Policymakers in Beijing wasted no time getting back into the swing of things after the week-long October holiday.
On Wednesday, officials at the Ministry of Commerce unveiled sweeping updates to China’s export control regime – with new controls on rare earths and lithium batteries in particular focus.
The moves also further Beijing’s drive toward long-arm jurisdiction by applying some of the controls to companies globally — not simply those producing within China’s borders.
Unsurprisingly, on Friday, US President Donald Trump responded to the move by applying a new 100% tariff to imports from China – and promised to implement an unspecified set of new export controls on US software.
In this week’s podcast, Trivium Co-founder Andrew Polk is joined by Cory Combs, Trivium’s head of supply chain research, to go through it all. Specifically, the two discuss:
The key details of China’s export control expansion
What’s new, and what’s not in these controls
Beijing’s seeming motivation in implementing these controls now — which we argue goes beyond the immediate US-China trade negotiations
How the near-term practical impacts of these controls are likely to be minimal – even if the medium-term implications are huge
Whether China has the capacity to enforce long-arm jurisdiction
What all this means for ongoing US-China talks
The gents end the discussion by walking through Trivium’s work projecting which critical minerals are likely to be controlled next by China.
For anyone who needs to stay ahead of the curve on China’s upcoming moves on this front — you’ll definitely want to listen to the end.
TRANSCRIPT:
Andrew Polk:
Hey everybody, Andrew Polk here — Trivium China Co-Founder and your faithful Trivium Podcast host. We just want to give a little intro to this pod because we are in a fast-moving situation where the U.S. and China trade tensions seem to be escalating quite quickly. In this podcast, we endeavored to delve into China’s rationale and the details behind China’s most recent export control moves, which took place on Wednesday evening U.S. time. We recorded this podcast on Friday, October 10th, at around 1:30 p.m. in the U.S. But since then, a lot has happened in terms of the Trump administration and Trump himself, reacting to these. So, I just want to lay out a few things that have happened since we’ve recorded, and what may even happen between the time we record and the time we published this podcast to give you all a little bit more detail.
So, first, the main purpose of this podcast was to go through the details of Wednesday’s moves by China to really understand and explain the expansion of export controls by China, and then we get into the likely impacts. And we spent a lot of time also on sort of the motivation, we think, that China had in putting these new export controls forth. Certainly, a part of that was somewhat retaliatory towards the U.S., largely in response to a move in late September by the Department of Commerce, which expanded U.S. export controls. But we also think there is a very large or more strategic motivation here as well, moving China towards the ultimate endgame of its export control. So, we spent a lot of time on that.
What we did not focus on was kind of how this was all being perceived in Washington, D.C., and what the response by the Trump administration would be. It’s pretty clear to us at this point that the Trump administration did not take these moves well and saw this as an extremely escalatory move by China. And so, since we record the podcast, Donald Trump has announced another 100% tariffs on China over and above existing tariffs, which will put tariffs on China at around 130%, just shy of the 145% maximum that we saw earlier in the year, and has also promised some unspecified but wide-ranging export controls on software and software technology.
So, we do seem to be on an escalatory spiral at this point, which is kind of where we ended our podcast talking about that would kind of be worst case scenario. And we will see whether or not Beijing responds to this move by the Trump administration’s 100% tariffs. I would expect by the time we published this podcast on Saturday that Beijing will have reacted to the reaction by the Trump administration. So, there’s more to come. This is quickly developing. And it’s also unclear at this point whether or not XI Jinping are going to meet here in a few weeks, as they were expected to at the APEC meeting in South Korea in late October. So, just want to set the stage for everybody. We talked through a lot of the motivation on China’s side, talked less about how Trump and D.C. would think about this, but it’s pretty clear that we are now escalating again, and potentially in dangerous territory.
We will, of course, release ongoing pods, starting next week, on the latest developments, and we’ll see what happens over the weekend. But just so everybody knows, this pod is largely about kind of China’s motivation. I will say it does seem that China is taking a more offensive stance with this latest move than they have taken, basically, since this latest iteration of the trade war broke out. So, that seems new. And figuring out what Beijing’s stances and kind of goals are here in real time is what we’re trying to do. So, a lot of this is new. It’s all happening in real time. But we think a lot of the observations in this pod, or all the observations in this pod still really stand. So, hope you enjoy, and we’ll be back in your feeds next week with more analysis of the developments that are inevitably going to happen over this weekend. Hope you guys enjoy it!
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 I am joined today once again by my colleague and Trivium’s Head of supply Chain and Critical Mineral Research, Cory Combs. Cory, how are you doing, man?
Cory Combs:
Well, pleasure to be on.
Andrew:
Yeah, it’s great to have you back. It has been a pretty wild 24 hour, 48 hour period in the world of U.S.-China relations and specifically in the world of export controls, with China making a spate of sort of export control expansions or announcing and spate of export control expansions just on, when did that happen? Was that Wednesday evening, our time in the U.S., Cory?
Cory:
Correct. The moment policy makers walked back in from vacation.
Andrew:
That’s right. Directly back from vacation, from the October holiday. The first week of the year. This was their first move. And we are having Cory on because he’s our expert in this area, in critical minerals, in rare earths, and in export controls. So, we are going to get into exactly what happened with these export controls, the details of what they do. We’ll dig into the implications specifically on rare earths and the lithium and batteries, which are kind of a separate piece of this. Then we will talk about whether or not China can even enforce these new controls because one of the big pieces is that they are trying to increase their long arm jurisdiction. They’re basically saying companies in countries outside of China have to apply for Chinese export licenses to send any… Well, we’ll get into the details, but some items with Chinese technology and Chinese minerals in them.
Then we’ll dig into why China is doing this now. And in this one, we have a bit of a non-consensus view. There’s undeniably an impact on the U.S.-China trade talks here. But the kind of consensus, especially Washington, D.C., is this was all about building leverage for the upcoming Xi-Trump meeting and those talks more generally. And we think that these developments have been in train for a long time, and that this is more of a strategic move that China is looking to put forth and to go after. But that said, of course, it’s going to impact U.S.-China. So, we’ll get into that piece. Finally, we touch on how we think it will impact those talks.
