Alright folks, this one is a banger.
In this week’s Trivium China podcast, host Andrew Polk is joined first by colleagues Dinny McMahon and Joe Peissel. The three discuss:
The most recent China macro data
Economic headwinds and tailwinds as we move into 2026
Their early read of the 4th Plenum – and Xi Jinping’s make or break moment with the upcoming Five-Year Plan
Andrew is then joined by a very special guest – US-China Business Council President Sean Stein. They get into:
How US businesses are navigating the uncertainty of the US-China relationship
How the fentanyl issue offers the most promising path toward building trust
The impact of the BIS’ new 50% rule on corporate compliance
Why US companies still value the China market (The reasons might surprise you!)
It’s so good you’ll want to listen to it twice.
By the by: The fellas mention this report in the pod, which is very much worth checking out, as well: China’s Economic Transition: Debt, Demography, Deglobalization, and Scenarios for 2035
Transcript follows:
Andrew Polk:
Hi everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder — Andrew Polk. And today, I am joined, once again, by Trivium’s Head of Markets Research, Dinny McMahon. Dinny, how’re you doing?
Dinny McMahon:
Good, mate. Good to see you.
Andrew:
Yeah. Glad to have you on. And also, we have another Trivium insider who’s a less frequent podcast, but we’re excited to have on today, Trivium’s Lead Macroeconomic Analyst, Joe Peissel. Joe, how are you doing, man?
Joe Peissel:
Yeah, good. Thanks, Andrew. First time on the pod. So, pretty excited.
Andrew:
Yeah. Great to have you on. We are going to talk with Dinny and Joe today briefly about the latest economic data that came out. So, Q3 macroeconomic data came out on Monday. We’ll go through the data, kind of where the economy’s currently at, then we’ll talk through sort of the near-term economic trajectory; what do we think is next? We will talk about near-term macroeconomic headwinds and tailwinds — so what’s going well, what’s not going so well. And then we will give some quick thoughts on the fourth plenum, the communique of which just was released a few hours ago. We’ll do a longer pod on our thoughts on the plenum next week, but just some quick reactions from the econ side with the guys here today.
And then, just want to make sure listeners stick around, on the back half of the pod today, we have an excellent interview with the President of the U.S.-China Business Council, Sean Stein, where we talk about U.S. businesses’ perspective on recent U.S.-China trade tensions and volatility. So, you’ll definitely want to stick around for that. It’s an awesome conversation. So, we will go through the econ stuff relatively quickly so we can get to that conversation with Sean. But before we get into that stuff, we, of course, have to start with our customary vibe check. Joe, it’s your first time on the pod, so I’m going to start with you. How’s your vibe, man?
Joe:
My vibe? Well, happy to be on the pod. I’m back in the UK from China. Happy to be back home. So, you know, my vibes, mixed feelings — personal life, very happy in a good place. China’s economy — so-so. So, I guess I would say my goal is something like a crescendo of caution. Yeah, if I can say that. I mean, am I allowed to say that?
Andrew:
Yes, you can absolutely say that.
Dinny:
You know, Andrew will have you back on, mate, if you keep those up.
Andrew:
Yeah, that’s right. Dinny, how about yourself, man?
Dinny:
Oh, man, I’m exhausted. My wife got back last night after a two-week work trip, and, I mean, the kids are great. I mean, it’s so good when she’s away, but this is always how I feel when she gets back. I just kind of feel like I’ve been hit by a truck. How I’m just like, “Oh, great, you’re back. Here, you take the kids.” So yeah, I’m a little bit rough this morning.
Andrew:
Well, good to know where your head’s at. We’ll try to get your energy up a little bit. I’m, likewise, sort of sick. So, I’m trying to get my own energy up. And my wife wasn’t away for two weeks, but the past couple weeks in the U.S.-China has been, and not just U.S.-China, China generally. Right? You’ve had the trade stuff, and then the plenum, and the macro data. And it has been pretty frenetic. We’ve been doing a lot of client work, a lot of client calls the past few weeks. So, I think everybody’s pretty well up for a nice rest of this weekend. But we’re not going to let that impact our energy on this pod. I think we’re all ready to get into this stuff, and I’m excited to do it with you guys.
