It’s been a frenetic and exhausting couple of weeks on the U.S.–China front.
After tensions heightened again last week — in the wake of China’s major expansion of export controls — the two sides continued to jockey, both privately and publicly, over the past few days.
At this point, it appears that both sides are willing to continue negotiating – but the current state of the relationship is very fragile and will remain highly volatile.
To discuss where things currently stand, how we got here, and where we are going, this week’s pod features Trivium Co-founders Andrew Polk and Trey McArver.
The gents get into everything we know, everything we think we know, and everything we definitely don’t know about what’s next for U.S.–China negotiations.
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 I’m joined today by one of my Trivium Co-Founders and Trivium’s Head of Political Research, Trey McArver. Trey, how are you doing, man?
Trey McArver:
Yeah. Doing good. Excited to be on the pod.
Andrew:
Yeah, man. Great to have you on as always. Good to have you on, in particular today, because we’re going to do yet another pod on the fast-moving geopolitical fluctuations that we’ve seen over the past couple of weeks that I’m sure all of our listeners will be well on top of and well aware of. But specifically, we’re going to get into, first, where things currently stand in U.S.-China trade negotiations after the latest deterioration and talks came on the back of China’s major export control expansion last week, which we covered on last week’s pod. And specifically, we’ll go through the latest back-and-forth moves from each side and try to illuminate sort of what the path forward might look like.
We’ll also touch on the question of intent and ask whether each side actually wants a deal at this point because we think that really fundamental questions are really important to get to the heart of, and also touch on how all of this is playing with key U.S. allies, particularly the Europeans. And, finally, we’ll end with just a quick look at the most important domestic story in China right now, which is the Party’s fourth plenum, set to take place next week. But before we get into all of that, got to start with the customary vibe check. Trey, been a minute since you’ve been on the pod. How are you doing, man? How’s your vibe?
Trey:
I’m good. I think vibes are pretty good. It’s a little bit all over the place. Personally, I’m happy it’s Friday afternoon. This is the last thing I’m doing this week, knock on wood, workwise. Happy to be talking to you. Happy to be talking to you about this stuff in that I enjoy discussing these things with you. At the same time, like having to discuss these things kind of just like drives me crazy because, at heart, like, I’m just like a good old free trader who is not really a fan of export controls or port fees or tariffs or anything else. And so, the fact that that’s kind of defines the state of the global trading system, it kind of bums me out.
Andrew:
Yeah. Well, it’s good to be good in your personal life. And I don’t know, yeah, I was talking to a client earlier this week and was saying the exact same thing. It’s like, you know, business is good because people are asking us about this stuff, but I’d rather it not be happening. And he was like, “No, no, no mild chaos. That’s what you’re shooting for. You want mild chaos.” And I think we might have gotten beyond mild chaos, but I thought it was a good observation from one of our clients. And then I also was laughing because last night I was coaching my younger daughter’s soccer team, and we were talking with parents beforehand, and none of the parents know what I do, thankfully, for work. They were like, “How’s it going?” I kind of do Chinese stuff. They’re like, “Oh, that must be pretty wild right now.” And I was like, yes. Yes, it’s very wild.
So, it was a funny conversation to have. But we will try to bring, as I said last week, or a couple of weeks ago, I guess, some order to the chaos in the pod, but not too much order because mild chaos is exactly what we need, I guess, according to one of our clients. But we’ll get into all of that stuff. But first we have to, of course, also go through the quick housekeeping. First, a quick reminder that we’re not just 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 within China on a range of areas — autos, resources, tech, you name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others, which is exactly what we’re going to get in today. So, if you need help on any of those friends, 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 receiving more Tribune content, check out our website, again, triviumchina.com, where we have a bunch of different subscription products, both free and paid. You will definitely be able to find the China Policy Intel option you need on our website. So, check that out. And finally, please do tell your friends and colleagues about Trivium, both the company and the podcast. It really helps grow our listenership and grow our business, which we need to be growing in order to continue to do the podcast and put out other great free content for those of you who are interested in that. So, please tell your contacts about this. All right. Let’s get into it. I have to, Trey, quickly lay out all the latest developments. We were just talking about kind of how frenetic it’s been over the past few days.