And this is the last piece, but it’s going to be really important. So, stick around to the end. We will also talk about what is next on the export control front. So, we have been looking into this a lot. And I’ll even tease here that much of Cory’s work predicted to a large extent the move that happened this week. So this is not unexpected from our standpoint. And so stick around to the end because we’re going to talk through our sort of mental model and our actual model for projecting out what China is going to do on this front. And we’ll dig into that at the very end. But before we get into all of it, we’re going to start with the customary vibe check. Cory, it’s a wild couple of days. How’s your vibe?
Cory:
Oh man, it’s been a frenetic pace for a little while. So, I look forward to… I mean, the weekend won’t exist in normal weekend form. We’re still working through a lot this. But no, actually, vibes are not bad. Not as bad as one might expect. You know, on one hand, it’s really gratifying, I have to say, to be in a position to support. I mean we have a lot of panicked phone calls, right? Is immediately what happened. And rightfully so. What’s happening? How has it affected everything? So, it’s good to be in a position, as I am in position, to be able to help talk to and manage some of the immediate crisis. Of course, on the flip side, that is our job. But we would also prefer that such crises don’t keep appearing. It’s a little ambivalent, but overall not bad vibes. And hopefully, they get better over the next week.
Andrew:
Yeah, I mean, you know, you get the sense when you’re working on some of this stuff that I think the sense that everyone’s had for years now kind of going through the pandemic, right? That you’re really living through history in a very, almost tangible way, like in a very conscious way. And this is the kind of stuff that is certainly going to go in the history books, the U.S.-China, back and forth. And this is just the latest element. So, knowing that you’re kind of working with clients and companies to navigate it, but also, at the same time, that these are like really momentous global developments that are going to impact the course of history. Not to go too big, but, I mean, it’s just a weird headspace to be in.
So, my kids have been off of school, so they’re off industry, off on Friday, they’re off on Monday. So, a long five-day weekend. We did the parent teacher conference yesterday. Felt like a Friday. And I was saying, “Oh man, it feels like Friday. This is going to be a great long weekend. And then just wake up today, and it’s like more back and forth because Donald Trump has now responded to this via Truth Social, saying that maybe he’s going to cancel the meeting with Xi Jinping. And then you layer on top of that sort of the U.S. government shut down. And they just earlier this morning announced that rifts are starting and building leverage in that. And it’s just like – I thought I was going to have a nice, quiet, relaxing, long weekend hanging with my kids. And it just feels super chaotic now. So that’s the energy, chaos, that I am bringing to this in this extended vibe check.
So, we will try to bring as much order to the chaos as we can here in a moment. But, first, we have to start also kept up with the usual housekeeping. So, first, 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, which includes policy towards China out of Western capitals like D.C., London, Brussels, and others. And that very much includes, just in case it’s not clear, all this work on export control, and all this, everything that’s happening in this space, rare earths, critical minerals, lithium batteries, and China’s response to the U.S. moves, China’s own moves, how all this impacts U.S.-China relations. That is very much in our wheelhouse. So, we’re going to get through all that today.
But if you need help on that on an ongoing basis, I say this every week, but really reach out to us — hq@triviumchina.com is the email we’d love to help your business or your fund navigate these issues. So, if you need help there, reach out to us. Otherwise, if you’re interested in getting more Trivium content, check out our website, triviumchina.com, where we also have a bunch of subscription products that look at some of these elements in a less deep way, less bespoke way, but still track everything that’s happening and explain on China an ongoing basis. So, you can definitely find the China policy Intel that you need on our website. Go check it out. And, finally, tell your friends and colleagues about Trivium that the work we do, and also about the podcast so we can grow our business and grow our listenership and keep bringing this kind of content out to the world. Okay, Cory, let’s get into it. A lot of crazy stuff happening. Just lay out the basics of what happened over the past couple of days.
Cory:
Yeah. To make a very complex story very short, immediately after China’s policy makers came back from the October Golden Week holiday, Ministry of Commerce issued a sweep of new controls. And I want to emphasize we’re used to seeing an export control as a retaliatory. We’re not used to seeing this breadth or scope. And so, we’ve got a bunch of announcements in this case covering rare earths and equipment, lithium batteries, new inputs, cathodes, anodes, the whole works, as well as another addition to an old export control on super hard materials, adding some stuff that’s really critical to the manufacturing sector. On top of those, we also have this UEL or Unreliable Entity List expansion, adding 14 additional companies, 23 of UEL are all these subsidiaries that are allegedly involved in anti-drone technology. So, this is a massive problem.
Andrew:
Yeah. We’re going to really focus on kind of two of the main pieces here. We will circle back to, you know, that spate of different things happening all at the same time, why that happened right now. It’s certainly, like I said, is an element of the U.S.-China back and forth. There were some moves that the U.S. made over the past ten days that China is likely reacting to, to an extent, and, yes, building leverage for the upcoming talks. But there’s a bigger story here that we’ll get into in terms of China’s strategic move towards being able to use export controls more holistically. So, we want to get into that in a little bit. But the two big things that struck us most were, and that most of the reporting on this is the expanded rare earth element controls. Cory, talk us through the key details on that front.
Cory:
Absolutely. So, a few key pieces here. First is for the simplest piece, which is China’s added five more variants to the list. There are 17 total, seven already controlled, add five. We’re basically at a point where all of the key high valuable or high value rare earth metals, oxides, magnets are covered. But the only rare earth, particularly that is not yet covered is a light rare earth, neodymium, which a lot of folks have come to know about neodymium from all this magnet discussion. But it’s actually no that… it’s nice to say there’s one thing that’s not affected, but they are effective because the key product there and the entity magnets, typically the high performance ones at least have other rare earth additives to make them high performance. And all of those additives are also controlled. So, at the end of the day, basically everything that you could want from a general industrial supply security standpoint is covered.
