijing is not in a retaliatory position, it can just approve all the exports. It could, theoretically, I’m not saying this will happen, but theoretically it could rubber stamp, say, “Hey, you get a license approved for rare earths, approve it, get to go.” But they still have the ability to, on a dime, cut that back if they so choose.
00:14:35
There’s really no benefit to kind of removing that lever. Politically speaking, it’s possibly even worse in that, again, harkening up to earlier conversation, back to earlier conversation, the way these groups got on the list in the first place is that Beijing declared them a national security concern. That’s why you’re able to call them dual use and say, “Hey, this is the legal basis of inclusion.” And so to remove them from the list entirely would be to a very public, if implicitly, say, “Yeah, we were lying about that. These are national security concerns, and we just did it for retaliatory purposes.” Just, politically, that doesn’t really strike me as Beijing style to just say, “Hey, we just made this up.” They’ve been very clear. Even when cases where it’s clearly weaponized, they still stick to the narrative that there is a national security purpose.
00:15:16
And lastly, market-wise, you might argue, and I think it’s a good hypothesis to consider, I reject that ultimately, but there is a market incentive to roll these back. I really don’t think there is. And the reason for that is this is a relatively small, financially speaking, sector for China. The world is dependent on China, and so anything they allow through will get purchased. And there’s no foreign investment in most of these materials within China — maybe outside of China, but that’s really irrelevant. And so the market doesn’t really have any counter leverage to say, “Hey, we really want to see this action undone.” The market really has no power here. And so there’s really no reason I can see for Beijing to fully remove this from the list.
00:15:54
Andrew:
Yeah, that’s a great explanation. I want to circle back to the defense piece now, because now, what everyone’s going to be looking at, what we’re going to be looking at, is evidence that Beijing is allowing some licenses to go through to sell these to U.S. companies. The question for you, though, is if the preponderance of, well, first, is the preponderance of U.S. buyers in the defense space, and if it is, if they’re still not selling to defense companies in the defense industry, how will we know that they’re allowing more licenses through, right?
00:16:27
Do you understand what I’m saying? If they’re saying we’ll sell these to anybody that’s not defense, but if it just happens to be primarily defense industries or companies that are buying them, then still no licenses are going to move forward. And the Trump administration obviously will look at that and say, “Well, you’re not adhering to this agreement that we had”
00:16:46
Cory:
Right? It’s a great point, a subtle point. The consumer electronics side and automotive, they do actually import a fair number. It’s small relative to the intermediate goods they import. And so that the bulk of Chinese materials getting to the U.S. that are kind of from the right side are coming through intermediate products like motors and things like that that come from Korea, Japan, South Korea, Japan, etc. And their reliance on, almost entirely reliant in many cases, on Chinese minerals.
00:17:11
So, first is, is that issue. One of the risks that everyone’s worried about is if China really tries to pursue long arm jurisdiction and potentially sanction South Korea to Japanese companies for selling the U.S. goods that contain the controlled Chinese minerals. Now, that isn’t in place yet, but that is certainly a large concern and a real concern we take very seriously. We believe China is moving to bolster its ability to enforce long arm jurisdiction. Whether or not it actually does, it’s preparing to be able to do so. That much is fairly clear to us. At the same time, the direct imports are comparatively low, as you say. They are to defense and to consumer electronics. Defense also imports a lot of stuff, and that is really through the form of intermediate goods. It’s really flagged to intermediates before here. But that said, to the extent that the U.S. is trying to onshore, a lot of the supply chain security efforts we see are trying to onshore intermediate components. If you’re building defensive equipment or a really strategic piece of consumer electronics, you might want to either produce that in America or move the supply chain outside of China to some other country.
00:18:14
That’s where it gets really tricky. We will keep a close eye on the flows. They will be small, but they are everyplace able. And so even though they’re small, it’s essential that we get some of those at this point.
00:18:24
Andrew:
Yeah. Well, and one more piece on the kind of looking for evidence of are they sticking to their word, I think another thing that’s potentially going to come up the works is, again, as you’ve written, one of the issues here is that MOFCOM is understaffed here and this is all new stuff. And so, how quickly can they get licenses approved for various entities? And also what are the requirements already hearing about the requirements in terms of what they are requiring from purchasers to indicate that they know where these materials are going and that they aren’t ending up in dual-use activities or in defense-type of operations and production?