Trey:
Let’s see how quickly you can do this.
Andrew:
You know, I wrote this weekly piece that will go out, and it was just like, it’s basically 50% of it’s just the tick-tock of what happened. But I think it’s important because so much has happened. Just step back and literally say sort of what has happened. But we’ll go through the events that have happened since our last podcast, which was last Friday, October 10th, when Cory Combs and I discussed the major expansion of China’s export control regime. And we’re recording today, just to timestamp this as well, it’s 10 A.M. East Coast time in the U.S., just so in case something crazy happens later today, this weekend, and people who are listening to this, they sort of know where we are in terms of the news flow as of recording.
So, between the time that we recorded our podcast last week and today, a bunch of developments happened. First, we you know, we talked about the export control expansion, which was last week. Then last Friday, the Trump administration reacted to the Chinese export control moves, and they were not happy, needless to say. The first reaction was Trump on social media threatening, first, a new round of 100% tariffs on Chinese exports and then additionally threatening to add new curbs on exports of unidentified or undefined U.S. software.
And thirdly, to potentially cancel his upcoming meeting at the end of October with Xi Jinping. Then it seemed pretty clear there is some feverish back-channeling between the two sides over the weekend. One of the signs of that was that the Ministry of Commerce released this big Q&A explaining the rationale behind its export control expansion. And they really kind of underscored a few things. One was saying that the intent of the export controls is not to disrupt the flow of goods globally. They also reiterated several times that this is not a ban, that they do actually expect to put the licenses forth. And then they also, interestingly, claimed that they had communicated these moves in advance to the U.S. side, which, speaking with U.S. officials over the past few days, I don’t know how well it was communicated, or if it was communicated at all, but they claimed they had.
So then fast forward to Sunday, so that Q&A came out on Saturday, then on Sunday, Donald Trump posts a message, kind of, don’t worry about China. Everything’s going to be fine. Some people think he was trolling Xi Jinping. And my view is that seemed like it was kind of a walk back from Trump, kind of indicating he’s probably not going to go through with the promised retaliation. And that sort of seems further supported by early this week, Monday, Tuesday, Trump administration officials indicating that they still expected that Xi Jinping and Donald Trump meeting to go through in late October. Then, though, throughout the course of the week, there’s just been this kind of public volley back and forth with top U.S. negotiators accusing China of trying to tank the global economy and sort of aggressive posturing in recent meetings, kind of very threatening remarks from some of the Chinese negotiators saying that more trade actions might be coming.
And the U.S. officials also said that they basically expect China not to implement this new export control regime in order to get talks back on track. But then, of course, China’s Ministry of Commerce responded, claiming that the U.S. is mischaracterizing its actions in private and is fear-mongering around the export controls to cause panic to other Western governments. There’s been even a couple of other things on the trade side, on the shipping side that have actual moves that have also come through that we’ll get into in a minute. But that’s kind of like where we stand. So, export controls happen. Donald Trump reacts on social media back and forth over the weekend. Things look good as of Monday. But then over the course of the rest of this week, still sort of this public weird sniping.
And my question for you, hopefully that was a succinct summary, is where do things stand in terms of U.S.-China at this very moment? Have we stabilized? Are we on track or not?
Trey:
Oh man, that was exhausting. And also, I mean, it’s actually crazy. It’s hard to believe that all of that has happened within the course of a week because that is a lot. And it also feels like years ago because so much has been going on that it really is overwhelming. So, where are we now? Where are we going next? I mean, I actually do think that things have stabilized for the moment in that I think you’ve seen from both sides a desire to kind of walk things back a little bit or to calm things down, if not walk it back. And I think that’s obviously very positive. And I think it means that we should not expect any aggressive moves over the weekend.
That said, I think to the extent that there is a stabilization here, it is very fragile and it is certainly only going to be temporary. This is just obvious looking at U.S.-China relations, you know, under the second Trump administration, but also U.S.-China relations over the past kind of five years. Something is always going to come along that is going to upset any sort of stabilization that you get. And I think the relationship, again, is just so fragile that it doesn’t take much to blow it off course. And I think what’s important about these things is they’re not coming from Zhongnanhai or from the White House necessarily, like there’s just a lot of stuff that’s going on that can impact the relationship.