What’s left that’s not covered among right or fairly niche and a couple of other things. And technically, neodymium, but practically, it’s not free. So that’s the first expansion. It starts to get a bit more interesting from there. The second piece is in line with but expanding upon prior controls. It affects all of the equipment and technology to process and manufacture everything at this point. So, previously we saw restrictions on the export of rare earth production technologies. There was a version of that initially in December 2023 that was mostly about protecting Chinese industry. Basically, the message back in 2023 was, you’re not going to use Chinese technology to replace Chinese products. Okay, that’s a pretty standard kind of historical use of export controls. That really wasn’t this retaliatory stuff that came later. And then the retaliatory controls, the first rare earth controls that have been talked about more commonly, they’ve also affected various equipment technology. That makes sense, overall.
The newest controls from this week, expand on that yet again, and so getting into a lot more the nitty gritty, and really and also a couple of things like recycling equipment, which again, is not really a huge market right now, but, as the market gets closed off because of these controls, you know, we’d anticipated that, for example, demand for recycling equipment is going to skyrocket, although it’ll probably take a couple of years. It’s going to grow precipitously, but it’s not going to come from China. And then China is just made very clear as usual, any, I guess, midstream producer with ties to military defense, or even any clients that might have dual use applications, they’re not going to get approve. They’re cut off. And everyone else is basically going to have to prove that they’re not associated with that in order to have a hope of getting approved. Whether they actually get approved or not, it’s going to depend on broader geopolitics, even if they’re not in that defense space.
So, the last thing, and by far the most interesting, and really novel piece here is these controls basically adopt or expand China’s own version of the U.S. Foreign Direct Product Rule. And it says a couple things. The first, which directly mirrors the DPR, it’s U.S. rule that’s been a place for a long time, is that basically it says that if you are in a different country, not China, but you produce something using Chinese technology, that material is still subject for Chinese export. You have to apply for a license to produce and export something from a different country if it uses Chinese technology. They also add that if your product, again, produced overseas, uses even a trace amount of the controlled Chines rare earth materials, by trace, I mean 0.1% by value. So, really, really low threshold. If you have any Chinese material in there, they are basically subject to Chinese export control rules.
So, this is a huge expansion of extraterritorial jurisdiction. There is surprisingly explicit language in the controls about this specifically targeting a number of chips. We should talk about which chips here later. But they’re targeting chips. And they’re also, notably, there’s a line on the specifically saying they will control applications for AI research and development. So, this is a pretty significant escalation and a much clearer intent to come up with sort of applications than we’ve seen before.
Andrew:
Right. And just could not be more clearly a reaction to U.S. high tech or advanced tech controls for AI, for AI production and AI chips. Right? They are pretty clearly saying here, “All right, this is a supply chain that ends in chips. You’re controlling a very high value added piece of that. But we’re going to control a piece of it as well,” which is just further upstream.
Cory:
Exactly. And I do want to make a clarification as well, just for those wondering, rare earths are not present in the chips, but they’re present in all the things you use to make the chips. And so, this is really expanded. So, gallium and germanium, that stuff is in a chip in the substrate rare earth materials like sputtering targets, which is a term that people suddenly had to become familiar with once these export controls came out. That’s how you do thin film deposits and how you actually make a semiconductor or a chip, I should say. So, it’s really expanding up the action chain.
Andrew:
Yeah. So, we’ll get into that a little bit more. But this is a, as you said, very much an expansion and very much a reaction to how the U.S. uses its own export controls and even kind of taking those export controls from the U.S. a step further, or many steps further, in many ways that we’ll talk about a little bit later. Okay. So you walked through the interesting developments on the rare side. Now, talk us also about lithium batteries.
Cory:
Right. So, a little bit of context here. Broadly speaking, China has not targeted this sector in much detail. In July, I believe it was, there were very niche controls on the leading edge cathode technologies. They were very specifically targeted to make sure that a couple of Chinese companies don’t sell off really high-value stuff that is going to be an industrial advantage in the years to come. It was not a retaliatory. The other one of the only other instances we can think of, I can think of that we’ve seen the controls that were not directly retaliatory, as these ones clearly are. So, there’s existing controls and a couple niche things. But broadly speaking, this was not a front that had already been opened. The lithium ion and battery stuff here is pretty much new. But even more interesting is unlike previous controls, which are fairly specific to the material, it’s not cheap materials. It’s gallium, it’s germanium, all that stuff. The controls we’ve seen before have been fairly narrow from a kind of industrial production chain standpoint. The lithium battery controls are incredibly broad. I was shocked, I had to reread the first time I saw it.
I was like they’ve covered of everything. So, to go through what that means, for lithium-ion export controls, we’re looking at batteries, meaning the actual battery packs. We’re looking at the cells, we’re looking at cathodes. We’re looking at anodes which are kind of lower value. The cathodes are usually the most important piece. So, anodes being on the list is like, well, they’re really going further afield from the particular choke point. And they went even further to a bunch of materials from all the stuff used to produce aforementioned materials and products, and everything from specialized furnaces, which are, as I say, specialized equipment you can’t just confined, to things like, and I kid you not, air grinders. Stuff that is really not the typical fare kind of stuff.
You know, an industrial version of what you buy at Home Depot, not getting into the details there. And so to see that kind of stuff in an export control policy is just really striking. They’re clearly trying to cover the entire space in there. The only thing I didn’t know was the actual electrolyte material, lithium phosphate mostly used commonly, that’s the only piece I didn’t see. And that’s pretty broadly available. A couple of things I do want to note on which batteries, because again, incredibly broadly, targeted is really the wrong word, it’s a shotgun blast in terms of export controls — but it is interesting to see how they decided which lithium ion. So, there’s a bunch of different parts. So a little weed, but bear with me a little weedy, but bear with me, the question is what industries does this target?
