When it comes to China’s key nodes of economic leverage, rare earths get all the attention — because they’re the cheapest, easiest lever China has to pull.
But the more durable — and future — points of leverage are already hiding in plain sight, in hundreds of intermediate goods most people never think about.
Gerard DiPippo, Director of Global Macro at Eurasia Group, returns to the pod as our first ever two-time guest, joined by Dinny McMahon and Cory Combs, to unpack it.
On this episode, host Andrew Polk sits down with Gerard, Dinny, and Cory to dive into:
Why rare earths are a uniquely cheap and low-cost weapon for Beijing, and why other chokepoints like batteries carry far higher stakes
How China’s licensing regime doubles as a surveillance system, giving Beijing visibility into global supply chains it can use to ratchet pressure up or down at will
The “shoe that hasn’t dropped yet”: China’s shelved extraterritorial rule that could restrict any product containing Chinese-origin content, anywhere in the world
Why intermediate goods are the next frontier to watch, and why China’s reaction function gets a lot murkier once controls move further down the production chain — into products with real commercial value to Chinese firms themselves
It’s another great discussion – so enjoy!
Transcript
Andrew Polk: Hi, everybody, and welcome to the latest Trivium China podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and today we’ve got a bit of a special lineup. I’m joined by two Trivium regulars, our Head of Markets Research, Dinny McMahon, and our Head of Supply Chain and Critical Minerals Research, Cory Combs, but we also have an extra guest with us today, and that is the Director of Global Macro at Eurasia Group, Gerard DiPippo.
Gerard, how are you doing, man?
Gerard DiPippo: Good. Very happy to be back on the show.
Andrew: Yeah, it’s great to have you back. You’re our first two-time guest.
Gerard: Really? Wow.
Andrew: Yeah, absolutely. Very excited to have you back. Dinny, how are you doing, man?
Dinny McMahon: Good, mate. Always happy to be here.
Andrew: And Cory, how about yourself?
Cory Combs: Doing great. Really excited. We’re starting the hiring process for a new analyst position. So, very jazzed for that. It’s a good week.
Andrew: Awesome. Love to hear it. All right. Well, today we’re going to do another look at basically the economic lawfare and economic coercion playbook that is evolving out of China, specifically looking at kind of future choke points that China may look to draw on as its export regime evolves and its kind of choke point capabilities evolve. We’re going to use, as a jumping-off point, a piece of research that Gerard has done called China’s Chokepoint Leverage Goes Beyond Critical Minerals.
We’re not going to go line by line on that research, but we will kind of use that as a jumping-off point. And we’ll talk about where China is quietly building a dominant kind of share in various global markets. And then we’ll walk through that paper in general and our general thoughts from the Trivium side on Gerard’s analysis. It’ll be a great discussion. But of course, before we get into it, we have to do the customary vibe check. Gerard, I’ll start with you. How’s your vibe today, man?
Gerard: I’m happy to be here, although it’s funny because just before we recorded this, I was talking to my co-author from that piece, Amanda Hsiao, and she was saying how she loves this podcast, but actually doesn’t like the vibe check. And so it’s always controversial. So, shout out to her and shout out to the vibe check.
Andrew: Awesome. I love it. Yes, the vibe check is very controversial. We get a lot of people who love it, a lot of people who hate it. And so I guess that means you’re doing something right. I don’t know.
Gerard: I love it for what it’s worth.
Andrew: Well, see, good. Exactly.
Dinny: Yeah, I’m on the other side of the divide.
Andrew: Well, and with that, Dinny, how’s your vibe today?
Dinny: I’m feeling good now that I know that there are people out there who feel the same way that I do. But no, my vibe today, I’m feeling pretty rested. I had a long weekend in New York with the family. So yeah, I’m feeling good.
Andrew: Nice. So Dinny’s vibe is officially unburdened, I feel, now that he’s let it be known. Cory, how about you, man? How are you doing today?
Cory: I’m good. Yeah, again, just really excited to be bringing on a new team member soon, in particular to help work on a lot of these types of issues. Although now I have a new interview question, which is going to be the make-or-break for the candidates, which is whether or not they like the vibe check. It’s going to be a deciding factor now.
Andrew: Well, you can’t give away what the correct answer is actually now so that people will make sure that they answer honestly. Well, my vibe is pumped to have all you guys on. I’m excited. I think this is going to be a great conversation. I’m also excited. I’m going to see Gerard in real life later today. I always enjoy catching up, talking China beyond what we put on the pod.
So, we’ll get into the meat of the discussion in a sec, but of course, we also have to quickly do the housekeeping. So, a quick reminder to everybody — we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China on a range of areas: autos, tech, etc., minerals, you name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others.
So, if you need any help on that front, please reach out to us at 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 more Trivium content, check out our website. Again, triviumchina.com. You’ll definitely find a subscription option that will meet your needs in terms of staying on top of China policy, intelligence, and research. We have a bunch of different options on the site. And finally, please do tell your friends and colleagues about Tribune, both about the podcast and about the company. It really helps us to grow through those word-of-mouth recommendations, so we really appreciate those.
All right, Gerard, are you ready to walk us through this?
Gerard: Let’s do it.
Andrew: All right. So, Gerard, your piece, or not just your piece, but let’s start sort of where the conventional conversation around this U.S.-China back-and-forth and evolving China lawfare usually starts, which is critical minerals and rare earths. Your paper argues that rare earth controls remain Beijing’s preferred retaliatory tool, but that the approach is evolving within that space. Why don’t you just set the scene and talk to us about how you see things evolving?
Gerard: Yeah, I’ll just give you the bottom line, which is that it is proper to be focused on critical minerals as a key choke point. And those are, in fact, what Beijing knows it can weaponize for at least years, and we can debate how long. But the point we wanted to make is that there are other choke points that are developing, particularly in intermediate goods. And Chinese industrial policy is geared towards expanding China’s market share of those goods.
And so, the implication of all of that is even if you think at some point the West is able to have enough secure supply of critical minerals, and we can debate how long that takes, at that point, China will have other choke points. And there are implications from that because it means that China’s coercive leverage is growing in ways that I think Western governments are not planning for.
Andrew: So, Gerard, we’re going to talk a little bit about the evolving nature of some of these choke points that you point to in your paper. And Trivium has done some work on this as well, so we’ll kind of be able to compare notes on what we think is next. But before we get there, you also identify some of the current attributes of China’s export control regime, specifically zeroing in on the licensing aspect, which sort of allows Beijing to ration supply and deny importers of goods from China the ability to stockpile.
Can you talk to us a little bit about why you think Beijing’s leaning on the licensing piece rather than an outright ban of sales to have a more durable and effective approach to export controls?
Gerard: It’s for several reasons. One is that the licensing requires foreign companies to apply for those licenses, which means they’re able to collect information on supply chains and general needs of companies. Relatedly, if they have more comprehensive data, they can then have a sense of what total demand is and have better mechanisms for detecting whether there’s any sort of transshipment or stockpiling going on.