So, I think about the balloon incident a few years ago, or I think about the Pelosi visit to Taiwan, which, again, if you remember, like the White House did not want that visit to happen, but the White House is not always in control of what’s going on with the U.S.-China relations. And that’s certainly the case under this administration as well. But you can actually see that, I mean, we’re going to get into the specifics of what have been happening over the past couple of weeks, but I would say that, you know, this most recent kind of upset of the relationship is a great reminder of how fragile relations are and how things can just come and upset it seemingly kind of out of the blue, or without any real intent from the leadership of either country to upset the relationship. So, I would say all of this really kicks off with the 50% rule issued by the Commerce Department on September 29th that was in train for a long time. But it wasn’t like Donald Trump on September 29th was like, “Let’s do that.”
I don’t think he was really thinking about it. From what we know about how the Trump administration works, the Treasury might not really have had that on its radar either or known that that was coming right at that moment. And you have a lot of things like that that are still bubbling behind the surface that I think could pop up at any moment. So, I think we’re likely to have a stabilization here before the Trump-Xi meeting. But, I mean, I could name you a handful of things that could occur, I mean, many handfuls of things that could occur, and in fact that are likely to occur certainly in the coming months that could be seen as a provocation from either side, even if they might not actually be.
Andrew:
Well, I want to get into those tripwires that are out there and which are many, but before we do that, I kind of want to ask a follow up question on what you just said, which is, is it credible, from the Chinese perspective, that the 50% rule, which I’ll just talk about quickly so in case anyone doesn’t know, which is the U.S. Commerce Department expanded basically a sanctions list on China to include not just currently blacklisted companies, but any company associated with other companies on the blacklist if they are 50% or more owned by companies on the blacklist, they automatically get added to the list.
So that dramatically expanded the number of blacklisted companies, kind of with the stroke of a pen. And we’ll get into some of the very immediate fallout of that. But is it credible from the Chinese side that that actually wasn’t done from the White House? I mean, you and I can see that it wasn’t. And we actually now see that the U.S. side is saying, actually, maybe this expansion of export controls last week was some, you know, lower-level official, and there was just miscoordination on the Chinese side. Is that credible? So, is it credible on the U.S. side? Is it credible on the Chinese side that some of this is just miscoordination?
Trey:
Just to be a little bit more specific, so this week, the U.S. Treasury Secretary basically said that the export controls put out by China a little over a week ago were the results of a lower-level official who had gone rogue. There’s no way that happened on the Chinese side. That statement, I mean, when I read that, I just felt like that was probably just the U.S. kind of mirroring back to itself what often happens on the U.S. side. So, do I think that commerce consulted with Donald Trump before or like flagged it for Donald Trump before issuing the 50% rule on September 29th? No, basically. I hesitate because they may have notified the White House in some way, but in a way that they knew there was little likelihood that it would actually reach his desk or be understood.
And for that matter, did BIS put out the 50% rule without Lutnick really understanding? I mean, possible, right? Like, I mean, I’m not even 100% sure that the Commerce secretary kind of understood or signed off on that on the day. This is just pure speculation, but we’ve seen things like that happen before in the United States. And I’m sure Commerce explains this as just kind of a follow up to a rule that they already had. I think that is the U.S. position is like, “We didn’t introduce any new measures. This was just kind of tweaking the old measures that we had.” And for that reason, as well, you know, it might not have gone across certainly the desk of Trump or even Lutnick. Right? Because it was like nothing new here. This is just a little bit of a tweak.
So, I certainly think on the U.S. side that this was not a kind of decision that was signed off by the top leadership. However, I think the export controls released by China absolutely were signed off by the top leadership.