And the first thing is what we’re looking through, it’s looking at they target the high-value lithium-ion phosphate LFP batteries. They target NCM and NC batteries, and they target lithium-rich Manganese oxide cathodes. It’s okay if you’re not familiar with which ones those are applying point to, but basically, that’s everything you could want for an electric vehicle and for battery energy storage, separating the sodium ion and solid state. If you see those news, not really commercial yet in general. These are the commercial EV batteries in grid storage batteries or energy storage batteries. Interestingly, they do not cover LCO, which is the mainstay of legacy consumer electronics. High end cell phones and laptops now are increasingly using the batteries that are controlled. But this is not targeting the kind of older kind of the lagging edge of battery and a lot of electronics.
So, one of the questions we had is like, well, clearly, in terms of impact, the electric vehicle space is I’m very worried about the Ford-CATL deal. Like this doesn’t cover just trade. This covers the licensing and ability to produce these things using China’s technology. So Ford-CATL is my, first of all, every other battery dealer globally is in question now. They have to be specifically approved again for these controls. But it is interesting at least some portion of consumer electronics is off the table. So, that’s I guess a silver lining. But the high value, you know, think of your Samsungs and more advanced Apple and other products, those are very likely to be affected too.
Andrew:
Well, that brings up an important point. First of all, I think that talking about the entire space of this battery supply chain, and specifically for EVs, is one of the reasons why we think there’s a more strategic element here. It’s not just tactical building leverage ahead of negotiations with Donald Trump, because blowing up the Ford-CATL deal doesn’t really give China much in those negotiations. But having more control of the EV supply chain globally is a huge strategic advantage that will redound to China’s benefit for many years to come. There’s a bigger context that China is working in here, and it’s not just about this tactical meeting with Trump, which may or may not happen at this point since Trump has posted on Truth Social that he might not meet with Xi Jinping at this point.
So that’s one thing. The second piece is, given just how broad the batteries is, the lithium batteries, I mean, we’ve got clients panicking, right? Because if read in the most extreme way or if implemented in the most extreme way, this impacts an entire supply chain. It could increasingly impact every consumer electronic made in the world, every consumer electronic product at some point. But practically speaking, we don’t think the impacts are going to be actually that broad. So, give us some context there. Why is everyone panicking and why do you think maybe the reaction has been a little bit kind of overstated initially?
Cory:
Yeah. Part of it is these controls are actually really complicated. In one hand, you know, I have the documents open, I’m looking at them, the text is there, it’s spelled out, but there’s still a lot of room for interpretation. There’s a lot of uncertainty, both in, set aside the legal questions, but just the in its own terms, the policy questions. What exactly are they trying to achieve? There are still questions between the lines of the text. And then there’s a huge set of questions around intent to actually… you know, building the ability to use these doesn’t mean you’ll use them. So, there’s that level of uncertainty. There’s another layer of uncertainty that if they actually deploy or put a thumb on the scales on a lot of these potential interventions they set up, how effectively can they actually pull it off?
So, there are all these questions. And I think it’s these stacked two levels of uncertainty where the first response, you know ,I say panic not to diminish. It’s a genuine response. And I think it’s understandable. There’s a lot we don’t know at this point about how China will actually use these. What we do know is that, or I would strongly argue, I think, high confidence is that this is a categorical break on the kind of past strategy we’ve seen with export controls, which previously we’ve seen direct, credible threats to particular materials. For example, the seven rare earths that were targeted initially, that disrupted the flow of those seven things very directly. We’re still dealing with the fallout. Both the U.S., EU, and others are still trying to streamline approval of licenses and all that. And that was a very targeted thing. Of course, it had big implications.
Andrew:
And clearly retaliatory.
Cory:
And clearly retaliatory. Absolutely. Very directly so. This is laying claim to huge swaths of multiple industry chains globally. And then so said like that obviously that’s a big scary framing. That’s true. Practically, no, we absolutely do not think it’s in China’s interest or, frankly, capability, but more importantly its interest to suddenly cut off the world. Just one example of this is one of the first conversations I had on the lithium side was, well, isn’t this a double edged type of leverage? Because with involutionary pressures in China, Beijing is on board with all of the battery and EV makers. They’re trying to export more and more batteries, not fewer. So, MOFCOM is not really there to hamstring that effort and include this strategic push to continue boosting exports. But when we get down to data, so that’s one reason why even in Beijing’s in terms, there’s really not a clear goal to suddenly cut off the total production chain.
But in terms of strategic positioning, the U.S. has a pretty weak battery market. EV adoption pace has been very slow, and so would it would really upset a few companies in China, of course, but mostly what it does is honestly it wouldn’t harm China that much because they’re already not exporting that much to us because the U.S. has been blocking them, but it flips the script. I think this is a really important point about a couple of the specific dimensions of these controls. Previously, the question was really D.C. asking, “Do we want Chinese batteries in America via trade or by manufacturing investments?” Now the question is, “Will China let us have Chinese batteries?” The strategic options here are completely flipped.
Andrew:
Yeah, it’s a good negotiation tactic. But I think, to your point, even though I keep saying this, you made a great observation about how this move on the lithium batteries is categorically different from what we’ve seen before. And that’s why we keep going back to this is a bigger strategic move. It’s not retaliatory. It’s not meant necessarily as leverage. That kind of, though, explains the panic, I think, because people saw one difference, they saw, like you said, that they’re not just trying to control one little or not one, not little, but one specific element. They’re trying to basically lay claim to an entire chain. And then they assumed that they were also going to use that in the same way that they did with the April controls, which is, and thus cut everybody off. Right?
Cory:
Right.
Andrew:
So, people didn’t recognize that not only is the nature of the breadth of these lithium battery controls different than what we saw in April with the rare earths controls, but the strategic calculus behind them is also different. So, I think as you explain that, maybe it explains why people are so panicked because the implication, if you read it wrong, is that China is about to cut the entire world off, potentially, of its world-leading battery production supply chain. And that’s not what China is trying to do with that.
Cory:
Yeah, and I agree. It doesn’t seem at all in China’s broader interest. But the ability to lay claim, absolutely, is for the reasons you mentioned. Yeah, absolutely.
Andrew:
And what about on the rarest side.