So, they want full visibility so that there’s no smuggling or workarounds that put holes in things once they leave China’s borders. The other reason is you want to be able to keep companies on as short of a leash as possible. And that, one, is to prevent stockpiling. But two, it also means that if Beijing wants to dial up the pressure on any government or company, it can do so fairly quickly precisely because it’s prevented that stockpiling and workarounds.
And so think of it as sort of a surveillance and enforcement capacity that’s working together.
Andrew: Totally makes sense. And another piece I wanted you to highlight is, you know, focus in on Chinese state investment and overseas mining as well. So, this isn’t just about sort of controlling the source inside China, it’s also about reinforcing dependencies in the long term through investments. Cory’s also done a bunch of work on this. So, talk to us about that piece of it in terms of what China’s doing externally to reinforce its domestic export control regime.
Gerard: Right. So, they’re investing in overseas mining and capacities. I mean, Cory is a master of tracking this stuff, so I wouldn’t deign to lecture him on it. But think of it as a comprehensive plan. I don’t know if there’s a single plan, but there’s at least planning going on such that they’re able to track the supply chains of the things they know are upstream vulnerabilities. And their companies are making those investments, right?
And so, they also are aware that Western governments are working quickly by at least Western government industrial policy standards, to try to indigenize or sort of de-Chinaize offshore those capacities. And so, it’s really like a race of industrial policy systems.
Andrew: Cory, what are you seeing on this side? Do you see it similarly to how Gerard’s characterizing it?
Cory: Yeah, the first thing is that top to bottom, at a high level, there is systematic effort to map and understand China’s vulnerabilities. And so we have that supply chain and industrial security policy from March made public in April. And it’s a state council level doc that says that very explicitly, various authorities, including Central Planner and DOC, are basically in charge of making sure that these foreign vulnerabilities don’t disrupt China’s industrial upgrading and regular operations.
So, that’s driving a lot of investment by state actors, by state investors, Ex-Im, development banks, policy banks, all that. And so absolutely, at the same time, you also, at a lower level, at a more commercial level, you still see a ton of, and I would probably argue even more, private sector investment. Now, obviously, private gets very messy when you talk about private sector in China’s mining ecosystem, but you also have things like CATL, BYD, genuinely private listed companies that are pursuing no-one supply chain security overseas, especially in Latin America, parts of Africa, etc.
So, there’s both fronts happening simultaneously, and they both support Chinese mineral resiliency, as well as processing. So, it all aligns. And to the extent that Beijing doesn’t have certain central-level plans for driving specific niches of minerals, it’s because the market’s doing it for them. And so the areas where the market’s not doing it, Beijing is making sure it’s happening. So in both regards, it’s happening, 100%.
Gerard: I may be jumping ahead here, but I would say that China’s focus on overseas investments as a means of securing its own critical materials or other resources is not new. That’s been going on pretty much for decades, at least in a concerted way, at least 20 years. I think what is more new is China imposing export controls, not only as a means of having coercive leverage against countries, which you’ve already mentioned, but also to control the technology that it knows those countries want, including for things like magnets, so that they can indigenize their own technology.
I mean, one theme you can see is that a lot of China’s recent measures, including recent controls and outbound investment, are really aimed at technology, including but not limited to things that would be useful for critical minerals, right? So, it’s the idea that China now has the capacity, one, to hit back, but two, it also has technologies that it knows other countries want, particularly to break free of those chokeholds. And so, it’s sort of protecting in both directions.
Cory: Exactly right. And a good case study of that, I think there’s 100 of them, but I think one very clear one is gallium. So, one of the earliest controls, so gallium and germanium, had a lot of attention. Australia is now recovering some gallium as a byproduct of other operations. But what do we need the gallium for? And one of the most important applications right now, to my view, is the rising demand for GaN, a gallium nitride used in wideband-gap semiconductors.
I don’t know of really any large-scale producer outside of China that can turn the gallium into gallium nitride in the substrates we use for semiconductors. So, it’s great that we’re getting gallium, but what about the processing? And that’s exactly the kind of choke point that I completely agree — this is the intermediate goods issue. This is the processing issue. And where Beijing continues to control that, that is leverage.
Andrew: So, staying on this kind of idea of where we are now with the export controls and the strength of the export controls around critical minerals and rare earths, you guys both, I think, rightly touched on the processing piece, which now, of course, other countries, notably led by the U.S. are trying to you know alleviate that choke point from China, trying to build processing capacity. But again, Gerard, you point out in your paper, in your research that even if China’s critical minerals processing eventually erodes, Beijing could extend restrictions to foreign-made goods containing Chinese mineral content.
So, this is sort of the extraterritorial piece that we talked about a little bit, Cory, where you say if there’s any piece of Chinese content, doesn’t matter if it’s processed in China or not, we’re going to restrict that. Notably, that was part of their big October 2025 controls that really brought things to a head in the U.S.-China negotiations and led to the U.S. backing off a little bit and ultimately to the Busan agreement. But talk to us about that aspect of it, Gerard. How do you think that unfolds?
Gerard: Right. So, it’s the Chinese version of the foreign direct product rule. And that is the provision among several, but maybe that one in particular in October that scared Russian government so much. Because if you read it, at least verbatim, it sounded like China had the ability to impose controls on anything that had any non-negligible amount of Chinese rare earth content in it.
Which would, if you read it that way, would mean like a battery that China had made that is in a car made in Poland that goes to France or whatever. That is still subject to those controls. Now, because of the Busan truce, that part of the controls has been shelved. It’s not dead. It’s just on pause as part of the ceasefire. And so, to my knowledge, that part has not been fully tested. And it’s sort of the shoe that hasn’t dropped yet.
But because China is collecting data during this time through the application process for the sort of normal export controls and licensing requirements, it might be able to more effectively implement that in the future. And I don’t think that regulation or that capacity is going away.
Andrew: 100% agree. I mean, I think we always talk about these export controls as, Cory, let me bring you in, like, basically, China is sort of suspending their use. But there’s just one way of general travel here, right? China wants to bolster its export control regime overall. The actual implementation of the controls may ebb and flow, but they want extraterritorial jurisdiction. They want to be able to not only use these in a weaponized fashion when needed, but also for broader industrial policy purposes. What’s your perspective on the piece Gerard was just talking about?
Cory: Yeah, I mean, all of these tools, I think the hardest part of all this to map is what are the constraints on Beijing’s use of these tools, right? And so, I think exactly right, there’s one direction of travel when it comes to the material level controls. I think at this point it’s pretty clear. Meaning, which is to say, Beijing can impose an export restriction, which just means you have to apply for the licenses. I shouldn’t say just, it means you have to apply for licenses. And this is where a lot of the attention comes from.
At that point, I don’t see any way of coming back from that. Like that is just a lever that it can ratchet it up, it can ratchet it down. And there’s two different levers on top of that, which I’m sure many listeners will be familiar with, but just to confirm, first, they can escalate the restriction to a prohibition, which means you’re not getting a license. And separately, there’s a number of ways they can expand, add new compounds, add new derivative materials, etc. Or they could go the extraterritorial route and say, “Not only are you not getting it from China, you’re not getting it from somewhere else if it has a Chinese input,” right?