Andrew:
Yeah, I mean, I would agree with all of that. So yeah, 100% nothing is happening of this magnitude on the Chinese side without direct signoff from Xi Jinping. I think we can confidently say that. But I actually had a slightly different interpretation when I read the comments from Scott Bessent, the U.S. Treasury secretary, that maybe, yes, it likely sort of reflects their understanding of what happens on the U.S. side, but also like maybe it was giving China an out, like a creative way to kind of say, “Oh, this wasn’t Xi Jinping’s fault. It was some rogue official.” So, I actually kind of read it as positive that maybe it’s a way to sort of just messaging that to get things… Yeah. Okay, go ahead,
Trey:
So, I read it positively as well. I was like, this is the U.S. giving China an out. But I still thought it was really telling about how the U.S. system works versus China. So, first of all, like it was not the right out to give China. Because what it actually said is like XI Jinping doesn’t have control over his officials, right?
Andrew:
Yeah, yeah, yeah.
Trey:
That is not a cool message to send. But I also thought what I imagine is it’s like, you know, they’re like, okay, American, you know, Bessent, whatever, sitting around talking with his aides — “Okay, how do we walk this back?” He’s like, “Well, you know, we could just say it was a rogue official. I mean, that happens all the time, right?” And it’s like…
Andrew:
No, that’s good. Well, and just a couple more points on that, which is we do know that the NSC, the National Security Council process isn’t really working all that well right now. That would be the energy that would normally move like this. Right? That would make sure all the stakeholders across the government are on the same page for a move like this. And so, you can see, with that process not working, how the miscoordination and miscommunication could happen. And then secondly, something that you hit on that we won’t draw on too much, but is the expectations game, which I think is really important as well, which is in D.C., there wasn’t much reaction to the 50% rule when it was released because everybody kind of knew it was coming.
And exactly as you said, it was like closing a loophole in an existing restriction. And so, it was not really seen as that big of a deal. But I think on the Chinese side, they may or may not have known it was coming, and it was definitely seen as a new and punitive action. And the goal fun kind of how you understand those two things or the expectations around, say, the 50% rule coming out, I think is really one of the big things that led us to where we are. And speaking of which, what are some things that could be upcoming where we have an expectations mismatch? Why don’t you run us through that list?
Trey:
Well, I think the risks primarily come from the U.S. side, kind of because of what we were just talking about, where the U.S. is a much more decentralized system. So, there are a lot more actors that have agency that might do things that could kind of upset the relationship. I mean, right now, you’ve got everything that’s attached to the NDAA, the National Defense Authorization Act that’s going through Congress right now. The Senate just attached some bills to that that would prohibit outbound investment to China. They also reattach the Bio Secure Act, which would outlaw a lot of Chinese pharmaceutical and biotech in the United States. So, that could kind of pass and blow up into something. Commerce remains a kind of a loose cannon over there. I mean, they have multiple 232 investigations ongoing and so they could announce the results of those and announce sanctions or tariffs.
I mean, that could kind of happen at any time. And like I said, commerce sometimes does this without necessarily getting the sign off or understanding the impact that it’s going to have. Or maybe they understand the impact and it’s exactly the impact they want to have. I mean, that’s a bigger can of worms that maybe we’re not going to, or a rabbit hole we’re not going to go down. I think on the China side, I mean, the big one for me is the U.S. Trade Representative, Jamieson Greer, said that China wasn’t going to enforce his export control or that it was going to roll back its export control regime. They’re not. So, they absolutely are not. China’s failure to do that could be seen as provocative in the United States.
Part of it is that I think both sides are increasingly trying to basically defend themselves against each other to kind of, you know, either the U.S. China-proof its economy or China U.S.-proof its economy. And so, you have a lot of different things going on, different policy moves that are in train that may come to surface that could be seen as provocative from the other sides.
Andrew:
Well, and also add to the list any number of things, as you said, that happen outside of the government process, whether it be something like the balloon incident or whatever, some kind of accident on the seas, where, or in the sky, where U.S. military hardware and Chinese military hardware can too close to each other or whatever. So, there’s a laundry list of things that can upend this. Your point about that the Chinese are not going to roll back this export control regime, this export control expansion. They might delay implementation. They might sort of find some way to suspended temporarily, but that, to me, that strikes me as like really key to getting everybody back to the table. Because I think the U.S. has to come back to the table in a way that basically doesn’t just simply accept the fact that this new export control regime has been rolled out and that we’re just negotiating under these fundamentally altered new circumstances.