00:19:05
Cory:
Yeah. The first bit of evidence is that these controls are taking a long time to approve. In principle, the recently reported approvals that Reuters scooped, they were most likely within a day or two of the initial announcement. So, April 4th. So, we’re looking kind of April 4th to 6th was probably these. I’m guessing it did not take very long for these requests to come through. And that’s kind of the longest timeline possible. But it certainly would’ve been longer than a week. So, between then and May 12th. That’s over a month for approvals of exports to, one, non-sensitive technologies, two, countries that weren’t actually being targeted in the first place. So, these are about the most banal exports of these groups that you can imagine. Consumer spaces to Europe and South East Asia.
00:19:50
And that still took five, maybe six weeks to come through. Probably about five weeks of that approval to come through. How much more difficult is it going to be for MOFCOM to kind of vet applications and confirm by doing their due diligence and say, “Hey, we’re good to clear these exports.” It’s just going to take a lot of time. And, certainly, there’s probably an upfront crash. And so we could see those timelines come down. Maybe it’s a few weeks. But there’s absolutely going to be probably a 3 to 4 week time delay between any application, even on non-sensitive sectors, and approval. And when it comes to things that if you’re a producer that sells to both commercial and defense interests, that’s going to be extremely time-consuming to prove to your exporter so that they could prove to MOFCOM that you’re clear.
00:20:33
We don’t know exactly how long it’s going to take. Obviously, public information about that is very, let’s say, hard to come by. But we would expect that to be probably double the time.
00:20:42
Andrew:
Yeah. Well, I mean, the point, though, is like we’ve only got 90 days for them to show some goodwill. And so six weeks for the first approvals were already halfway through the time period. I guess the question to me is how do you think all this is going to impact the current truce in, we won’t even call it trade war, but the take and trade negotiations. That’s, I think, what I’m concerned about is it’s going to be very easy for people to say the Chinese are not upholding their end of the bargain. How does all this play out in terms of ongoing negotiations, do you think?
00:21:19
Cory:
Yeah, it’s a big question. I think two possibilities emerge. So, first of all, I think, at base, for everything that sounds very negative in this conversation so far, one point I think is a positive is that Beijing has every reason to be sincere in this part of its side of the bargain for détente. Beijing, generally speaking, would like more trade. Because, honestly, more trade, it’s not only good financially for those industries, but to the extent that foreign actors remain dependent on Chinese goods, that’s good for China’s long-term interests, including its leverage in trade, true, but also in terms of the rest of its industrial ecosystem.
00:21:55
China does not have an interest in accelerating decoupling overall, at least in this sector. In some other areas, maybe, but not here. And so, there’s really, Beijing has been using rare earths and other export controls as leverage because it feels it needs to have some leverage against U.S. tariff effect controls. Absent those controls, Beijing has every incentive to not employ them. And so I think, to the extent that Beijing believes it can get a deal, it’s sincere in relaxing constraints. So, it’s not going to obviously continue to relax if things escalate again. So, that brings me to the kind of two outcomes here. One is that everyone on the U.S. side is kind of rational about, “Hey, these are very nested controls. We didn’t import that bigger volumes to begin with. So, we have to be very sensitive about how we’re looking at the data.” I’m sure this and backchannel discussions are going on to say, “Hey, can you confirm the status of certain applications?” And things like that. One is if the U.S. takes their business here, then this doesn’t have to be a huge issue.
00:22:48
This doesn’t have to preclude further progress. But it would be so easy to politically weaponize for anyone on the U.S. side to say, “Look, we can’t find evidence that things are changing,” even though there’s good reason for that. And then say, you know, accuse Beijing of not holding up its side of the bargain, and then just things take a terrible turn.
I could see that happening if the U.S. feels it’s not getting what it wants in other regards. For example, the U.S. right now, we’ll talk about this too, is going after tech again. You connect with the recent guidance around Huawei chips and others, and if China then retaliates against that in a material fashion, one concern would be that the U.S. would then take that as escalatory and we end up kind of cycling back down, and it would be very easy to make the kind of argument that even that happen here.
Andrew:
Yeah.
00:23:33
Cory:
Yeah. So, that’s what I’m concerned about.