Som there’s other ways of escalating. And so, I think that is negotiable. That’s up and down. That’s leverage that you can deploy at will or pull back when you’re trying to pursue strategic stability, all that. But the existence of a licensing requirement in the first place, I don’t see you coming back from that point. I see one direction of travel there, and then it’s flexible from there on. And this is in contrast to, for example, some of the commercial security or industrial security investigations, which have been very explicitly used as leverage in negotiations.
Like, oh, maybe we’ll investigate this sector, but we’ll scrap that investigation if we get certain concessions, right? And so, one question I have for Gerard and Dinny as well is, in this context, is where do intermediate goods fall? I mean, we have some intermediate goods are already affected, right? spluttering targets are a good one. They’re not intermediate from a consumer perspective, but if you’re making semiconductors, you’re not taking rare earth, making a spluttering target making a chip. You’re buying a sputtering target from somebody who bought rare earths elsewhere.
So, in the upstream sense, we’ve already seen that migration down the production chain, so to speak, and we’ve seen it in a number of others that I won’t go on about. When do we start seeing that in intermediate goods where that, I think, starts to play? Those are much bigger factors in China’s total export value. Those have much bigger costs associated with them. So that’s why I’m very curious, how do you see China’s reaction function? What are the constraints on its willingness to move further down the production chain with export controls?
Gerard: So, I think we’re waiting to see what happens when they fully weaponize other intermediate goods. I mean, you’re referencing things that might have critical mineral components in them, but there are a lot of things that are unrelated to critical minerals where China makes intermediate goods. But you mentioned something that’s really important, which is those other goods, or some of them at least, things like, say, batteries, right, they have much more commercial value for China to restrict those things, but actually be imposing harm on its own companies in a way that rare earths do not.
Rare earths are basically an optimal upstream weapon, right? Because in dollar value terms, they’re really not worth all that much. But China controls the chokehold on the processing side. It has basically two state firms it can operate with to do that. It has the ability to use that to get visibility through licensing of a whole bunch of other industries. And it can do it without really disrupting its own exports all that much. And so, it can sort of pick and choose which industry it wants to disrupt.
There are other intermediate goods, like just think of industrial chemicals, let’s say, right, where China could disrupt something, but that’s going to be probably more narrow, right? So, I’m actually skeptical that there’s any one set of things that is going to be as powerful and as sort of cheap to use for China as critical minerals. That said, there are a lot of other things that could be used in conjunction.
And if you have a sort of whole supply chain visibility, you don’t have to use the same type of good to retaliate against any one country, right? You could use different sets of goods for multiple countries. So that was kind of the point of our piece, that there are other things I can go at that would be valid, even if it were the case that there were Western supplies of processed critical minerals that could avoid China.
Cory: Absolutely. Excellent. And just to put some scale on this, you’re talking about the difference in the impact for China, the cost of imposing this. China’s rare earth industry, the entire rare earth industry is probably on the order of one to $2 billion in terms of total value. That’s obviously not strategic value. I believe their exports of batteries last year were over 60 billion. So, that’s one product and that’s just exports, right? That’s exports compared to the entire rare earth industry. So, it just doesn’t really compare, and the nature of the companies as well.
The battery revenues are even more critical because a lot of Chinese companies can sell batteries, for example, at a much higher premium overseas than they can domestically given involution. And a lot of that money is going straight back into R&D. It’s going straight back into development of new battery chemistries that China is hoping will drive its competitiveness long term. You’re not seeing that kind of R&D in rare earths. You don’t need it. So, I think both financial value-wise and strategically, the costs are so much higher for some of these.
But very well said, I completely agree with the kind of ability to target narrowly these intermediate goods. It’s not quite the same blanket. Yeah, so just seconding all of that.
Gerard: And part of why we’re still talking about this is basically hypotheticals because they still don’t need to use as other weapons, so to speak, right? You could debate how long, but at least say five years conservatively where they would have a lot of leverage with critical minerals. And if we get to a point, say, in 2030, where there is Western self-reliance, we’re going to have another conversation about what else to go after.
One thing we tried to highlight in our piece was to look at specific intermediate goods in the trade data where China has 50% market share globally, both in value and volume terms. And we identified 300 goods at the HS6 level where that’s the case. And it’s grown rapidly since 2022. It’s almost like a straight line up and on track to be 400 goods by the end of this decade. Now, I should say that because we’re operating at the HS6 level in trade code terms, that’s like sort of medium granularity.
If you are assessing your own vulnerabilities, I would want to go much more granular than that. But the problem is that you don’t actually have a global standardization of those codes at that level. So, think of that as just sort of a high-level illustration that you actually see in the data what their industrial policies are saying they’re trying to do, which is to develop whole supply chain security, including for their own defensive reasons.
But it also means that because a lot of these things are pretty low value added or low margin goods, it’s things that Chinese industrial policy is just much better suited to absorb.
Dinny: Yeah, I’d say that when it comes to the intermediate goods, I mean, what Gerard’s saying makes perfect sense that for the most part, you know, so many of these intermediate goods for the meantime don’t necessarily pose a… aren’t the sort of things that can be weaponized particularly although one day it might get to that point. In some ways, the real threat to developed economies in particular at the moment is that China’s moving so aggressively on intermediate goods. And I think that’s kind of what Europe in particular is sort of struggling with.
It kind of looks at the degree to which China is so aggressively expanded into things like chemicals or it looks at the degree to which sort of China dominates, you know, precursor ingredients for pharmaceuticals. And yet, to a certain extent, it feels exposed, but it’s also worrying about the hollowing out of its own industry because China is moving so aggressively into these sorts of bits and pieces.
I think the researcher Richard Baldwin coined the phrase that China is effectively the OPEC of intermediate goods just because of the sheer scale at which it’s producing the components that go into manufactured goods. So yeah, the point’s well taken that for most industries, China isn’t in a position to weaponize these, certainly without sort of doing damage to their own industries. But certainly, I think the rest of the world is increasingly cognizant of just how vulnerable they feel, given how dependent they are.
Andrew: Yeah, I think this is basically the sexiest part of your research, Gerard, is the intermediate good space. Can you talk to us about how you think that’s going to increase China’s leverage over time? And then you also make an interesting point about how it’s more politically palatable to control intermediate goods instead of final goods?
Gerard: The intermediate goods are, in some sense, better as a weapon because you can mess up the production side of a target economy. And you might even be able to mess with multiple industries at once with the same good. The counterfactual would be if China were going after, say, consumption goods or final goods, right? These are things that consumers or end users would notice more visibly. They could, in theory, do that, right?
So, for example, in theory, BYD could be told you have to restrict exports of electric vehicles. The problem is that’s just much more visible, so more likely to engender political pushback. And also, because final goods, by definition, contain the value of all the intermediary goods, they’re worth more, right? Which means that if you go after final goods, you’re basically asking Chinese firms to eat a bigger cost as part of that weaponization.