Cory:
This is so complicated because I’ll give the kind of the two extreme ends of the collection of views. Both are true. Neither is the full story. So that’s going to lay out both ends of it. On one hand, the big framing I put is the strategic implications outweigh the immediate practical impacts. And so let’s start with the practical impacts. And that’s where I think it might not be as scary as it sounds in the first place. And that might sound a little surprising given everything we have said about how big this is. But practically, one, most of the actual production. When I say production chain, I mean all the many steps that gets to the thing you’re trying to import. So, supply chain, it’s like, do I have my magnet? When I say production chain, I mean, can you access the materials? Can you access the equipment, all the processes to make that magnet? All the upstream stuff. A lot of that stuff was already pretty well decoupled because of the initial prior controls, not 100%. But the global market has already had to adapt to these for months.
And so what the new controls do practically is really intensify some of that. But they’re already largely decoupled. We’re not aware of any major producer that is currently dependent on any of these equipment or technologies driven because they’re already basically cut off from them months ago. And so, in some ways, it’s probably not as much a sudden shock as it looks like. That said, niche applications of terbium, and a couple of the things that were added, certainly erbium, there’s certainly applications, so we’ve we got holmium, erbium, thulium, europium, ytterbium are the newly added ones. Certainly, there’s going to be direct impacts there. But also, a lot of those are extracted in the same processes and already kind of sort of subject to the stuff.
So, long way of saying that status quo might not change that much or that quickly. But strategically what Beijing has done, or what MOFCOM has done is basically make sure that we’re also cut off of recycling potential, future investments in other dimensions of upstream processing that we could have collaborated with or could have used technological transfer, all that stuff is cut off. It’s also basically saying that there’s going to be a complete split, not just between heavy rare earths and light rare earths, which was kind of the important market difference, but between more fully Chinese rare earths and non-Chinese rare earths. There are going to be massive price implications over the long haul as markets kind of adjust to that reality.
There’s a question over how much Chinese equipment is being used in Malaysia, which is one of the only and most important sources of “non-Chinese rare earths” in many cases. If they use any Chinese materials or equipment or technologies, which probably some of them do, they’re also off the board if China wants them to be. So, this is this further bifurcation. It’s further decoupling. And that does matter longer term.
Andrew:
Well, thanks for laying out those implications. So, I think the headline there from you is just the initial read, you can understand like how these seem hugely impactful. And that’s why we’ve seen, at least in our space among our clients and from the U.S. government, a very big reaction. But upon sort of reflection, it seems like maybe that reaction is overwrought, that actually the practical implications in the near term are not likely to be that big.
Cory:
Or that new.
Andrew:
What’s that? Not that new?
Cory:
Yeah, exactly. It’s kind of an extension of things we’re already dealing with as opposed to a sudden kind of new, like if you have a whole new type of material, like it’s cut all of them.
Andrew:
Right. I guess my point is, at first blush, these things look massive and new. And really, we read in as a sort of practical next step in many ways on China’s sort of export control roadmap. That’s one way to sort of think about this framing. The other is why now? Why did it happen now? Let’s talk through that. Explain your thinking on how much of this is retaliatory, how much of this sort of feeds into the immediate U.S.-China talks, and how much of it is sort of more fundamental and the timing is more coincidental?
Cory:
Yeah, absolutely. First thing is kind of tying into the impacts conversation. I mean, one of the things that leads us to think these are very different in purpose is the way they’re implemented. One of the most interesting and important strategic implications of how these are being pulled out is the use of, effectively, Chinese version of the FDP, on foreign direct product. So that’s a bigger piece. China is approaching these controls differently, extending its extraterritorial jurisdiction authority, or its claimed authority. That’s not the kind of thing we would expect to see or have ever seen in a narrowly tactical response, right? Certainly, there are elements of this that seem very narrowly retaliatory against, you know, for example, lawmakers on Tuesday, U.S. lawmakers on Tuesday called for more chip controls. That certainly did not help things.
The AIS had interim final rule around export controls soon that would very seriously impact Chinese entities. That was published September 29th, just before the holiday. So, there’s all these other considerations that I think have pushed China to this threshold of actually issuing all these policies like they’re war tunnels. And so, in that sense, this is a retaliatory move. But it’s also much more, much broader. This isn’t any narrow retaliation. This is a broader strategic positioning based on the analysis as far as we can tell. And so when it comes to Xi-Trump, certainly this is relevant, as we’ve said, really just want to hammer it home. This changes the dynamics completely. But I would be shocked if anything like this happened absent these other catalysts. And also, these moves have been planned for, it’s hard to say exactly how long, but this is not the kind of control that you can roll out overnight.
This is the kind of stuff you prepare for months. There is clearly very significant depth to the policymaking here. There’s also a lot of symbolism. There’s a practical element, but also a symbolic element to the way the rare earth targets or rare earth controls will target overseas production using Chinese technology. The language is almost a direct or mirror for the U.S. export control and then adds other pieces on top of that. And so I think there’s a huge symbolic element to it kind of showing we’re going to do what the U.S. is doing and do it bigger and do it better, basically.
Andrew:
Yeah. And we talked about this. It’s hard to get a read on it because like again if these, especially the lithium battery aspect of this is implemented to full effect for retaliatory purposes, they are rules that no one has ever seen before laying claim to an entire swath of a production chain. Export controls aren’t typically used that way, and we’ve even kind of characterized it as sort of taking the U.S. style controls and, if not perfecting them, sort of taking them more towards their logical extreme. We don’t expect China to necessarily use them that way in the short term. But that approach, as you say, is a long-term development that I think has largely taken place because of U.S.-China tensions dating back to sort of the first Trump administration. So, yes, U.S.-China tensions are driving this overall move and China’s overall desire to build out its lawfare toolkit, which we’ve talked about at length on the pod in other formats.
And I would say on top of that, so China’s moving in a specific direction within a specific geopolitical context, and it will continue on that path. And I think in a way, as you said, it’s using certain moments in the back and forth in this most recent, very specific trade negotiation to kind of act as a catalyst to say, “Okay, this is something we’re going to do anyway. We can put it out now and it shows we’re hitting back within the more narrow context as well.” Does that make sense?