00:23:35
Andrew:
Yeah. I mean, there’s just so many tripwires on this truce. It seems very fragile. Both sides kind of wanted to surprise the market to the upside. I think they do want to like advance negotiations, but because of the desire for all that, published a pretty hastily written and a pretty hastily agreed, it seems, statement about what was going to happen over the 90-day period. And it’s part of the reason why we’re talking about because there’s a lot of items left unclear. I want to ask you one more piece on the defense side of things before we go sort of more to the commercial side and then we’ll talk about the Huawei stuff. And that is, even with the détente with the Geneva agreement, and even without it, there are still huge implications for the defense industry as we’ve talked about. It’s obviously sort of the target of China’s approach here.
00:24:28
And it seems to have worked insofar as the White House, like, has taken notice. And that’s kind of what China wanted. But from the U.S. side, even though we always try not to break our rules that we normally are China analysts. But in terms of impacts on the U.S. side, have you seen any kind of early signs of impacts on national security for the U.S. defense industry? I mean, I know we’ve talked a little bit about it’s not like they have a bunch of stockpiles of these goods. So, what are the conversations you’re hearing on how worried people are about getting these inputs?
00:25:01
Cory:
Yeah, there are kind of two levels to this. Part of what I was doing in D.C. was I was at an aviation defense conference for a part of that. And, obviously, there are limits on what I can share from that. But long and short, the fact that I was there for that conference that I was asked to talk about rare earths, I think is itself a signal of the interest in space. This is the first time, up to my knowledge, that this very long-standing conference has had this type of focus on export controls and the trade of very, very far-reaching minerals. I mean, we’re talking the most upstream you can really get in these supply chains that are extremely complex supply chains. Usually, the conversation hangs out in the lower quadrant of that supply chain to a large extent.
00:25:40
And now it’s like, oh no, this is very serious. So, it certainly caught the attention of industry. It certainly caught the attention of those advising the industry, which is almost as important because they’re kind of the ones saying, “Hey, here’s the next risk that you need to put on the horizon.” Risk on horizon that you need to be paying attention to, I should say. What I can say is that, as you say, the stock price this year was kind of the first question that a lot of producers had is like, “Hey, well, can’t we draw from reserves?” The U.S. does not have significant reserves of any of these. It doesn’t have any reserves in some cases. Now, there is the angle from which U.S. defense contractors to import a lot of intermediate goods, as mentioned.
00:26:16
But a lot of their suppliers are very specifically also in the defense industry. So, it’s very unlikely that if you’re a foreign, non-U.S., non-Chinese company whose main offtake is through U.S. defense, I do not expect them to get their licenses approved. And so I hesitate to say that the defense is panicking, but it’s my understanding, it is considered very daunting, the challenge ahead.
00:26:41
Andrew:
Well, we will see how the industry reacts. That’s, again, I think a dynamic that China was trying to sort of enforce or put in place. And it certainly will accelerate efforts to diversify away from China and to extract some of these minerals in other places where possible. But let’s move a little bit now to the commercial side. I mean, now, kind of whatever happens, let’s say, even in the best case, you know, China starts approving licenses for any U.S. company who’s nondefense who wants this stuff. The fact remains that companies are still now freaked out about a supply chain in security. And there’s good reasons for that. But talk us through kind of how commercial companies outside of China have already been impacted by the controls and how they’re reacting to kind of mitigate some of the uncertainty.
00:27:38
Cory:
Yeah. The first is that a lot of companies were impacted by relatively short term, but still very significant supply shocks, like just straight-up supply, just access to the material regardless of price. And a lot of that was because, and this goes back to gallium germanium. This is throughout this whole series of export controls that Beijing has imposed. If you’re not prepared to shift your inventory and you’re stockpiling timelines, then you’re going to get hit by supply shortages in the short term. And that’s exactly what happened with a lot of producers who depend on chips from… maybe you have material coming from East Asia. You have some from Southeast Asia, some from India. But those suppliers, they were not able to get the goods until their licenses were approved.
00:28:19
And so there were these five, six-week delays. And one of the issues is that the U.S. often depends on just-in-time imports. And so its supply chain is very susceptible to short-term shots. And so that immediately threw a bunch of companies in the panic mode. We know companies that had to completely re-shift where supplies are going across the world, some that have delayed products, some that have… rapidly to pay any price just the fine material. We’ve seen, in some cases, a few materials went up to 20x in prices briefly. Now, a lot of that come down after the approval. Something came through for certain materials of a kind of restricted supply chains, etc. But then the second piece comes in that’s kind of a much more enduring issue, which is price.