So, again, the intermediates are really just the better tool, both economically and politically. And in terms of how they’re going to do it going forward, now, as I said, this hasn’t really happened yet because they haven’t had to rely on non-critical minerals because they still have critical minerals. Right? But we’ve seen in March, the Chinese Academy of Sciences published a note, a bulletin that had some research looking at 63 different technologies that China could, in theory, control.
And it sort of bracketed them in different metrics. And you get a sense of, you know, that’s just like one window, right? I’m sure there’s more going on that we’re not seeing. And there are ways of trying to systematically assess different technologies or goods where there are choke points. And what that shows is we think there are basically five broad criteria that they can assess whether something is, you know, a good weapon, right? So, one is obviously, does it hurt the target economy? Two, how replaceable is it? Because it can cause a supply or policy response.
The third is how much hurts Chinese industry, because if it’s worth a lot, then you don’t really want to actually impose those costs on the Chinese firms. And then there’s the enforcement capacity, which we talked about briefly. But if you’re talking about extraterritorial controls, that is harder to do. And they have spent the last year building up their ability to map out rare earths. But if you try to do that with other goods, they might not have the same visibility into that.
And finally, there’s reputational risk. So, there are things like pharmaceutical APIs. People talk about China having choke points there, which is basically true. And I should say that last year during the height of the U.S.-China trade war, Chinese interlocutors were back channeling, suggesting that a nice API supply chain there would be a shame if something happened to it, meaning that would be sort of the next threat. We’re personally skeptical they would actually do that, partially because if you’re trying to cut off pharmaceutical goods, you’re basically risking, at least narratively, killing people because they’re not getting medication, right?
So that’s not really optimal. That’s why I think their preference would be to stay in things that are either more sort industrial or “dual use,” they would have the pretense of having that sort of geopolitical security covered.
Andrew: Yeah. Cory, Gerard just walked through his kind of framework in terms of how he thinks Beijing identifies its next export control or its item to export control. What are your thinking or what is your thinking on how Beijing makes that decision? What are its key criteria going through that? And then I want you both to say what you think, kind of based on that criteria, what might be next? That’s what people want to know. What’s coming down the pike in terms of what the next choke points are?
Cory: Yeah. I mean, first off, seconding so much of what you said, I think it’s a great framework. I’ll just add a couple of pieces. I think one is in a lot of the lawfare countermeasures retaliation, we still see a preference for symbolic reciprocity, you know, reciprocal actions. When it comes to specific critical mineral-related export controls, you know, they’ve run down the list, you’re not going to see exact reciprocity. So, if there’s a defense action, you’re not necessarily going to see a defense mineral, right?
But at the same time, I think at this point, that on the export control piece specifically, we’re just seeing them go through kind of the next best targets in terms of where China has control and where the costs are not extreme. And so, for example, if I had my money where my mouth is, I think tungsten was one early on that we were very concerned about. And it’s a huge issue now because China appears to not be exporting any of it, as far as we can tell.
Another one very similar to that or akin to that is magnesium, which goes into so many things. But magnesium metal specifically, not oxide, is just such a risk if Beijing were to go after that, and we’d have to talk about that another time. So there’s your one, going on a limb to say something specific. But I think more broadly, I mean, I agree that we’re moving past the era of just an export control, right? There’s so much more dimensionality retaliation across the lawfare toolkit, but even within the realm of export controls.
And so, I agree with Gerard as well on things like API that there are costs that are not just financial that definitely seem to factor in. I think Beijing has had many opportunities to cause more damage, if it so chose, against a particular economy, against a particular sector, against particular institutions or interests that are very clearly not taken or stopped short of. And I think API is a good example. If you really want to force the other person to do what you want, API is not a bad target, but if you also want to be accused of killing people.
There are costs beyond financial that Beijing has been very wary of, including, for example, hurting the broad consuming public. I haven’t seen them go after, for example, things that would just drive inflation. I know it’s one of the early kind of questions– would Beijing go after kind of downstream goods? And there’s other reasons for that. Like Gerard said, they’re not the top strategic targets, but I also think the cost is, you know, right now, I think more Americans are mad at America than China, and for the current situation when it comes to consumers.
Not talking about the fans, not talking about the people involved in procurement, but the average person. There’s power in that, right? And so actually, I mean, one question I have going further down the chain, I had for Gerard is, does Beijing’s reticence to use certain tools in intermediate goods, obviously, there are potential risks there, but for the ones that aren’t risks, is that enough for the U.S. to focus less on de-risking, diversifying, decoupling in certain areas?
Is the sense that, for example, Beijing would not want to target certain sectors, is that enough for the U.S. to feel more comfortable in that space? Like, right now, I feel like the strategy in D.C. is decouple as much as possible, de-risk every possible thing that China has any leverage over. Are there pockets where we can relax a little bit, or should we continue to try to push to de-risk as much as humanly possible, just because China has control, regardless of the analysis of its likelihood of using it?
How much can we trust that? So, I’m going to fight the premise a little bit, which is to say that it is true that in D.C., where I live, there’s a lot of concern about reliance on China. But as a matter of policy, the focus is overwhelmingly on critical minerals. There are a lot of other things like, say, industrial chemicals, right? Which is there are various kinds, but that’s sort of a decent bucket of targets.
I am not aware of any U.S. industrial policy specifically to address that. The point I keep making to clients is that we knew, the West, everyone knew, about the risks of reliance on China for processing of rare earths 15, 16 years ago. And yet, there was not really a concerted Western response until about a year ago. Why? It’s because China had to fully weaponize them against the U.S., they’d use them a little bit against Japan.
So, we talked about the policy response function in Beijing, but the policy response function in the West, certainly in the United States, when it comes to industrial policy, is not all that forward-leaning. It’s quite reactive. So, there might be a lot of things where the system in the U.S. is good at sort of prohibiting emerging reliances on the technology side.
So, you see that with some of the actions with the FCC just announcing, for example, that they’re going to basically ban new types of robots coming from China. But there’s nothing equivalent on the lower value added intermediate goods side of things. I think it’s because there’s just too many goods to track. I actually don’t think the U.S. government is that good at tracking these things.
But maybe the more important point is even if they were, they don’t have the policy instruments or enough fiscal firepower to actually address all of them anyway. So, my sort of scary so-what of all of this is that my belief, my observation, is that Chinese industrial policy is quite good at targeting a very wide set of goods, in this case, intermediate goods.
Whereas the Western industrial policy apparatus, which is much less intricate and less developed, is more responsive. And so, the Chinese have this sort of first mover advantage in all cases. So, it might be true that the U.S. prevents reliance on China for, say, electric vehicles because the U.S. doesn’t allow any Chinese electric vehicles to come in.