But before we get into the meat of the discussion, of course, we also have to do the quick housekeeping. First, a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic Chinese policy on a range of issues like the fourth plenum that we’re going to talk about a little bit today and the macro economy. But it also means policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need help on that front, please do 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 Trivium content, check out our website, again, triviumchina.com, where we have a bunch of different subscription options, both free and paid from the website. You will definitely find the China Policy Intel option that meets your needs. So, check that out. And, of course, finally, please do tell your friends and colleagues about Trivium and about the podcast. It really helps us to grow our business and to grow our listenership. So, we appreciate the word-of-mouth recommendations whenever we can get them. All right, let’s get into it, guys.
So, Monday we got the latest economic data out of China. The headline was that Q3 GDP grew by 4.8%. That’s down from the second quarter, which was 5.2% year-on-year growth. And that’s the slowest growth rate in a year. Perhaps more importantly, though, nominal GDP increased by just 3.7% year on year. So, that’s obviously lower than the real growth rate, which we’ll talk about. So, reflects ongoing deflationary pressures in the economy. But it’s also the slowest growth rate since Q4 2022, when the economy was still reeling from Covid. So, that was like just before they dismantled the zero-COVID policy. Joe, you’ve described the dynamics like this; that the strong September within the Q3 numbers, the strong September export manufacturing data offered, you know, some support for the economy. But the deeper story here is one of uneven growth momentum and fragile consumer confidence.
Talk us through what you mean by that and tell us what you think the sort of placement of the economy is currently.
Joe:
Yeah, sure. I mean, we can look at consumer confidence or willingness to spend across different metrics. We can look at the growth in retail sales of consumer goods, look at households’ propensity to spend, so how much, what proportion of their income they’re spending. The stats bureau does household surveys and engages consumer confidence on a monthly index. All of those figures show that consumer confidence is low. Consumers feel pessimistic about the state of the economy. Household propensity to consume is going down, so households opt in to save a larger proportion of their income. And this translates into economic data, right? The sale of consumer goods grew by 3% in September, which is really slow. But then we contrast that with other parts of the economy, which are doing really well. So, manufacturing output is booming and exports are surging. So, this is what I mean by uneven growth. We’re seeing supply side of the economy is doing pretty well. Exports are doing well. Domestic demand is doing quite poorly.
Andrew:
Yeah. And Dinny, we’ve talked about this a little bit before, kind of characterize this as the fact that average people are not seeing the benefits of economic growth right now. You know, how do you think about where the economy currently stands in light of Joe just said?
Dinny:
Yeah, absolutely. I mean, this whole domestic demand issue, and specifically how households feel, I mean, the way we see there’s three big reasons for it. One is people are still feeling the consequence of the collapse in housing prices, largely because that collapse isn’t over. They’re still falling. Additionally, you’ve got local governments are still pursuing austerity policies because there’s a real and ongoing shortfall in their ability to finance their budget because of the debt problems and the collapse of land sales. And then, additionally, people don’t really have that right sort of job security, partly because what local governments are doing is undermining business confidence, but also because of what we’re seeing with anti-involution and overcapacity. You’ve kind of got these companies that are making great exports overseas, but it’s not necessarily translating to job security because the profits aren’t there and bonuses aren’t there.
So, you put all that together and it’s not a great outlook for households, even though, as Joe points out, some parts of the economy are going gangbusters.
Andrew:
Yeah, very much a contradiction. And we’ve seen that in other economies. We saw that in the U.S. economy last year, actually in the run-up to the election, right? That the headline numbers were doing really well, but people just weren’t feeling the benefits of growth. And there’s a real disconnect. And that can be a challenge for government policy. And we’ll talk a little bit about policy, what the government might do when we get to the plenum piece. But I want to go a level deeper on some of these numbers and subcategories below the headline GDP. Joe, on a recent podcast, we talked with Gerard DiPippo about how China’s economy is strong and weak at the same time.
I think that’s still very much reflected in this most recent data. Let’s start with the strengths. You talked a little bit about them, but can you give us a little bit more on what you saw as the macro strengths in the Q3 data?