00:29:00
You just have to play some of these supply chains quickly. And so, if you now have, say I’m a trillion producer that produces 10% of the global market on some good and it’s not susceptible in supply chain shocks, now 90% of X China demand wants that same supply, prices are obviously going up. And we’ve seen this time and again in so many sectors. And so what are the responses now, obviously, from a kind of political standpoint and a government standpoint, we’re seeing a lot of efforts to invest in new mines. And everyone, even the Biden administration was talking about this, and now certainly the Trump administration, too, it’s very focused on getting new capacity to process and even extract materials. But from a corporate standpoint, you have to think a lot more short-term than that.
00:29:43
And so one of the things that we’re seeing is a lot of companies are now trying to do a type of near-term risk, supply chain risk forecasting that is really not typical, where they’re trying to examine full scale, tip the tail of their supply chain and say, what’s next? Because everyone has been blindsided too many times. And I think a lot of producers are very frustrated by the fact they just keep getting blindsided by things that are fundamentally out of their control.
And so they’re trying to figure out how to diversify among existing capacity right now. That’s putting a lot of pressure, but also a lot of opportunity for smaller producers. The question now is how does that dovetail with government and the more politically driven side of investment? Because we’re talking completely different time scales. Secure materials for your products today and next week versus bring out supply capacity that’s going to take likely many, many years to come online at best. It’s just an awkward timeline dynamic.
00:30:37
Andrew:
And so companies, it’s really kind of the zero-sum game as well for these companies because there’s only so many of these materials to go around — critical minerals, magnets, whatever. Companies have to react quickly and be the first mover to the extent that they can. So, obviously, we’re seeing within our clients quite a bit of a scramble on this side. What other actions is the U.S. government doing to help companies who are trying to react to all this stuff, if at all?
00:31:08
Cory:
Yeah. No, honestly. So, first of all, there’s no easy, obvious answer. And I want to state that upfront because there’s a lot of good analysis out there right now around the sector. And one of the main tasks of an analysist is to put forth clue solutions, say, if we do this. But I have to make clear, there is no easy answer. And so no analysis that you’re seeing out there from anyone about if we just do this, it’s not simple. If it were simple, we would’ve already done it. So, what D.C. now, generally, is trying to do outside of the government is to inform the government strategy, and what the government itself is trying to do is figure out, which of these strategies actually makes sense with a few constraints.
00:31:45
One is the timing constraint. One is the political constraints about, yeah, it’d be great to have access to Vietnam’s rare earths, but like, politically, is that happening practically? How easy is that. And then the financial side. These tend to be, especially in the rare earth sector, they tend to be, despite how vital they are to so many different systems and applications, and really high value downstream goods, the actual extract or processing of minerals, it’s generally very low margin, long time horizon return kind of prospect. It’s not a sexy industry for most actors. And so D.C. is now grappling with the question of, to what extent do you subsidize these? I mean, at the end of the day, you’re not going to be pulling these minerals, most of these metals out of the ground without substantive government investment. Because, commercially, there’s not a huge prospect of immediate financial return.
00:32:35
Even the medium to long-term financial returns are not that attractive in most cases. Even despite the supply chain, you might hear also prices are going up, so it’s worth it. Only if you can produce at a certain price point, which most people are not going to be able to do outside of trying to be like a talent, the supply chain synergies domestically, etc.… And so now it’s a question of this is clearly worth investing in from a more than a financial perspective, right? From a defense perspective, from a kind of general tech upgrading perspective. If you can’t get the stuff to keep innovating, you’re going to fall behind. So now there’s this huge question. The first thing that we’ve seen that’s kind of practical is we have seen a couple of investments. Follow President Trump’s trip to the Middle East. And so there was, for example, a major deal between MP Materials and Maaden, which is a Saudi wealth fund. And so there is an effort to kind of move these bilateral contracts forward. So, it moves to the investment board. And I think that’s actually, of all the noise and all the kind of, sometimes crass policy making or policy signals around this stuff, I think that’s actually one of the most practical solutions, as we’ve seen.