But do the same thing across, say, pharmaceutical inputs or across industrial chemicals, things that are not really all that valuable but are still part of the supply chain? I doubt it. And so, I actually don’t think that the Western response can front-run Chinese industrial policy, so to speak, which is why I push against the premise of your question. So, you might say that the West might be less worried about things like batteries if you think there’s a big financial cost for China imposing controls on that, which I agree with.
But nonetheless, there are other things they’re going to miss. And I think the Chinese are going to map those things out.
Andrew: I’ve got a couple of thoughts and a bunch of questions. So, one is I think almost the exception that proves the rule of what you just said is that the FCC is now talking about restricting inputs into AI data centers from China, right? And it’s kind of like, oh, we found this one intermediate good, right? First of all, it’s the FCC doing it, a smaller regulatory body, not the Department of Commerce would do larger-scale export controls.
And secondly, it’s only there because it is part of the AI buildup, right? It is the sexy thing that everybody’s focused on. And data centers in particular are a huge, you know, they’re becoming a political issue. They’re part of the infrastructure buildup, all that stuff. So, I think the fact that the FCC is like looking ahead at this one intermediate good really backs up your point because it’s so rare that they would do that. I guess on the back of your statements just now, I wanted to bring in Dinny to see, I mean, again, you’ve done a lot of work on this intermediate goods stuff… Well, I’ll bring Dinny in and then have Gerard respond.
How much of this, if you can put a proportion on it, China’s investment in intermediate goods is for the express purposes of future weaponization versus this is just a strategy to grow our exports versus we just want to ensconce ourselves in supply chains, not for weaponization’s sake, but for our own economic security’s sake? What do you think about that, Dinny?
Dinny: It started off as the latter. So, I mean, Xi Jinping first started talking about this, I think, back in, probably going to get it slightly wrong, but I think it was about 2019, the idea of, you know, we need to do, that Intermediate goods is something that we have vested interest in investing more in and expanding our capacity. And the idea was that China would become so embedded in global supply chains that it’d be incredibly difficult to decouple. It’d be very difficult to extract China from them.
And so, it was a defensive measure. It kind of speaks to what Gerard was talking about before. It’s like, you know, it’s a smaller target. It doesn’t attract the same attention as sort of a consumer brand or anything that, you know, it’s sort of an end product. And so, it was a way to protect China’s export machine by embedding it more deeply in global supply chains and make it more difficult to extract China from it.
And so, in a world of decoupling and de-risking, it was a degree of protection that China could lean into. And I think, over time, it’s probably evolved because as China becomes more embedded in those supply chains and the rest of the world becomes more dependent on China for procurement, it gives China unprecedented power to sort of withhold supply. And so, yeah, I don’t think it started off as a weapon, but the success of the policy has certainly created weaponization opportunities.
Andrew: Gerard, what do you think? Well, let me restate the question. If we break it down, weaponization versus just growing exports versus economic and industrial or supply chain security, where do you put the emphasis? And then I guess the follow-up question is, does it matter? Am I splitting hairs? It’s all everything all the time, just because this helps China out economically?
Gerard: So, I agree with Dinny that you can see clearly in the planning, going back to maybe probably around 2019, that the fixation on supply chain security that was embedded in the 14-5-year plan, I think that was born out of a sense of insecurity based on U.S. actions, particularly what happened with Huawei and ZTE, and then also the trade war, right? So, I actually think it does come primarily from a position of insecurity. But that’s evolving over time as we’re getting more confidence.
And I think you’ve seen over the last roughly year or two, much more confident Beijing in how they’ve been using the export controls and how they’ve handled the United States for various reasons. So, it could be that, yes, most of this is “defensive” in origin, but then it has offensive implications. In terms of growing exports, it’s obvious that they care about manufacturing as a source of growth and they generally care about exports.
But a lot of these things that are going to be choke points, those that are actually the best types of choke points, are precisely those things that actually aren’t worth all that much. So, from an overall developmental perspective, they don’t actually do much for China. What they do is buy China resiliency against coercion against them. But then once you do that, with sort of the same mechanisms, you have your own indigenous supply, and then it gets big enough, it starts to be 50% or more of global supply, you then created a weapon, right? So, it’s sort of like a distinction without a difference.
Andrew: What do you, Gerard, and then I’ll bring Dinny and Cory on this as well, make of this argument that we touched on a little bit with the whole processing versus upstream inputs piece? That China sort of shot the starting gun on companies diversifying away from China, and therefore, the export controls actually backfired, they overreached. What do you make of that in terms of, A, the current situation, but more importantly, what we’re talking about going forward? Like, if we say China overreached, as having seen that in the instance of rare earths, will that create any policy impetus or a policy roadmap to avoid more dependencies in the future at all, in your view?
Gerard: So, the response function that Beijing has to watch for is not so much what companies do, it’s what governments do to facilitate diversification for companies. And that’s because for things like rare earths, if there is no state support, if there is no industrial policy, there’s pretty clearly a limit on what companies are going to be able to do on their own, because it just doesn’t make any sense for any one of them at least to pay for it. So, basically, I think they do have to be careful to not provoke a massive industrial policy response against them.
However, because there’s only so much industrial policy capacity in the West, and they’re quite focused on critical minerals at the moment, I think the risk of overreach there is currently pretty low. If you ask the question in the other direction, I think the U.S. export controls on China, or at least the early entity listing, and then later export controls, particularly what happened after 2022 with chips, that clearly has triggered a massive industrial policy response. And so, insofar as you’re seeing this as sort of an industrial policy race on both sides, it’s advantaged China for basically institutional reasons. And I think they are playing that to their advantage.
Andrew: Cory, I see vigorous thing that in your head. What are your thoughts?
Cory: Yep, absolutely that. And tying it to the biggest points on intermediate goods and kind of the limitations of Western industrial policy more broadly, I think one exactly, companies cannot replicate these production chains. I had conversations before this even blew up about companies who considered it, said it’s not worth it, spoke with the same companies after gallium, germanium, tungsten, all these, and finally rare earth controls, and they said, “Yeah, still can’t do it, still not worth it.” And these are some of the biggest companies in the world. They need the support. It just doesn’t make economic sense otherwise.
And, as that conversation happens, you know, we start thinking ahead companies, like, how do we not get in this position again? How do we de-risk and diversify our supply chains before the next action, which is why everyone’s asking, “What’s next?” Because they want to get ahead of it. But the calculus doesn’t change. They’re even less able to get around some of these other things than they are where it’s in many cases from the financial perspective, right?
And to tie in Gerard’s point from earlier, this gets even more difficult the further down you go into intermediate goods. There are too many of them, right? And I think exactly right. I see the same thing where the U.S. is able to focus industrial policy attention on maybe a couple of things. We see it on rare earths for sure. We’ve seen a couple of other things, but pretty modest, honestly, overall. And you frankly don’t see any industrial policy, meaningful industrial policy actions, even where there’s attention when it comes to certain critical minerals that definitely need diversification today or already controlled, but they just aren’t Earth since they don’t get a type of attention.