So, like, they’re going to have to be creative about how they work together to message that so that it’s palatable for the U.S. side. But that then gets to the next question, which I wanted to ask you, which is the question of intent. Does China want a deal? Does the U.S. want a deal? Because that’s sort of a more fundamental question. If one of these sides actually doesn’t want a deal, then there’s no incentive for them to kind of figure out the question of how do we get everybody back to the table. So where are we on that front?
Trey:
Yeah, I think that is a great question. And I think you go, what does each side actually want here? And I think that’s always been a little bit of a question on the U.S. side. I mean it’s not just China, but I think the whole world which has been in trade negotiations with the United States, has said, “What do you want exactly here? What are you asking for?” And so, I think, fundamentally, this all started with Donald Trump wanting to reduce the trade deficit. But then the trade war kind of takes on a logic of its own. And now we’re kind of much further down this path. And you can see this in the way that the negotiations, like, what are we even negotiating over?
It changes every single negotiation. Where the first one, it was like, okay, let’s just like dial down the tariffs. But then the next one is like export controls, which were not really part of the discussion before. Right? And then the next one is TikTok. And then this new one is probably going to be a different form of export controls. So, I think everybody on both sides is probably a little bit just kind of lost. It’s not a kinetic war, but it is a trade war. And I think everybody’s lost a bit in the fog of war. I do think we will have to see. I mean, one thing I’m still surprised at is how relatively benign the impacts of the trade war with China, and really the trade war…
Andrew:
Globally, yeah.
Trey:
… with the rest of the world, that obviously has had no effect on the markets, really. I mean, if you look at kind of where we are versus where we were before Trump came into office, the impacts on the real economy haven’t really been felt in the United States as well. I think the impacts on the real economy are likely to be felt. And I also think that if the U.S. and China can’t reach some sort of deal, that that will also probably ultimately negatively affect the markets as well. And I do think that will probably change the calculus in D.C. to want to get to some sort of equilibrium. I think China has always wanted a deal, just wanted some sort of stability, some sort of predictability.
I think that’s still the case. I think it’s less the case than it used to be in that I think China has gotten used, is no longer like expecting a deal, and has been taking measures to increasingly kind of just prepare for a world in which there are major restrictions on trade and investment with the United States. And I think they may be wrong on this. I mean, I do think they’re a little bit overconfident these days, but I do think they’re more comfortable with that world and kind of see a path through it. And so there may be less eager for a deal than they used to be. But ultimately, they also want a deal. At this point. I think ultimately, where we get is for both sides, it’s not really… like the deal becomes the thing because what the deal gives is stability and predictability.
So, it’s not really the end state of the deal. Before, maybe Trump wanted to close the trade deficit or bring back jobs. The Hawks wanted to make sure that China couldn’t access certain technologies or whatever. In the end, I think we’re just going to end up at a point where everybody’s going to be like, “Can we just figure out a way to like, stop doing this so that we can just relax a little bit?”
Andrew:
That’s a great point. I want to pick up on the China side first, which is so since the original trade war started in 2018, my framework has been China wants a deal, like they don’t want the trade war to happen. They say that in their official language, and they’re willing to kind of do whatever they can to try to find a path towards a deal and de-escalate. That said, I think something has fundamentally changed in the past few months, which is I think at this stage, the status quo is kind of okay for China. Like, they’re living with U.S. tariffs. They found new export markets; exports continue to grow at a very fast pace as exporters refashion where they’re selling things. And then they also, I think, have made the calculation that they can basically live with the U.S. semiconductor restrictions that they can get around the need for the highest end chips by clustering lower-end chips.