00:33:41
Basically, what’s happening there, and it’s just kind of a microcosm of the broader set of discussions around the world, but MP Materials is a rare earth producer, the only one in the U.S. of scale that is actually producing. It’s not comparable to the scale of what the U.S. needs or what China can produce, of course, but what they need is to expand, and they need capital to expand that the U.S.’s doesn’t have. Saudi and another project going on in the UAE, or at least announced in the UAE, there’s a memorandum of understanding going on around this, there is a lot of money sitting around in government-controlled funds, and they’re looking to diversify their economies. They’re a little bit tired of their GDP just literally tracking oil prices.
00:34:20
And so it would be good to diversify. We’ve seen this with deals with Chinese solar and battery makers. It’s a lot of capital waiting to be deployed in future growth industries. And so now we’re seeing the potential for Middle Eastern capitals to support non-Chinese expertise to scale up. Now that’s still years away, but I think that’s one of the most productive efforts. Setting aside the politics of cooperation in different regions, not touching on that, but unlike Greenland, which is really not that good of prospects, right? The financing isn’t there. The capital is not there. The expertise is just not there. In this case, we could actually see some more productive movements.
00:34:54
Andrew:
Interesting. Yeah, well, there’s obviously a lot that is going to be ongoing, not just over the next 90-day period, but years and years in this space. I mean, this is just where a ton of the conversation is so we will continue tracking it. But for now, I want to pivot to this second piece that I talked about, again, mostly focusing on kind of the potential for some of this stuff to trip up the brief fragile détente that we have between China and the U.S., or even if can you even call it a détente? We’ll see. Because while there’s this truce that’s happening, and yet, as per usual, even as negotiations are ongoing, both sides are still kind of taking pot shots at each other. And one of the pot shots that the U.S. took, so this was May 13th, the day after the officially announced the agreement to end the temporary cessation of tariff hostilities on May 12th.
00:35:48
The Bureau of Industry and Security under the U.S. Commerce Department issued nonbinding guidance stating that Huawei Ascend chips anywhere in the world, or the purchase of Huawei Ascend chips anywhere in the world, may violate U.S. export controls. This was announced, as I said, as part of this broader rollback of the AI diffusion rule that was implemented by the Biden administration in the very last days of that administration. And it’s always been a question as to what the Trump administration would want to do with that. It now seems like they’ve, or not seems like they have now said we’re not going to implement it. And part of that is to be able to use the sale of chips as part of trade negotiations. So that was the big thing that happened on May 13th.
00:36:31
As a part of that, they issued this guidance about Huawei Ascend chips. And the guidance means that major customers of Huawei’s Ascend chips, including Chinese tech giants and state-owned telecom companies, are now technically violating U.S. export controls. So, MOFCOM, the Chinese Ministry of Commerce, initially reacted by accusing the U.S. of overreaching and told Washington to change its course, saying, “China urges the U.S. to immediately correct its wrong actions and cease its discriminatory measures.” Now, that is all pretty typical language from MOFCOM, and it seemed like, okay, maybe that’s as far as it would go, but then this week they upped the ante, and MOFCOM, yesterday, I believe, on Wednesday in the U.S., the 21st, so I should have done this at the beginning. We’re recording on May 22nd, 3 p.m. in the afternoon at this point.
00:37:19
So, time timestamp this so everybody knows that anything after this, we’re not responsible for. So, on the 21st, basically MOFCOM said we will punish companies that cooperate with this guidance on Huawei chips. And, specifically, they said any organization or individual that implements or assists in the execution of U.S. measures will be considered in violation of laws and regulations such as the anti-foreign sanctions Law of the People’s Republic of China, and will bear corresponding legal responsibility. So, China is saying, we’re not going to take this lying down, and in fact, we’re going to retaliate. What are your kind of general thoughts on all of this, kind of what you make of it? And then you were saying you want to get into a little bit on some of the discussion around the chips themselves, these Huawei chips. Give the listeners some background on what these chips, the import of these chips and the context around them.
00:38:16
Cory:
Yeah, absolutely. I mean, this is, to put it lightly, is a bit of a mess. And I actually have some questions for you about the timing of this. I mean, was the guidance itself, I mean, first question I have is, was the guidance itself kind of issued to timeline wise as a natural progression of BIS investigations and research and kind of clarifying rules, or was it really the trade side really trying to emphasize, hey, the U.S. has leverage and this is part of the negotiation practice? Is it ill-timed the kind of announcement or is it actually part of the strategy. So, before we get to the rest of it, I’d actually love to hear your brief thought on that and characterize the U.S.