So, I think when it comes to has Beijing overreach, is Beijing going to face a slew of industrial policies that erode future leverage? The U.S. is struggling to erode the leverage it already has in rare earths, and it’s going to be harder to erode the future types of leverage on intermediate goods. The U.S. is going to be even less able to do that for the future goods than is for the current. So yeah, that’s my take here.
Gerard: Can I make a political point? I know this show is about China, but we’re talking about U.S. and China, so I’ll make a point about the U.S. We keep saying, or I keep saying, that and the U.S. is not as responsive, not as sweeping with industrial policy compared to China, which is true. And there are many reasons for that. But I think one important thing to focus on now is that the U.S. institutionally and legally has a bias towards mechanisms that give executive-level discretion, particularly when it comes to banning things.
That’s things like export controls or ICTS rule or things like what the FCC just did. It does not have the same level of discretion on the fiscal side, which is to say it doesn’t have the means of greatly empowering industrial policy in the way the Chinese system does. So, to take an example of critical minerals, and Cory, correct me if I’m wrong on this, apart for some small sort of top-up measures that were part of NDAAs or the One Big Beautiful Bill, there is no sort of sweeping congressional legislation that has been passed on critical minerals.
It’s mostly running through executive discretion, largely through the Department of War and the Department of energy, but there’s no comprehensive plan. There’s not a lot of actual money behind it, even though fiscally speaking, the U.S. could afford it. And I think it’s really revealed preference. And so, there’s a lot of talk in this town, there has been really for the past eight years or so about industrial policy for various reasons, including climate change. But my point is revealed preference is pretty important.
And the U.S. is actually just not all that disposed to do industrial policy that has any real fiscal outlays, except for rare exceptions like the IRA or CHIPS. And that’s basically the only ones I could think of, except for a few things on the defense side. And so even if we identify these goods, unless there’s going to be some mechanism to actually fund the response to them, it’s not just a question of, oh, do we have enough expertise or do we not know what those goods are?
Is there’s a literally fiscal authority to make it work. The U.S. does not have the equivalent of the Chinese state-owned financial sector to direct credit or government guidance funds at scale. And so, there is sort of an instrument in a political economy disadvantage here.
Cory: Absolutely. And I’d add to that, they’ve revealed preference. Obviously, there’s party line, there’s other ideology, this administration, etc. But when it comes to supply versus demand side, there’s a lot of focus on let’s keep feedstock here so we can get recycling all of black mass and all these other materials. What would be more productive, I would argue, for developing a battery industry would be to help support demand for batteries, which would be an EV policy, which was under the IRA, right?
So, there’s obviously a lot of complexity to what happened with IRA rollbacks and everything. But I’d argue that there’s a problem. It’s a supply problem. We can fix it with this targeted thing. And even within that, it’s very restricted, as you said. And I’d argue that’s another aspect of the reveal preference.
Andrew: Yeah. And Dinny, why don’t you talk a little bit? You just made a great point on the demand side, Cory, on the back of Gerard’s comments, which is, you know, not only is the U.S. policy not good at incentivizing, it’s really bad at creating demand for goods, which is what Chinese industrial policy is particularly good at. Dinny, wouldn’t you say?
Dinny: Yeah, look, I wanted to go back to this question about overreach, actually, because I think what Gerard and Cory were saying is spot on when it comes to specific issues, instances of lawfare. I mean, so far, we probably haven’t seen China overreach. And as Gerard said, I mean, what the U.S. did in terms of the CHIPS Act and whatnot sort of ended up in a massive industrial response in China.
But I think if we’re talking about Chinese overreach, I don’t think it’s with specific industries or specific instances of lawfare or protections or whatever. I think perhaps what we’re looking at is a more macro level, and it’s kind of what we were talking about a couple of weeks ago, or was it even just last week, Andrew, with the Ministry of Commerce’s essay about how China isn’t dealing with overcapacity and a kind of defense of its trade surplus and whatnot.
And I think if we’re looking at overreach or we’re looking for instances of overreach, that might be where to find it. I mean, China in its full-throated defense of its trade surplus saying, “Yeah, sure, we use subsidies, but so do you. We adhere to WTO rules. We are the defenders of the free trade regime.” But then you look at sort of Europe, for example, you know, and other parts of the world, you know, developed world where increasingly, if you’re kind of looking at the free trade regimes that currently stands, European nations in particular must be looking at and going, “This isn’t what we originally signed up for,” right?
Because free trade, more or less, was supposed to be a win-win situation, not a Chinese win-win, but a win-win for everybody, right? Where you sign up and you bring down your tariff barriers and your protectionist barriers, and sure, some of your industries are going to suffer, but you’re going to come out the front because that’s why everybody got involved in it.
And for a lot of countries in the world at the moment, there isn’t any clear benefit from the free trade regime as it currently stands because of just the sheer overwhelming power of China’s export machine. So, I think for me, the space to watch is more that kind of macro level of overreach. China says it’s sort of the defender of free trade and clearly sort of supports the current trade regime because it gets so much out of it.
But is it potentially undermining the sustainability of that system because more and more countries are going to find that they’re actually not benefiting in a way that they intended, that they thought they would from this regime and wake up one morning and go, you know, we want out because we’re not getting anything from it?
And I think the EU will be the proverbial canary in the coal mine because of China 2.0. Now, of course, you know, China shot 2.0 with the Europeans, it’s probably a slow moving response or a reaction given the sort of the way the EU works. But I think, to the extent we’re talking overreach, that’s the place to watch rather than sort of China’s management of individual industries or products.
Andrew: Yeah, and Gerard, I know you’ll have thoughts on this, so I want to let you cook on it for a minute. But I guess the way I bring it together in my mind is we talk about the overreach on weaponization of export controls and Dinny making the case that China’s overreaching in terms of, you know, its overall current account and trade surplus. We’re kind of getting to a situation which you can understand why other countries are frustrated with is China’s basically saying, “You have to buy all of our stuff, except you can’t buy certain stuff.”
And really kind of weaponizing the surplus in a way, saying we’re going to deluge your economies with all of these goods, except for really high value stuff or really stuff that goes into military applications. And that you can’t buy from us, and we’re dominant in it. I mean, that’s not a tenable situation at all. Gerard, what’s your thought on all of it?
Gerard: There’s maybe a dark irony that for years, Western companies saw China as being the market of the future. So, there was sort of a demand side narrative, but it turns out that China’s power is on a producer side. If only someone had been paying attention to Marxism, maybe that would be a little more predictable. That’s clearly where the policy has been driving at, right? And so, they are weaponizing it to some extent.
I would say to Dinny’s comment, maybe there’s different layers of overreach. So, I think Beijing more routinely commits types of diplomatic overreach. I think having a paper that says, “Basically, we deny all charges when it comes to industrial overcapacity, it doesn’t exist, blah, blah, blah.” Or telling the IMF, “No, our undervalued exchange rate has no bearing because prices basically don’t matter and our subsidies are actually in no way boosting our competitiveness, which raises the question, why do you have subsidies at all? But okay.”