Right? So that they get the compute that they need. And that they can probably close, or that they think they can close the gap at the frontier chips, the frontier technology within 2 to 5 years. And that basically that choke point for the U.S. is getting weaker and weaker and weaker over time, whereas compared to the rare earths choke point that China has is very strong and will take much longer for the U.S. to close or to alleviate. And so, I think they’ve started to realize that while they still want to do, if they can bring down tariffs in particular and get some stability, as you said, that’s ideal. But they can live with the status quo actually. And so, their main goal is like trying to keep things from materially deteriorating, like, getting to the point where we’re in a full-on trade embargo like we were at some point in May or whatever it was with 145 tariffs.
So, I had always kind of been working from the assumption that China was pretty eager and pretty keen on getting a deal, but now I almost read it as if we can just keep things where we are and buy time and delay, that’s also a fine tactic for us. What do you think about that?
Trey:
I think you’re right. And I kind of mentioned, I mean, I think China might be a little bit overconfident these days, but I definitely think that they are confident in where they are and in their ability to kind of weather what the U.S. has already thrown at them. Basically, I agree with you. At the same time, I don’t think that means that they don’t want a deal. It just means that they think they’re in a pretty good place. I think they’re going to be tough negotiators, basically. They feel that they have a strong hand to play, which, of course, may mean that it’s harder for us to get to a deal. Right?
Andrew:
I guess what my point is it maybe it signals a willingness to walk away at some point for the Chinese, whereas I don’t think that willingness was necessarily there before. And so, I think this latest iteration, this latest back and forth, seems to me that some fundamentals have changed. And you already went through the stuff on whether the U.S. wants a deal. Ultimately, depends on whether or not Donald Trump wants a deal. He’s a dealmaker. My sense is Donald Trump always wants a deal but he’s also willing to walk away from a deal. So, we don’t really have a clear answer on the question of intent, in my view. I think the intent is there on both sides, but sort of weakening. But speaking of the foundational or fundamental changes in the dynamics, one of the other things, in my view, that’s really changed is that with this latest export expansion, China really has seemed to go on offense in a way we haven’t seen previously. Am I reading that right, or do you have a different view?
Trey:
I have a different view, but I realize it’s kind of out of consensus. I wouldn’t characterize it as China going on offense. I would just say that China is hitting back harder. It’s an interesting question because I do not think we would have had the rollout of this export control regime, when we did, had it not been for the 50% rule on September 29th. I also think they went so big. And let’s remember that, you know, we talk about the rare earths, but like, you know, it was also the lithium batteries, it was also the Qualcomm investigation. I mean, there were six different announcements from MOFCOM. It was a huge punch, but I would still say that it was a counterpunch. And I do think it was a big counterpunch because I think, going back to what you were saying, I think China is feeling more confident, is more willing to walk away, is more comfortable with where things are.
And so, I think they’re willing to be a little bit more assertive. But I also think that China’s fed up with the United States. I remember when the 50% rule came out, I was like, “Oh my goodness. Like, I cannot believe they did that.” I was like, “This is going to be huge.” And I was actually shocked that we had two days before National Day, and we got in there, and nothing happened. I was like, “Oh, I guess I misread that.” But when we came out of the Madrid talks, what was said was that the U.S. was not going to impose further restrictions. That was what was agreed. And like the U.S. said that and China said that. China was like, “This is what we got.” The U.S. is like, “This is what we gave them.”
And they both seem to say the same thing, like no new restrictions. And I was like that deal is not even two weeks old, and here’s the U.S. doing what, to me, looked like a really big expansion of its export control regime. And so, I was just like, oh no. And so, then when China hit back on October 9th, I was not surprised that they were hitting back. I was slightly surprised at how big it was. But again, I kind of interpret that of them just saying, like, “Look, you said, you know, you want to keep ratcheting it up, let’s ratchet it up.”
Andrew:
I think you’ve correctly captured the way the Chinese view this, which is kind of really what matters, at least in determining what they’re going to do. But you can see how they got from that to basically thinking, “All right, we need to get their attention. They’ve said that we’re on pause. They’ve said they’re not going to do things. The U.S. side said they’re not going to put on new actions. They clearly are. And so, they must not have been listening. We need to make sure they’re listening.” Well, now they’re listening, right? So, I mean, I can see the logic there. And I mean, just to go a little bit further on this point about the 50% rule, I mean, we’re already seeing the outcome of that. So, some details, on October 12th, the Dutch Ministry of Economic Affairs issued a statement that it was taking over a chipmaker called Nexperia in under something called the Goods Availability Act.