00:38:50
Andrew:
Yeah, my sense is that it’s just the left hand not knowing what the right hand is doing that commerce was kind of in train on this. They obviously had to deal with a diffusion rule by a certain date. So, they came out on the date and he didn’t announce something about it. And then they made this announcement about Huawei alongside it. I think there’s probably some thinking in commerce that this wasn’t that big of a deal, because, technically, this guidance was always true, that the sale of these chips…
Cory:
Theoretically.
Andrew:
Yeah, were theoretically contravening U.S. export controls. But the BIS is just saying we’re reminding everybody this, and we may enforce it more aggressively. Right? And so, in that sense, I can also see them thinking maybe this wasn’t that big of a deal, but we do know from reporting subsequently that the trade negotiators in the White House are going to the BIS and saying, “This isn’t the right time." And, additionally, there’s reporting that the BIS wants to put some Chinese chip makers on the Entity List, which would be a further escalation on that side of things. And also Scott Bessent, Treasury Secretary, who’s leading the U.S. side of the trade negotiations, is also saying this is not a great time. So, it does seem not fully coordinated.
00:40:05
I don’t think this move was meant to build leverage. And we’ve even seen, the one thing I should have mentioned that the Chinese side actually, like, called this out and said this is not agreeing to the spirit of, or adhering to the spirit of our conversations in Geneva. So, the Chinese are specifically saying, “Hey, this might blow up the deal, this might blow up the negotiations, and we want you to know that.” And potentially even using that kind of to impact what they know is a debate in the White House about the best way forward for kind of how all these pieces fit together. So that’s my view on it. What’s your thought?
00:40:44:16 - 00:41:08:24
Cory:
Now, that’s really helpful. And I think really puts into sharp relief some of the details of this about this really is a technocratic push to enforce existing controls, which obviously is just very badly with the kind of broader trade discussions. So, thank you for that, that background, that analysis there. So yeah, just a tie in exactly what’s kind of being said, I’m just to confirm the language here is BIS guides is that specific set of chips, specifically the Huawei Ascend 910B, 910C, and 910D, which are kind of a sequence of iterations on the 910 original series, that they were likely developed to produce in violation of U.S. export controls, and, therefore, anything that builds on that actual legal development process is therefore also subject.
00:41:29
And so this is a huge issue. As much as BIS might have considered, hey, this is the technical detail, for China, this is huge. For context, the original kind of Biden era tech controls were attempting to make sure that China could not take advantage of the world’s most advanced AI chips. And they were produced by American companies. And, subsequently, Huawei, very, very rapidly too, I think even industry surprised how quickly, even Chinese industries, surprised by how quickly were able to come very, very close to cutting edge capabilities in AI chips. And so for China, this is, one, it’s a victory or it’s a success story of Chinese tech innovation capabilities. Two, it’s essential to building out AI applications across industry. These are the chips that will enable many other parts of industry to be competitive in the age of AI-driven manufacturing and services, especially around all the data services.
00:42:21
And if anyone is using AI to take meeting notes or anything like that, that’s the kind of stuff that these chips are actually being used to natural language processing, all that stuff. And so this is where Beijing is saying, look, you’re attacking our ability to scale up and grow an indigenous from Beijing to technology that is essential to our long-term economic growth. That is not a small deal. And so, just give a little bit more color around what these chips are and why they matter so much, basically, I won’t go too in detail, but I want to kind of clarify what we mean by AI chips. And this is not the same as your CPU, GPU, stuff that people might have heard about, especially if, like me, you were recently investing in a gaming PC around the time of COVID.
00:43:02
Everyone learned a lot about GPUs at that point. But just a little bit of context here, basically, what’s happening is this is a fundamentally different type of chip than we have traditionally used in modern computing. CPUs are really good for handling complex tasks because they are really good for handling complex tasks. Right? They manage things like word processing. So, your kind of the general task and operating system. And they’re not really specialized at one thing. They’re good at handling whatever you throw at it. But then the most efficient at doing any particular thing, GPUs are fantastic at doing a very simple, repetitive task, just extremely quickly, like simple calculations. That’s why all the gaming folks in the world go to a high-end game, and you want to see a lot of graphics.