I think that stuff enables the environment that is happening now in Brussels, where there’s serious discussion of finally doing something. However, it doesn’t operate on the layer of triggering a specific response function to get those countries to do something, particularly on the supply chain side, to target those goods. So, I think China has a pretty good read on other countries’ political economies in terms of their ability to actually respond meaningfully.
They don’t seem to be all that concerned of whether they’ve made the Europeans that upset. It’s more of, are they going to do something that is actually going to cause problems? And there, the threshold is much higher. So it might be true that China has committed diplomatic overreach in various instances. I just don’t think they’ve caused the same sort of specific policy overreach that’s triggered a response function that is that much of a problem for them.
Andrew: Wholeheartedly agree. My pet peeve is when prognosticators describe some action China has taken or position China has taken and describe it as untenable because it’s awkward, as if China is a person and they can’t stand awkwardness. And so, at some point, they’ll have to relent because the situation is just too awkward. We can’t deal with the awkwardness.
But actually, China have to have these dynamics be quite uncomfortable, even I would say awkward for other countries, and it might even prefer that because that’s the kind of situation where it’s uncomfortable, but it’s not so extreme that a country or a block of countries is actually going to push back. And that’s sort of the sweet spot for China in terms of exactly what you’re saying, sort of ruffling feathers, but not to the point where it actually spurs action a lot of times.
Well, Cory, you’ve got something. I do want to get to some of the specific, like what we think the upcoming choke points will be. And I want to give us a little bit of time for that because I know Gerard pointed out a lot of these in his paper, and I know Cory’s in a lot of work. But Cory, jump in on your thoughts here.
Cory: No, I agree. I think trying to hit that sweet spot seems to be the objective in many domains, politically and technically on the controls of export technology, as well as on the material goods. And I think you saw this, for example, I think the most robust overreach focused conversations I’ve had were early on after the rare earth export controls, when it became, again, this is reading between the lines, but I say it with fair confidence that Beijing did not intend to cause quite as much fear and anxiety in Europe with the rare earth export controls as they actually they did.
And they had to then have those conversations around, do we whitelist, do we green channel, etc. And eventually they got to the point where like, okay, yeah, Europe is angry, but not in a position to do that much more about it. And then rare earth, enough things got through that. It kind of held at this exact, that awkward, but not like Europe is going to do anything major over this. And I think that’s an example where when we talk about leverage, we talk about the dimensionality of leverage. That’s why it’s so important that China has the ability to make certain efforts more intense or less intense.
So, whether they move from a restriction to a prohibition, allow more exports or less exports, I think that, in large part, is the way that it’s able to calibrate and try to hit that sweet spot without going too far. And sometimes it does go a bit too far and then it dials it back a little bit. And actually, I agree on the diplomatic. I mean, the last several trips to Beijing this year, back and forth, was shocking to me how the level of technical depth of so many officials, and some of the, what I felt personally were ham-fisted diplomatic analyses of like, no, do you understand how big a deal certain things are diplomatically?
And so, while there’s a much greater, I feel, and again, this is not a definitive statement, the sample size is modest, but it does strike me that the average bureaucrat has a much deeper understanding of supply chain issues, industrial security, and all this stuff than you have, say, for example, in the U.S., where the U.S. has much less experience with industrial policy. But the diplomatic capabilities are not comparable in my view, at least in terms of what they were, certainly what they’re messaging, how they’re handling that.
I think, for example, the degree of concern around the cutoff of Japan, which Beijing, others have said this before, but Beijing seems to view the cutoff of rare earth exports and other critical matter exports to Japan as a bilateral issue. The entire world is now getting really, I’ll be polite with it, in a hard state, in a hard position, because Japan is not able to process things or to produce things that everyone else depends on.
So, this bilateral thing for China and Japan is not bilateral at all to the rest of the world, including Japan, including the U.S., including the EU. And that’s the case where I think if Beijing were listening or were acting more on the diplomatic side, diplomats have been saying this. This is not a surprise. This is something that diplomatic efforts have been trying to signal a message, but Beijing is not taking that seriously. And so, that’s where I think we could get into issues where it’s got a lot of tools to hit the sweet spot, technically, but maybe diplomatically it’s missing where the sweet spot really lives. I’m not sure, but that’s where I’d see it this day.
Andrew: Yeah, nuance certainly is not always the Chinese Communist Party’s forte. Great discussion so far. I do want to, as I mentioned a couple of times, drill down a little bit. We’ve talked about really the motivations, the current weaponization centered around critical minerals and rare earths. We’ve dug into the intermediates good piece at kind of the, call it 10,000 foot level. Let’s go a little bit closer to 5,000 foot level.
Gerard, you did a lot of work looking at what’s coming next. So critical minerals are really the tip of the iceberg. And you looked at, for example, Chinese dominance in battery active materials, super hard materials, power electronics, grid inverters, chemical intermediaries like fluorine chemicals, you mentioned pharmaceutical starting materials. What’s on your list for kind of, even just if it’s one or two things, that really are at the top of your list for where Beijing might zero in in the future that, you know, companies should be looking for, policymakers should be looking for? Where do you start with that?
Gerard: So, I would separate the question between what are goods that China might impose export controls on narrowly for sort of defensive reasons where it doesn’t want to allow its technology to go offshore for, you know, offshoring capabilities, right? But those are not meant necessarily to be retaliatory or necessarily to impose pain. That’s one set. The set we were looking at is one of the things that could replace critical minerals as a coercive tool for leverage. And there, it’s those five buckets you just mentioned.
So, it’s things related to batteries, super hard materials, power-related things, chemical things, and pharmaceutical things, right? I don’t know which one China is going to use. It thus far has not really had to use any others and won’t need to for at least several years. My guess is, of those groups, chemicals are going to be kind of an obvious one or certain materials because they are so upstream for reasons we already discussed, going after pharmaceutical APIs, while technically possible, is politically suboptimal.
And batteries are things where there is a real economic cost. Although you could imagine if China maintains its dominance of the technology, particularly with, say, Europe and the global south, not so much with the U.S. because it has more protective measures. Those could be weaponized. But I actually, I don’t know if they have a list of like what’s ready to go next.
I mean, they probably do for specific countries, but, by and large, I think the sort of magazine has some depth left in it on the critical mineral side.
Andrew: Yeah, maybe they’re like a coach in a football game that has, you know, he’s got a list of five to ten fourth-down plays that he can pull from, but he doesn’t know which one he’s going to pull until the actual situation arrives. As you can tell, I love sports metaphors, and they’re always very good, as is this one.
Gerard: Everyone understands American football. It’s a great reference.
Andrew: Cory, what are your thoughts on what’s next and how Gerard’s thinking about it?
Cory: My thought is that then you should introduce the cricket and rugby metaphors and watch them go everyone’s head. I think that’ll be the next best stuff here. No, in terms of predicting, I completely agree with all that. And I think chemicals in particular, I mean, it’s such a broad space. And so, I mean, more than saying, “Hey, we’re going after gallium nitride, I think one of the most approximate risks is probably riders where you start expanding existing controls a little bit further down the production chain, right?