Joe:
Yeah. So maybe we can start exports because that’s the economic variable that has consistently surprised to the upside. So, exports are surging despite being down somewhere between 20% to 30% to the U.S. And that’s because of export diversification. So, whilst shipments to the U.S. have collapsed, shipments to pretty much everywhere else is growing by double digits — Latin America, Southeast Asia, also the EU. In September exports to Africa grew by about 50%. Just mind-blowing. And I think Africa is a really interesting case study. And I wrote about this a little bit. Five years ago, China exported five times as many goods to the U.S. as it did to the entire African continent, and that ratio now is 2 to 1. So, China now exports twice as many goods to the U.S. as the African continent, which is just to say the U.S. is becoming increasingly unimportant. Well, I shouldn’t use the phrase unimportant, but it’s becoming less important.
And that diversification has a couple of benefits to China. The first is there’s going to be a lower impact of U.S. tariffs on Chinese shipments because they send less goods to the U.S. And second, that diversification lays the foundations for sustainable growth in exports because the Chinese exporters have more customers. So, that’s kind of the first strength. And that means I’m pretty bullish about exports going into next year as well. They consistently surprise to the upside, and I think they will continue to because of this diversification. It opens up so many more avenues of potential growth for exports. Now, manufacturing, which is the other kind of obvious strength, slightly less bullish about the outlook for manufacturing.
It’s grown well, and I expect it will continue to grow. But there are a couple of pushbacks. The first is policymakers’ anti-involution push. So, they’re trying to reduce excessive competition within China. And we’ve seen government policies translate into lower levels of manufacturing investment. And I expect at some point that’s going to translate into lower levels of manufacturing output. Lower levels, but it will certainly still grow. The other factor that could potentially undermine manufacturing is this persistent deflation. You mentioned at the beginning of the pod, Andrew, that nominal growth grew lower than real growth. Nominal GDP growth incorporates price effects, whereas real growth looks at the economy, an economy’s growth, assuming prices remain consistent. So, when we talk about nominal growth, we’re incorporating price effects.
Nominal growth is less than real growth. And it has been for ten consecutive quarters. So, two and a half years now that means that deflation is really plaguing China’s economy. And that, at some point, could put the brakes on manufacturing output because manufacturers, they’re simply selling goods for such a low price that is going to harm the industrial profits, it’s going to harm their investment, and, at some point, that translates into lower output.
Andrew:
You have two great points on both the export side and the manufacturing side. I was looking at the chart that you published the other day, talking about those ten consecutive quarters of deflation. And that goes back to the first one of those is Q1 2023. And so, what that tells me is like coming out of the pandemic, the zero-COVID policy, when they dismantled that late 2022, the reflation was all on the industrial manufacturing side. And I think that officials thought at that time that consumption would catch up, right? There would be rebound consumption. And it’s just never happened. And so that’s very much like a sort of an outcropping, I think, of how they related the economy after Covid. But then it’s also reflected a more structural factors in the economy, would you agree with that?
Joe:
Yeah, totally. Totally. This is a consequence of medium to long-term policy responses that provided an environment conducive to ramping up manufacturing output, and the economy suffers with the deflation as a consequence.
Andrew:
And then the point on exports, I think that stat on the Africa piece versus U.S is pretty astonishing.
Joe:
Crazy. Yeah.
Andrew:
Yeah. I think a lot of people think, well how much can China export to Africa? It can’t be that much, like the economies are not that big. But the diversification from the Chinese exporters has been a consistent theme since the trade war started, not just in April but since 2018. And so, I think these companies are getting quite good at diversifying. And many of them have just… you read it in the newspapers, like said, we think the U.S. is a lost market for the most part, so we’re going to go find growth elsewhere.
Dinny:
Yeah, totally. And I think in the African context specifically, because China’s investing so much in African countries and building infrastructure, and that creates huge demand for Chinese goods. So, it leads to these economies sucking in loads of Chinese imports. Yeah.
Andrew:
And that infrastructure spend by the Chinese in Africa is not going to go anywhere. Dinny, what are your thoughts on the export side? I know you’ve also been doing a lot of work on the export piece as well recently.