00:43:46
It’s really simple calculations, but a couple billion of them every couple seconds. And so that’s what those chips are really optimized for is doing that at the rate that other chips can’t do. AI chips — AI chips take a certain form of parallel computing to a next level. And so a lot of what AI, I want to say AI, machine learning, what it’s doing is really a sort of matrix multiplication. So, to do backprop and kind of various types of neural network modeling, and to really high data. It’s really high volume of data at really intense speeds. So, CPUs are not really designed for it. GPUs are not really designed to do that type of calculation. So, AI chips are really filling a new niche of really data-intensive, very specific type of compute that GPUs were not really designed for.
00:44:27
There are advanced GPUs that do some of this, but I have to take that to the next level. And so when we talk about competitiveness of AI applications, you really, not from a consumer side, but from the kind of industry side, if you’re operating a data center, you want to have a very high throughput, a very efficient throughput at relatively low cost. And for that, you need AI chips. And right now, the Ascent series, specifically D, is among the best in the world. And so cutting off access to that, that’s why it’s so fundamentally of interest to Chinese industry.
00:44:57
Andrew:
Yeah. Well, and, of course, it’s a huge deal whether or not the Commerce Department realized it. Who knows? I mean, they knew it was a big deal. This is the reason that they have the guidance, but maybe they didn’t understand what big of a wave it would make, and that it might make the Chinese basically say, “Well, this, you know, we’re stepping back from the trade negotiations.” But either way, we’re here. We should, though, talk about, you know, we’re kind of debating internally what China exactly means when they say we will respond with the anti-foreign sanctions law ASFL or AFSL, anti-foreign, AFSL. Because the reality is most of these, there’s very few these chips sold outside of China. Chinese companies use them inside China. There’s not enough of them.
00:45:44
Huawei can’t make them fast enough. There’s no foreign companies using these. So, it’s not like China is going to apply the AFSL to foreign companies for buying Huawei chips because that’s just not happening. It could in the future, though. So the question sort of becomes, what exactly is China threatening here? And is the threat meant to be vague so that everyone just kind of freaks out? Or what do you think they are getting at here? Is it a hollow threat? Is it a real threat? Is it a vague threat? What’s your thinking?
00:46:18
Cory:
Yeah, a few dynamics, I think, one, absolutely, the policy of strategic ambiguity on some of the stuff is certainly in play. But I think, in some sense, there’s kind of two pieces I’d highlight. One is I agree, I think it’s much more of a future focused thing. Huawei would love to sell this internationally. I mean, that much is clear. I mean, China is a huge market. It’s enormous. Right? Nothing else compares to it in its own terms. But the global market is still the price, I think ultimately. And so to compete directly with Nvidia and others for the entire world, maybe even ex-U.S. if all of Europe and the rest of the world starts buying chips for these applications, especially as the rate of demand continues to increase, I think there’s a lot of market potential there.
00:46:59
But still very much a future focused issue as you say. And so I think there’s that that future focus element for sure. The other side is why was this the mode of China’s retaliation? Basically, the threat is, in some ways, abstract because it’s not really that a bunch of foreign companies are buying news right now because they can’t, even if they wanted to. The other side is it’s relatively specific saying, “Hey, if you’re a company in the middle of this, you will get squeezed.” And that is kind of a very direct threat. And that is the whole point of the AFSL, right? The first time that they introduced, they’re like, "Hey, we’re going to make sure that this is not an asymmetric thing. We want to make sure we’re able to symmetrically impose punitive measures," and basically squeeze market actors as a form of leverage to say, “Hey, the U.S., your companies are going to face negative impacts if you continue to push us in this direction."
00:47:47
And so I think that’s pretty specific, they’re setting up for, it’s not just about chips.
I think it’s about everything else that comes later as well. Other companies. This is basically saying, “Here’s the playbook. If you do this, we will squeeze your companies in this way in future.” So, I think those are setting stage. The last piece I kind of raise is a question. I really don’t have an analysis to it, but, any deep analysis, but why was the response from China side, apart from the initial kind of lip service kind of we don’t like this thing, but the actual AFSL warning, they could have, say, impose new controls. They could have done more kind of non-tariff barriers. Why did they restricted to what is effectively a scary but not particularly impactful immediate measure?
00:48:32
And I think part of the answer has to be, and this kind of high-level an answer, but I think part of the answer is they’re not looking to blow up this deal over it. I think that has to be part of the answer for that to work.