It wouldn’t be hard to extend some of the existing controls to some of the, like, two production steps down from that. So, that’s one proximate thing, right? So, that’s one set of materials that we already track because they’re already impacted, but they could be much more impacted.
Andrew: Can you give a concrete example of one of those? I hate to put you on the spot, but just...
Cory: No, not at all, not at all. Yeah, so you have super hard materials, right, for example. That mostly is looking at tungsten carbide, and you’re looking at carbon-boron nitride, and then you have diamond windows which are using semiconductors. You also have things like types of silicon carbide that most of their applications are not actually controlled like just very specific ones. You could expand that, and that would be important in photonics and all these other applications. You have a lot of the gallium substrates, but you don’t have all of them, right?
So, you notice I’m focused on semiconductor. Guess what? We’ve been thinking about that a lot lately. Well, now on the flip side, you also have the potential, and Gerard, I’m not going to plant my flag on this piece, but when it comes to some mineral categories, there are certain types of control, I think, would be very difficult, very risky. So, lithium, for example, it’s kind of the canonical, why didn’t China do lithium? And it’s like China produces most of the world’s lithium and the cathodes and the batteries, and what they don’t control is the actual upstream supply of Spodumene, which come from mostly Latin America, specifically lithium triangle specifically Chile, and then Australia, U.S. treaty ally on the other side is where China’s getting most of its lithium.
So, you see them, this thing I mentioned before, increased domestic development of lithium, which is kind of a terrible source. It’s a lepidolite, which is not commercially attractive, and China’s investing in it just to have it. But I think that’s an example where Beijing’s going to be very careful about a blanket ban on lithium exports because they’re so upstream and upstream dependent. But there’s some really interesting intermediates, CAM, the cathode active materials, and pCAM which is the precursor cathode active material that stuff I feel like you could mess with that market if you wanted to, maybe more subtle than an export restriction.
China has a lot of control over those markets, right? So, the main thing that I would flag is that the whole response playbook has become much more diversified, obviously, in terms of tools available. It’s also become more creative within those tools. I think we’ve seen much more creativity within the application. And so, that’s why I’m thinking more broadly about rather than just it’s magnesium, it’s titanium, right? Yes. But what else?
I would just flag that there’s more space, that the possibility space is broadening. And that’s what makes it so difficult. And that’s why we go through, not just at a high level, but we literally do this mapping on a component and input basis because there’s so much stuff that parts. There’s a lot of possibility space there.
Andrew: Well, thanks for these kind of more detailed looks at what may be coming. We’re at over an hour already. And I want to make sure that I respect everybody’s time, especially our guest, Gerard. But I want to sort of give you a last word here, Gerard. We’ve kind of been thinking about what’s coming down the pike. And one other interesting argument you made in your paper, I thought, was that the threshold for usage of these various economic coercion measures is falling. And then you specifically pointed to the 1260H list, which is a Defense Department list that the Defense Department expanded and China responded to.
Talk to us about your thinking about sort of that lowering threshold and what you think that means going forward in terms of how China approaches these issues.
Gerard: Over the past year or two, China has been responding in a tit-for-tat way to pretty much everything the U.S. or the Europeans, to some extent the Japanese are doing, there’s more to a political side to that, with measures that it’s designed to be somewhat parallel. So it used to be, say, 10 years ago, China did retaliate in certain cases, but it was typically through import restrictions. So, messing with Australian wine exports to China, for example. They now have a parallel legal architecture, and the threshold for using it is basically if the West does anything it thinks crosses the line, it has a parallel response.
This has happened even in the past few weeks, with the U.S. adding Entities for the Uyghur Forced Labor Protection Act, and then China having a parallel act. They’re not necessarily doing it to pose massive cost. What they’re trying to do is signal for everything you do, we have a response. And that response is becoming more powerful. And if you take the intermediate goods argument seriously, as I think you should, over the medium term, it becomes more forceful and more responsive to those actions, which means that the big sort of geopolitical so-one of all of this is that China is trying to teach the West and has, I think, to some extent, taught President Trump, that they don’t have unilateral freedom of action when it comes to imposing offensive measures on China.
And it has real bearing on policy debates even now. So, I think there’s an actual debate in the administration of what to do about the Chinese open-weight models, particularly after Moonshot and K3, I think you guys had a separate episode on this, and people were expecting, and we are expecting some response to that, but it’s not clear what the response is. And part of the reason for that is, there’s maybe some commercial reasons, but it’s also that the U.S. White House is aware if they do something as aggressive as, say, banning Chinese models, then China is going to respond. And we know what they’re going to do.
They’re going to probably do something with rare earths, and then the U.S. will probably have to back down. And so, expect that equilibrium. Think of it as like an arms race where now both sides have demonstrated weapons. Both sides have shown they can shoot as weapons. And now it’s new equilibrium. Now, maybe the positive spin on this is like an arms race. If both sides know the other is armed, then it actually could be stabilizing somewhat perversely, right? It’s a little bit of mutually assured destruction.
But both sides can misread each other. I think the U.S. certainly misread China’s response to the 50% BIS rule last September, and they were not expecting China to respond so forcefully with its own rare earth export patrols, which were later shelved as part of the Busan truce. So, I think both sides are sort of learning, and they’re trying to teach the U.S. and Europe, basically, like, “Don’t mess with us, we’re going to punch back.”
And if that is accepted, or to the extent that it is accepted, it just means that policy in the West going forward has to be more careful and probably has to rely less on things like export controls and maybe to some extent tariffs than it has so far. And that means what’s left is more domestic industrial policy, which is still more or less in play for the West. But for reasons I already expressed, that’s not the comparative advantage of the West. So, that is it’s overall tilting the field towards China’s advantages.
Andrew: Yeah, great points. I think we should leave it there.
I’ll just, you know, speaker’s or host’s prerogative, make one final point, which is I would love it if the U.S. moved in that direction without getting too much on the soapbox. I think we should compete with China, right? You know, instead of complaining about China cheating and trying to hold them back and all this stuff. Yeah, we need a multifaceted toolkit, of course. But China’s on the playing field and they’re competing, and they’re trying to assert their interests.
Let’s assert ours by trying to invest at home, make sure that our companies are world-leading, that we’ve got the supplies we need. I don’t know if you call that more offensive or defensive in this context, but just kind of investing in our own capabilities, I think, is a longer-term and more sort of productive and proactive approach.
Hopefully, that’s a lesson we learned, and we can evolve and maybe become better at kind of that domestic investment that, as you say, we’re kind of currently disadvantaged at. So, that’s my hope. I’ll leave that hopefully for everyone on an optimistic note. But with that, Gerard, thanks so much for the time. Great discussion as always. Great to have you back on, man.
Gerard: Thank you for having me.
Andrew: And Dinny and Cory, thanks as always, fellas. Good to see you.
Cory: Cheers.
Andrew: And of course, thanks to the listeners. We appreciate it. We’ll see you next time. Bye, everybody.