Dinny:
Yeah, I don’t know much insight on the Africa thing, but the rest of it, I mean, China’s now in this position where it’s starting to cannibalize the market share of high-end industrial goods that traditionally, of markets had traditionally been not dominated by advanced economies. I mean, you look at the growth of vehicle sales in places like Australia, Mexico, Israel, all these markets have embraced Chinese-made vehicles very quickly and in huge numbers. I mean, I think, what is it? 20%, 25% of all new vehicles sold in Mexico last year or the year before were Chinese. I think you had similar thing is 20%, 18% in Australia and in Israel. And that might be off a little bit, but the overall amounts aren’t that wrong. And so, a few years back, no one was buying Chinese vehicles.
I mean, they were a rounding error. And so, I think what we’re saying is that China’s move into advanced manufacturing, it’s not only moving into new markets, but the markets it’s moving into is putting it in direct competition with foreign companies from advanced nations. And, by definition, it’s sort of cannibalizing their market share. So, you know, every inch that a Chinese automaker gains in Latin America or Africa is an inch that Japan, the United States, the EU and South Korea lose.
Andrew:
Yeah. And that’s going to be an enduring theme as China continues to press on its transition to a new economic growth model. That tension between Chinese advanced manufacturing and other Western and North Asia advanced manufacturing is going to be a persistent theme and obviously lead to trade and other economic tensions. That’ll be something we talk about a lot in the months and years ahead. So, just sticking with the sort of current theme in the most recent econ data, back to you, Joe. So, we talked about the strengths. Let’s get a little bit further into the weaknesses. We’ll leave property aside for a second because that’s kind of a beast unto itself. Talk us through the other key weaknesses you saw in the most recent data.
Joe:
Well, the big weakness aside from property would be consumption or particularly retail sales of consumer goods. It’s sort of growth rates have fallen off a cliff edge. And we actually called this out a while ago. One of the reasons that consumer goods sales performed quite well earlier in the year is because of the government’s consumer goods trade in program, right? So, they’re essentially subsidizing the sale of big-ticket items like goods, cars, furniture, and so forth. And funding is starting to dry out. That’s one issue. So, there’s less funding for this program. So, there’s less incentive for consumers to continue purchasing big ticket items. And the second issue is there’s only a finite demand for big ticket items. I mean, most households only want one fridge, right?
So, at some point, those consumers who are susceptible to tap into the program and purchase a big-ticket item at subsidized price, that pool of potential consumers is exhausted. We caught this a thinking Q1 or maybe Q2 of this year. We said by September, big ticket item sales are going to start slowing, and that’s going to have an impact on overall retail sales of consumer goods. And that’s what we’re seeing. But having said that, I don’t want to be too pessimistic. Retail sales of services are still performing well. They actually grew by 6% last month in September, 6% year on year. So, huge growth. And year to date, they’re up by 5.2% sale of services. So, it’s not all doom and gloom for the consumption picture.
That does seem to have been a slowdown relative to what we saw earlier in this year. But there are still pockets of strength. Now, what’s really interesting with the goods for services pattern is that we’ve seen, for a number of years, households could gradually shift in expenditure away from goods and towards services. We’ve written about this previously and we’ll continue to do so. I mean, it’s really important when we think about consumption to look at sales, service sales as well, because typically the financial news you read is only going to focus on the sale of goods. But there’s the other side of the coin. Sale of services is still pretty robust.
Andrew:
Yeah. And you’ve done a good job of that, especially on the data side capturing the services piece, which is important because not only is government policy increasingly focusing on supporting services consumption as opposed to goods consumption, which we’ll get into a bit more when we talk about the plenum piece, but also it’s natural for economies and individuals, as they become richer, to spend more and more of their income on services as opposed to goods. Right? They’re traveling, they’re eating out more, they’re having experiences. Is that right?
Joe:
Yeah, totally. Totally. It’s a natural development. And as I say, it’s the other side of the consumption coin. It’s not all doom and gloom. There are pockets of strength.
Andrew:
Well, let’s touch now quickly on the other big weakness, which is property. We just want to get a quick snapshot of that. I’ll have Dinny come in and talk to us about where he thinks things stand. But Joe, you wrote this week a stat that was, I thought, astonishing, which is that new property starts in, I believe, September were at the lowest levels since 2005, lowest in 20 years. Dinny, talk to me about that stat, how you think about the property market, and is there any end in sight for this property market contraction?