Cory:
It does. I mean, bottom line is it’s just hard to talk about. There’s many dimensions, many levels to what’s going on. I think the public discourse, it’s going to be simplified. It genuinely is complicated. But I think what you’re laying out makes sense. And I would agree with that. There’s a broader strategic trajectory. There are going to be moments in time that catalyze specific movements along that journey. I think that’s what’s happening.
Andrew:
You said it in a much more succinct way than I did. So good job. All right. So, there are certainly elements of this that are tactical and elements of it which are strategic. And, of course, as you said, things are going to be boiled down in Washington, D.C. to this is all just building leverage for this negotiation between Xi and Trump that’s about to happen. We think there’s a bigger story here. Part of that bigger story is this move into long arm jurisdiction, the ability to try to restrict exports of certain goods with Chinese inputs anywhere in the world. Can China actually implement that? Can they do that? That’s another question that a lot of people are asking. So, what do you think about the implementation side of this?
Cory:
Yeah, this is definitely the 7 billion dollar question. On one hand, I want to acknowledge it does sound crazy when you’re like, China is saying we can restrict massive swaths of global industry everywhere. Like that does sound like a pretty, let’s call it bold proposition. But when we look at it more realistically, oh, first of all, the controls are actually a little bit more precise than that. So, I just want to lay that out. But also, realistically, the leverage China has still lies in specific choke points. And it’s not just the products. I mean, typically we’ve seen the first rare earth controls. For example, the choke point was really the Chinese companies produced most of it and had to go through Chinese customs to export it. So, there’s your choke point. It’s on the material side.
But now when we’re looking at, for example, Beijing saying we want to check and see if your chips have any potential, you know, a legit dual use, whether it does or not, applications, and we want to know if you’re using any Chinese rare earths, on one hand, if you’re looking at the product side, that’s incredibly difficult. I mean, there’s such a huge and complex global production and supply chain there. You know, they’re not going to have inside. They’re just aren’t going to have insight into every company’s operations in detail. But they don’t need to. And this is another way, I think, the new controls are a bit different on the rare earths side at least. The choke point is not the materials, it’s the companies. There are only a few major chip companies doing the things that Beijing cares about.
So all Beijing really has to do is put pressure on 2 or 3 companies, not hundreds of products. and that’s where their power can come from. At the end of the day. I mean, you and I talked about this before, how does the U.S. export control regime works? It’s basically self-driven compliance and government comes in and make sure they complied. I admit I’m oversimplifying, but basically no company, I think you said this earlier, company it’s going to be able to tell Beijing, “Yeah, we’re just not complying.” They’re going to have to figure out how to either comply or get away with it while saying they’re complying for a little while till they figure it out. Beijing has a lot of influence over specific companies because they all have business in China.
Andrew:
So the U.S. does have inspectors and does audits, and you certainly need some level of enforcement capability. But at the end of the day, companies have to do it because they are respecting the law of the country that has put on the export controls and because they want to do business with that country. Right? Otherwise, if you have no business in the U.S., no presence, why bother following U.S. export controls? Why bother following U.S. law? Same with China, right? Companies are going by dint of the fact that these exist. If there’s any enforcement capability whatsoever, then companies are going to have to comply. Because, otherwise, you run the risk of being the one company that they decide to go after in full. And again, this is assuming you’re a company that also wants to continue buying from China, doing business with China, with Chinese entities.
And so, they almost certainly can’t implement these to the fullest extent possible. But that’s also true with the U.S. export controls, which we talked about before. Earlier this week, the House Committee on China released a big report talking about how U.S. export controls need to be expanded because they’re not working well enough because a bunch of Chinese entities are still buying a bunch of stuff that effectively would be controlled or, in their view, should be controlled or in some way is controlled but people are getting around the rules. And they’re smuggling. And so export controls are never perfect. They’re designed to disrupt — people and entities are always going to try to get around them. So, the point is the argument around whether or not China can enforce it is a little bit, it’s not a red herring, but it sort of tends to this idea of can China do perfect enforcement?
No. Well, no one can. And my question would be does just even a small amount of enforcement actually give them quite a bit of leverage? If they, over very specific companies, very specific entities, which may ultimately either cause other companies to self-enforce or may achieve, you know, if the aim is to disrupt at some point may achieve the disruption that in certain supply chains that China wants.
Cory:
Exactly. And I think, much more clearly, and tying this back to the earlier conversation around impacts and this kind of difference between saying, okay, we’re not too worried about immediate global production shutdowns, but this is still a huge deal strategically, long term. The two sides of that are one we do not expect China to try to implement this in a way that basically cuts everyone off, you know, this next week. We just don’t expect Beijing to do that. It’s not in their interest, and it would be kind of feasible on many levels. But we absolutely expect that if Beijing fuels a need to, for geostrategic reasons, be it trade or tech controls or anything else, if Beijing feels the need, they can absolutely deploy this leverage and absolutely have a direct material impact on particular, major and globally important companies. There’s real potential, threat potential there. Even if it doesn’t mean a sudden cut off, that potential is real, and I think it needs to be taken very seriously.
Andrew:
Well, speaking of you know, what the future may hold in terms of both the enforcement of these export controls, but also their further evolution. I do want to pivot now to some of the work that you’ve been doing on kind of looking at Beijing’s toolkit, looking at Beijing’s playbook, and kind of trying to project out what’s coming down the pike on this export control front. Your model has been very predictive in terms of many of the specific minerals and rare earths that have been controlled over the past couple of years, and you continue to maintain that model. And we’ve got to basically a list of the things that we expect may be next on this front. So, why don’t you just walk us through the modeling that you’ve been doing, and we’ll keep it high level, just talking about kind of how your model thinks about where Beijing will next train its sights. But talk us through the key variables you’re looking at that you think shape Beijing’s actions.