00:48:43
Andrew:
That’s a good point. Yeah, I think it’s right. They’re not looking to blow up the deal. And again, to the extent that threats like this may have some impact on the White House approach to how all those pieces fit together, tariffs versus entity listings versus their own export controls, maybe they were trying to also impact the U.S. side. I would say as well, as you said, a lot of these are future challenges. And it’s not just about U.S. companies. It may be about third-party countries. Right? So, countries in Southeast Asia. If Huawei is at a place where it can produce enough of these chips to satisfy domestic demand in China and then start selling them to, say, Thailand, I think part of both the U.S. and the Chinese calculus here is the U.S. is saying, well, if Huawei gets to that point, we actually want Thai companies in the Thai government to be concerned, and we want them buying Nvidia chips or other American-made tech rather than Huawei chips.
00:49:45
And so, it’s kind of about getting everybody reliant on your ecosystem early so that at the point that Huawei is ready here, third-party countries are kind of thinking twice about going with the Chinese tech instead of American or other Western tech.
00:50:02
Cory:
Absolutely. And just to add onto that in a very kind of tangible way, I think that’s exactly right. It’s a great point that the ecosystem around these chips is essential. And it’s easy to overlook. But the Nvidia Cuda system is basically, you have to have the software side to actually leverage the power that the hardware. And so the software ecosystem around the hardware, really, it doesn’t lock you in. But certainly, once a certain group of developers and companies are used to working with your system, obviousl,y there are advantages. And so Huawei has developed its own AI computing framework for MindSpore, and that’s a direct competitor to that ecosystem. So, as you say, getting locked into that ecosystem would be a huge source of path dependance for future purchasing as well as for future application development.
00:50:44
Andrew:
Yeah, well, kind of final thought here is all of this back and forth just reminds me just how fragile these 90 days are going to be. This détente is for these 90 days. It does seem like all this back and forth is… neither side is looking to derail the talks. You made a great point about, you know, why would China take an action that doesn’t actually have much impact, but seems like a really big threat? And it’s because I think both sides are committed and really wanting to advance the negotiations and actually get some sort of deal at some point. But it just underscores how difficult the journey is going to be and how many different ways things can fall apart. And then the last thing I’ll say is specifically the stuff on China’s announcement that we’re going to hit back with the AFSL is it’s just one step in a big step, and a glaring one, closer to the situation that I think we are eventually going to get in, where many companies are in contravention of either Chinese law or U.S. law, right?
00:51:46
No matter what they do. And I mean, effectively, what this is saying is the U.S. is saying if you buy Huawei chips, you’re breaking export controls. And China saying if you don’t buy Huawei chips, then you are in contravention of the AFSL, or you can be sued under it. And I mean, so this is the road we’re on, and it’s just going to get worse and worse and worse. We’re still not there. We’re like kind of dancing around it, but it just strikes me as another step in that direction. I don’t know if you have any thoughts about that.
00:52:15
Cory:
No, I completely agree. And I think to the extent that we have… This is less about kind of high-level decoupling and more about specifically walling off competition in various kind of emerging spaces. And I think the tech side, it’s one of the more worrisome because it’s strategically important, but also very poorly understood, frankly, at a high level. And it’s just so easy for these things to add up to kind of more dire consequences than perhaps even intended in the first place. And so I think it’s very easy for this stuff to escalate, even absent our intent to do so. So, I’m also very concerned for that.
00:52:46
Andrew:
Well, it’s going to be a topic of conversation for days, months, years, lifetimes to come. I always say we’ll be talking about this next week and the week after that and the week after that, and the month after that, and the year after that, until we basically all just die on the podcast, I guess. But that’s dark. That’s dark. But we, as usual, have covered a lot of ground. Cory, thank you especially for kind of getting into some of the very specific details on the export controls. I think a lot of people are super confused by that at the moment. So, thank you for the clarification and analysis on that side.
00:53:23
Cory:
First, it’s confusing. So, there’s no… I spent a lot of time.
00:53:27
Andrew:
Some of the questions at this point are unanswerable, but we’ll be covering it, we’ll be continuing to talk through these issues, helping our clients and our listeners think through them. I think, with that, we should leave it there. Thank you again, Cory, for joining me today. And thanks, everybody, for listening. We will see you next time. Bye, everybody.
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