Dinny:
Yeah, well, unlike consumption, this is all doom and gloom. I think earlier this year, things seemed to be looking up a little bit. There was a little bit of optimism. But since then, I mean like prices are still falling. You know financing for the sector is still falling. Investment is falling. New stats to falling. Sales are falling. This is a market that peaked early in 2021. And things are just going from bad to worse. At this point, it’s difficult to even say what the outlook is. The last time the government really rolled out a significant package of measures to try to get things going again was 12 months ago, and its focus or its approach over that period has been very much like, well, we’ll give the local governments the latitude to do what they need to do to get market going. And that really hasn’t been enough.
By global standards, usually it takes about, you know, the average is about five years from peak to trough for the sort of markets to get to sort of turn around. That will be next year. So, part of me thinks, okay, maybe we might start to see tier one markets start to turn around at some point during next year. But the rest of the market, I think we’d be lucky if these tier two cities started turning around a couple of years after that. And then when it comes to the rest of the country, China’s tier three and everything else, you know, these are cities that are kind of experiencing a population decline, very rapidly aging. The outlook for the rest of the country is really unknowable. So, yeah, that’s my 2 cents.
Andrew:
Yeah. Well, thanks for that doom and gloom. I think the key for me probably is just that this Q3 and most recent monthly data from September just reaffirms the story on the economy that we’ve seen really since the zero-Covid policy. So, since the beginning of 2023, end of 2022, manufacturing in the industry just absolutely humming from strength to strength. That’s resulting in major and growing exports through ongoing diversification and price cutting. So, translating also into very weak domestic demand because of weak confidence and just absolutely housing market in disarray. And the result is deflation, right? And a supply-demand mismatch that will continue to persist, we think, well into 2026. So, not a lot of alteration on the economic trajectory on the horizon.
But we appreciate, Joe and Dinny, you guys go in through those numbers in kind of the near-term economic narrative, if you will. I want to switch quickly to the more medium term. So, the other big thing we had this week was that the 4th plenum, the Party’s 4th plenum, took place. This plenum basically outlines a key priorities for the upcoming 15th Five-Year plan, which will be officially released in March. We have just gotten the plenum communique, which is kind of a short summary of what they discussed. We’ll get more details in the coming days about what the plan is. We’re recording at 10:15 a.m. East Coast time on Thursday, October 23rd, just to timestamp this with the information we have. But just quickly, I think this communique really, Dinny, I got to say, props to you.
I read this thing, and I was like your take on what China’s trying to achieve, Xi Jinping is trying to achieve with this transition to a new economic growth model was hugely verified in this communique, I thought. And for people who aren’t familiar with that, you can listen to our past pods on the new economic growth model. Or you can go read our report, primarily authored by Dinny on our website and at CSIS about China’s new economic growth model. We’ll drop the link to that in the show notes. But the key takeaways were, first, the number one priority in this communique for the 15th Five-Year plan, so for the next five years, is that Xi Jinping is going all in on supporting the industrial base and upgrading traditional industries. So, innovating in frontier industries, industries of the future and upgrading traditional industries, which was a key observation, Dinny, that you’ve made. That’s the number one priority.
They are saying it’s all about industry. We want this very strong, robust, innovative industrial base. Number two priority was technological self-reliance. That was priority number one over the past five years in the 14th Five-Year plan. So, it just shows you how serious they are taking the industry piece. And that means that all these trade dynamics in China shipping all these goods all over the place is not going away. Like the industry piece is part and parcel with reliance on exports to some extent. So, I just want to emphasize that point. Number two was again technological self-reliance. That’s going to continue to be a theme. We knew that innovation would be a huge piece of the 15th Five-Year plan. In fact, the only thing that’s surprising about innovation being there is that it wasn’t number one. That it was number two on the list.
That’s the only thing that’s surprising about that. Not that it was a high priority. And then the third priority was building a strong domestic market and accelerating the establishment of a new development pattern. This, to me, is all about taking that strong industrial base, goal number one, taking innovation and technological self-reliance, goal number two, and translating that into a new economic growth model, which is basically what you’ve talked about, Dinny. And they talk a little bit here about how consumption is part of that mix. But the main thing in my view, my reading here is it’s a move away from property-driven, investment-driven, debt-driven economic growth model of the past and establishing a new development pattern, as they say. So, a development pattern driven by industries of the future, technological innovation.