The statement from the government said that “serious governance shortcomings” at Nexperia had presented a “threat to the continuity of crucial technological knowledge and capabilities.” So, the act they use, like I said, the Goods Availability Act is similar to the U.S. Defense Production Act, and allows The Hague to intervene in private companies in emergency situations to ensure the availability of critical products. It’s now become clear that this was a direct outcome of this 50% rule because Nexperia was back in 2019 by Chinese semiconductor company Wingtech, which was later added to the Entity List US into the list in December of 2024.
And the U.S. government had been clear with the Dutch that this company was in its sights. And so, now we’re in this situation where, basically, there has to be at least a change of ownership, change of leadership for this company to basically be taken off the entity list, a direct outcome of the 50% rule. What does any of that mean, and how are the Chinese looking at that? Are they going to retaliate to this specific move, or is this indicative of something, you know, a series of similar takeovers that we’re likely to see? How do you view how this all fits in?
Trey:
I don’t have a strong read on this one yet, not least because you’ve probably seen there’s been some interesting information that’s come out about how Nexperia was actually kind of mismanaged by its Chinese owner. And so, it does look like maybe it’s a slightly more complicated story in actuality. But I think the Chinese have already said, like, “Look, we told you the 50% rule was a big deal. And you can see it’s a big deal because here you have a company that’s been directly affected by this.” Again, I think we are at a pause here, but I think there’s a bigger issue going on here on both sides where I think the problem is we are in this new world where everything is dual use technology, and the two sides see each other as strategic competitors, which have embarked on this road of trying to limit the other’s ability to kind of basically develop its strategic capabilities.
But the problem is that all of these “dual-use technologies,” whether it be AI or batteries or whatever, the dual use is there. And the biggest part of the dual use is actually on the civilian side. And so, you are targeting vast swaths of an economy if you’re trying to keep China from having access to advanced semiconductors; you’re actually just kneecapping the entire economy. Similarly, if you are going to start shutting off the U.S.’s access to critical minerals because some of those critical minerals are likely to get funneled into military applications, well, you know, critical minerals are used in a lot of things way beyond just military applications. So, I’m kind of going off a little bit of a tangent here. But the reason I am or the reason this is my response to your question on Nexperia is that there, it’s really hard to draw… like, we can keep going here.
Both sides can keep going for a long time. And so, will the U.S. aggressively enforce the 50% rule? They could. That’s certainly like within their give. Could China aggressively enforce its rare earths export controls? It could. It’s certainly possible. So, I think, again, this is why a deal is actually necessary, is that if there is no deal, I don’t see how any of this really stops.
Andrew:
It just keeps, yeah, widening and deepening. Yeah, I think that’s right. And we just talked through how the outcome of the 50% rule very quickly impacted an important company in Europe. I mean, we talked to our clients, many of whom are European companies, and they just feel like they’re full-on collateral damage from the two heavyweights just going after it. And there was another couple of developments this week that we still haven’t even touched on. We’ve gone through all of this back and forth, and one thing we haven’t even touched on that also impacted another major U.S. ally, which is South Korea, but also impacting the global shipping industry. So, while all of this back and forth is happening, and one of the reasons that kind of China, I think, made its big move last week was that the U.S. has also implemented new fees on Chinese flagged ships at U.S. ports.
So, those fees went to effect on Tuesday this week. The U.S. fees are on Chinese-owned flagged and built ships. And they were announced back in April as part of a wide-ranging section 301 trade investigation. I think China was probably expecting those to be suspended after Madrid, right? Kind of the idea like, okay, we’re not going to do any new trade actions. The U.S. side was like, “Well, this isn’t new. It’s already been in train. It’s something we announced. It’s just going and enforcement.” And so, again, difference in perspective and expectations there. So, part of China’s big package was to announce reciprocal fees on U.S.-owned flag and built ships last Friday with the Ministry of Transport releasing implementation rules, only on Tuesday, leaving virtually no time for companies to prepare. Like, within basically 24 hours, these things went into place, and it’s causing chaos, partly because the rules aren’t super clear about around ownership.