Cory:
Absolutely. So I mean, it started out as what felt like a fool’s errand but we realized there actually is power to systematizing the kind of more qualitative analysis. So, I’ll get into a couple of things. The first is how do we think about export controls? Why is Beijing doing what it’s doing? And the first thing we have to think about, which is hasn’t been perfect, but the first goal here is to understand what is shaping Beijing’s decision making. That sounds obvious, but I want to make clear that is not the question of what is highest risk for the U.S. What is the U.S. fearing or vulnerable to? Those are not the first questions. The first question is how does Beijing think about these controls? And so we spent a lot of time just basically trying to infer that from all the different actions in the policy discourse, the actions not taken as much as the actions taken.
And we came up with really kind of four pillars. And I want to be clear, there’s a whole mess of variables behind this actual modeling. But basically, we can boil it down to four kind of key considerations, things that shape it. The first is thinking about export controls as a tool of, and as a geostrategic tool, a retaliatory or to shape others preferences or actions. The first thing we have to ask is, very basically, what are the different materials strategic importance? I mean, that really gives us the universe of things to consider. There is oftentimes when we’re discussing this stuff, the first question is, okay, where is the U.S. or other actor or some other actor vulnerable?
That’s not the first question. It’s like the second or third question. First is what is strategically important in terms of Beijing’s goals? The first part is obviously understanding Beijing’s goals for macro and other considerations, but we can map it out. Gives us a huge list of stuff to consider as it may be relevant. Then we get to the part that is most obvious to most people, which is where are China’s material advantages? Operationalizing that is as much art as science, but I think we’ve gotten down fairly well. It’s not just where do we see the advantage. It’s again, a lot of study of how Beijing talks about industry and industrial policies, or industry associations. Trying to read between the lines to see where do Chinese authorities view their material strengths.
Part of that is research, a bigger part of that is production. A large part of that is processing, as we’ve seen with a lot of the kind of graphite and stuff like that as well. Part of that is downstream, right? So, there’s separating out those material advantages and where Beijing thinks it can leverage them. There are a lot of variables to try to capture that piece. Next piece, which initially I think it’s more common now but early on was very overlooked, which is China’s material disadvantages. So, just to give a concrete example, almost every time we have kind of an initial consultation on this stuff, cobalt comes up. Cobalt’s absolutely critical in batteries and a bunch of other stuff, and basically China processes most of it. Why wasn’t that like the first choice? It’s incredibly hard to substitute, incredibly controlled by China.
Everyone’s can credibly dependent on it, even if they’re working to make that less the case, they still are for now. Why wasn’t that in any of the top 20 things that China chose in export control? I think the answer is relatively simple — they don’t control their supply. Supply comes from the DRC, which, granted, the DRC is not about to become the U.S. best friend, but it’s a very volatile situation in terms of the production and all the kind of state level mining issues. We won’t go into that now. But China doesn’t have control. And so if you want to be taken credibly as a governor of all these export controls, it’s a little bit risky, I think, for China to impose controls on something where it doesn’t actually control the source, even if it controls the downstream point. So, the disadvantages, that kind of thing, there’s a bunch of them.
It’s not just control source. That’s an example. The last piece is broader Chinese policy signal. So, we won’t go into them, but there’s a lot of stuff that kind of leading signals where you can say for sure always for X. And so definitely Beijing is very much not… no part of Beijing is like… and we’re thinking for our next act — That’s not happening. I’ll give you one example. A few weeks before Antimony control, we were, for completely unrelated reasons at the time, but now we’ll make this a regular habit to check, there were local industry associations that generally talk about economic competitiveness and products in this kind of stuff, and they started talking about Antimony supply.
That’s oddly specific. Where is this coming into? They’re like, “Hey, just make sure everyone kind of keep tabs on, you know, where are you getting your supply?” And we’re like, this is really unusual, right? So, now we’ve kind of systematized monitoring for things like that that don’t necessarily mean, hey, the control is coming, but it might suggest that this is a consideration. This is something that’s in the discourse that’s behind the scenes. The last couple of things I’ll comment on. That’s all talking about why we think Beijing might consider targeting particular material or a set of materials. We get very detailed with it. And I will note that all but one of the lithium products that we have identified in our list were just targeted. Like, literally, I kid you not, three hours after we delivered our latest report on this exact topic, all but one of the lithium products that we identified were targeted.
The one exception being lithium iron phosphate. We’ll see if that happens later. The flipside of this is how much risk does it pose? And so the flip side of the equation is if China imposes a control, how bad is it? Now, obviously, the real question is how much of a choke point is it? So we look at industry concentrations. We do a lot of work to understand specific production chains, like, hey, this is a real problem. How exactly is this stuff made? Where is the exact choke point in the production of it? Can anyone else resolve that choke point? For example , light rare earths, this is an order example obviously, but light rare earths, Mountain Pass has obviously a lot of supply, and with enough investment, it has the ability to bring on processing.
So the choke point processing, they did really good. And other American companies and other companies across the world are now getting supplies from non-Chinese producers who are able to work on light rare earths. Heavy rare earths, that takes so much longer chemically. There’s basically a long series of chemical balance and you have to stasis, and a bunch of chemical reactions to separate these chemically and magnetically very similar materials out of a rock. It’s not easy, but it’s much, much harder for heavies. And so, to our knowledge, China has never brought, China has never brought online a new heavy rare earth processing chain in under a year. There is no way that someone outside of China is going to do it faster. So that’s a choke point analysis. That’s the stuff we’re looking at, all the materials.
And so then the last piece is diversification. Can you diversify? Anyway, we stack all this stuff up. Obviously, we create things that’s needed to align with the empirics. But that’s kind of how we’re going about it.
Andrew:
All right. Well, so you walked us through the framework. That’s great. But the people want to know once you go through the framework, what’s on the list? I’m just going to be like frank with everybody at this point, we’re not going to give you the whole list for free here right now. We’ll give you a couple and then you can talk to us if you want the rest. This is the business part of the podcast. But talk to some people about what are some of the top things on your list in terms of what you’re looking at that you think would be natural next steps for Beijing to control.
Cory:
I’ll start with the obvious, which is, and I again, I have to emphasize, it was wild. It was deliver reports. Think about dinner and maybe a drink in celebration of finishing this report, and then the phone blows up saying, “Hey, rare earths just go hit.” And just wake up a few hours after that, short night, and say, well, lithium products also just got hit. So, in our latest iteration as model, two categories were one the rare earth that got hit specifically, the metals oxides, and sputtering targets which are used for used in physical vapor deposition and chips. Those who were in them. In addition, all of the cathodes that were in the model, we also had hexafluorophosphate, which has not been hit yet. But it’s kind of the next obvious point on that.
So I will say it was a little surreal. We never know what’s coming next, but we have a sense of what’s better leverage and what’s more strategic seems aligned with Beijing’s interests. So it’s kind of surreal to see them come out quickly. But anyway, to kind of look beyond those two sectors or areas, I’ll give you one super vague one, which you have to make operational, we need to go into a lot more detail, give us a call, and then one pretty specific one, and you can do some, some digging in your own supply chain if needed. The upstream one is magnesium. I’m still very concerned about magnesium. There’s others, obviously people ask about copper, aluminum, these more household name ones. Magnesium has a couple specific alloy choke points that I’m very concerned about.
It’s definitely lower on our list than all the stuff that’s been targeted. But also China has been going through its best leverage, so we expect to start moving down the list. Again, if you want details, give us a call. Another one I think is probably a little more niche is phosphor, which is really the source of hydrochloric acid. And that sounds really niche is because it is, but it’s absolutely essential to a huge host of applications including chip making. Very far upstream. So there’s kind of two extremes here. You can look at the downstream product, you can look the upstream things that you need to make products. We look at both, and so on, to get one from each end spectrum.
Andrew:
Yeah, that’s great. Well you know, we don’t want to do too heavy of a pitch for the listeners because we know that people come here for the content. But yeah, if you do need help on this stuff, reach out to us. I think those are two great examples, and we’ll see what comes next. I mean, this is work, obviously, that we’re doing on an ongoing basis. I guess the last question for you before we wrap up is, so we talked about what was in the latest controls, how we don’t think these are just about U.S.-China, but there’s a bigger strategic impact. And we talked about what we think is coming next. That said, this is obviously going to impact the negotiations between the U.S. and China.
What do you think the impact is going to be? Donald Trump is now saying maybe he won’t meet with Xi Jinping here in a few weeks. I guess one thing to maybe think about is did China mess up? Did they kind of think this would be read in a certain way in the U.S. as sort of mildly retaliatory, but more generally part of their build out? And did they just maybe take it a step too far? And is this going to set things back or not? What do you think?
Cory:
God, you know, I got asked this last night. I was like, “Let me ask and you should get back to you.” It’s like my answer last night. Big picture, I’m most concerned about another export retaliatory spiral, I think. From Beijing’s perspective, one can read this. And again, we’re kind of being analytically empathetic. It’s not in agreement with but it just in terms of power and strategy, it makes sense why Beijing might go up to laying this claim to a broad swath of industry and saying, “Look, we’re not messing around. We have the power, we have the control.” But the U.S. position seems to be incredibly tactically focused.” We’re talking about this tariff, this purchase. We’re very, very specific. And those are just different games. And so one of the big concerns I have is that, and this isn’t to say either side should be doing X,Y, or Z, you’re kind of playing the other’s game, so to speak.
It’s more that if one side doesn’t understand game they’re engaging in, it’s going to be very hard for anyone to meet any of their goals, even when there is potential for some kind of détente, or at least maintenance of détente. So, I think the worst outcome here would be for the meeting to be canceled I don’t think that is strictly necessary. I don’t view this as a Beijing effort to derail talks at all. Obviously, to add leverage to kind of position itself is certainly a one of the many, many implications of the moves. But I don’t see this as trying to undercut anything. They want to move forward. But they want to move forward in a stronger position That position is not being conveyed, perhaps in D.C., and that’s what I would say.
Andrew:
Yeah, that’s a good point. I’m kind of with you. I’d say, if I was a betting man, I’d say the meeting still happens between Trump and Xi. You never know what kind of back channeling is going on. I do think the Chinese may not have done the legwork they need to do to let the administration know some of this was coming. That was actually something that the Biden administration got better at over time was kind of messaging, “Hey, Beijing, here’s what we’re working on. And at some point here soon we’re going to announce something along these lines.” And that at least kept Beijing from getting caught off guard so that they would still react publicly to the announcement, but they sort of knew.
Now, that’s definitely not happening with the Trump administration towards China. And it also does not seem to be happening with the Chinese giving a heads up to the U.S. That, to me, seems like a smart tactic to, or a smart piece of the strategy would be to kind of inform to some level so that you don’t kind of catch the other side off guard, unless part of the point is to get to the other side of guard, which I don’t think it is in this instance. Anyway, that’s just an aside, but the broader point is maybe there’s some back channeling going on and Beijing can explain, “Hey, we’re still want to move in the direction of trying to get some kind of deal.” And I would say, similarly, you know, Trump saying, ‘well, maybe I won’t meet also could just be a tactic.
That’s a tactic he uses. He used it with congressional leaders last week. And then, ultimately, they did have a meeting after the initial meeting got canceled. So, we’ll see. Lots of moving parts. Really, I think that’s the hardest part of analyzing what’s going on these days is no one knows for certain if an action is being taken because either the U.S. or China wants that action to continue or an action is being taken so the action can be undone later as part of the negotiating process. And that’s what’s I think making the analysis these days so difficult. But we’ll see. We’ll know soon whether or not this meeting happens. We’ve already gone long. I think we should wrap it up. But Cory, you know, thanks for the excellent analysis. Listeners, thank you for kind of bearing with us while we walk through our model and framework for what we think is coming next. But I think it’s really important to kind of get that out there and show that you can project forward on some of this stuff. We’re not flying blind. But thank you, Cory, for the time today. Really appreciate it, man.
Cory:
Thanks so much.
Andrew:
And thanks everybody for listening. We’ll see you next time. Bye.