Global shipping companies are trying to figure out whether or not they hit the threshold of 25% U.S. ownership based on institutional ownership in public markets and all that stuff. It’s just a total mess. That’s meant that some cargoes have been diverted from China so that the fees don’t have to be hit. And also, on top of that, late on Tuesday, the Commerce Ministry sanctioned five U.S. linked subsidiaries of South Korean ship builder Hanwha Ocean, banning Chinese firms from doing business with them. The Hanwha has just committed to 5 billion USD to a shipyard in the U.S. in August. They took this move, China took this move under the Anti-Foreign Sanctions Law, which is an interesting new development. So, this is a piece that’s also ongoing and simmering that we haven’t even factored in yet. Talk to me about how you view this as an input to the drama.
Trey:
I’m exhausted again. All of this is really important, and I’m really glad that you brought up the sanctions on the Hanwha shipping subsidiaries, because to me, that is a really interesting development. Like you said, those sanction, MOFCOM announced them and said that they were because Hanwha had been in violation of the Anti-Foreign Sanctions Law. And this is really the first time; I think it is the first time that we’ve seen MOFCOM use the AFSL to go after companies. And so, just for some background here, you know, the AFSL was passed in 2021. I mean, gosh I want to go back. There’s so much background here. But I think this is indicative of kind of where we are and what’s going on.
And I think what we’ve seen in all of this, the export controls, the AFSL, China, ever since 2018, when the U.S. first kind of went after ZTE, and then 2019, 2020 going after Huawei, China has been looking to develop its own toolkit to basically hit back against efforts by the United States to sanction its firms or cut its firms off from American goods and technology. And I think this is a really significant watershed because it took time for China to build those tools, and it’s taken time for them to figure out how to use them. But they are now using them. And this is so, again, the AFSL, we did see this coming, you know, not this specific instance. But in March, the State Council released implementing measures for the Anti-Foreign Sanctions Law, which was a key signal that they were feeling more confident in how they were actually going to use this law.
Now they’re using it. We’ve seen the same thing with the Unreliable Entity List, which was developed around the same time. Right? Developed in 2020, kind of was just a lot of symbolic uses of it for years. But then last year, we saw some two companies, PVH and Illumina added to those. And then in March, we saw Illumina actually get sanctioned under that framework. Same with the export controls. China passed an export control law in 2020. Then they put out licensing requirements in 2020. They expanded them in 2023. They put out implementation regs in 2023 and 2024. They did all these studies about what do they export, where do they have control. So, they’ve been working on these things. And I think now they’ve developed that toolkit.
They’ve honed their tools and they’re ready to use them. So, for all of our clients out there, for global businesses, this unfortunately is that awful development because it means that you have a Chinese system that has a lot of different tools to go after you and much more willingness to use them. So, it’s a risky time, I think, for the global environment. But I also, going back to your point, I think all of this also makes China a much tougher negotiating partner and much more confident in these negotiations with the U.S.
Andrew:
Yeah, well, we are definitely going to see the use of these tools proliferate. That’s 100% sure. We’ve written a lot about that kind of chronicling the development of these tools. I’ve written some in public about that as well. But it’s largely just China, you know, mirroring the U.S. And they will continue to mirror the U.S. And so, we’ll see a lot more of this going forward. So, I think we’ve gone through a lot of stuff. I don’t know that we have any answers. Trey’s got to go so we need to wrap up. So, we won’t get into the plenum. I will get into that on a pod next week with a special guest that we’re having on next week. So, be on the lookout for that. But Trey, just last 20 second question, are Xi Jinping and Donald Trump going to meet in two weeks?
Trey:
Yes.
Andrew:
Didn’t even take him 20 seconds. All right. I’d put good odds on it as well. Trey, really great conversation. Enjoyed having you on. Good to see you, my man. Thanks for being here today.
Trey:
Yeah. My pleasure.
Andrew:
And thanks, everybody, for listening. We’ll see you next time. Bye.