It’ll take a while to get there. And they do layer in consumption. So, I want to talk with Joe about that. So, it’s not that consumption isn’t a piece of it, but as Dinny has said before, it’s that consumption is at the end of the process. You get innovation more profitable and productive companies who have higher profits and then can pay higher wages to the people, more taxes to the government, who can build out a social safety net. So, ultimately, that leads to consumption but through this process. The last thing I want to say here before I bring in Joe on the consumption piece, and then also get Dinny’s stance, is that they said very clearly, the 15th Five-Year plan will play an important role in connecting the past and the future in the process of achieving socialist modernization.
In my view, that’s very clearly saying the next five years is a key transition period. It’s sort of make or break from getting to the old model to the new model. Dinny, I see you shaking your head. Yes, I want to bring you in on that thought, and then we’ll go to the consumption piece with Joe. What’s your reaction to that?
Dinny:
Yeah, I’ve been seeing bits and pieces like that sort of pop up in things written by government advisers and whatnot, and I wasn’t quite sure what to make of it is like, you know, is this really a pivotal transitionary? I mean, you can kind of almost say that about, you know, we’re always at a pivotal time, and it’s always an important moment in time, and we’ve got to knuckle down and work. But to actually see that in the document, I’m like, okay, yeah. In particular, you know, the way that you frame those priorities, sort of they frame the list of priorities, it’s like that’s definitely how they see this. And also, I mean, you take that also into context with what Xi Jinping has said repeatedly, it’s like we’re at a once in a century, once in a hundred-year moment.
And so, I think what we’re seeing with the plenum is almost kind of the economic articulation of what it means to be in a once-in-a-century moment. And I think they do have this small window in which they kind of have to overhaul things. And I think that’s kind of… I’ve argued that as well with regard to the population issue. People have argued for years that China runs the risk of growing old before it grows rich. And it does have a small window of time in which it can make it a short sprint in order to put its economy in good order before demographic decline kind of makes it a lot more difficult to kind of put in place an economy that might allow it to grow increasingly affluent and converge with the U.S. and E.U. So, yeah, I think it certainly does, the powers that be do believe that we are in a pivotal transitionary moment.
Andrew:
Yeah. Thanks for that, Dinny. And Joe, to bring you in here, you wrote about the consumption piece of this in the plenum, what did you see there?
Joe:
Yeah, I mean, not a huge amount. It seems a lot kind of policy consistency, steady as Xi goes. Broadly, I think Beijing is going to continue doing what it already is, which is three areas it’s trying to support, or three ways I should say it’s trying to support consumption. So, targeted policy support. That’s things like the consumer goods trade-in program I discussed earlier. The second way is trying to support demand through expanded supply. And by this, policy makers have the view, and I think rightly, that a lot of the time consumers want to buy certain high-quality goods and services, but they can’t because the supply isn’t there. So, policies to increase private sector supply, things like interest rate subsidies or building out consumption infrastructure like shopping centers.
And then the third area is this idea of raising people’s livelihoods, which we’ve covered quite a lot recently, expanding social security, increasing pensions, raising the minimum wage. So, nothing strikes me as particularly new, more policy consistency than anything. The big question about whether or not it works is how effective or how far does Beijing go in trying to raise people’s livelihoods. I mean, really, we need to wait for policy details to figure that out. But they’ve been banging on about this for a long time, for years about expanded Social Security and reforming the Hukou system, household registration system, and so forth. So, it’s really a case of waiting for the details.
Andrew:
Yeah. Like I say to my wife or my colleagues and they’re bugging me about something, or I shouldn’t say bugging, when they’re encouraging me to get something done that I said I would is it’s on the list. It’s still on the list. It hasn’t fallen off the list, but consumption support seems to be on the list. Building social welfare, it seems to be on the list. We’ll see if they get to it in this next five years. Although, again, just re-emphasize that, as Dinny has pointed out, they want to do so in a sustainable way fiscally. And so, it starts with getting, you know, more profits from companies who can pay more taxes, who then can fund the build-out.
We won’t rehash all of that, but this has been a great discussion, guys. We’ll leave it here for now. Joe, thanks so much for being on the pod. It was great to have you.
Joe:
Yeah, great to be here, man.
Andrew:
And Dinny, thanks as always, man.
Dinny:
Pleasure as always.
Andrew:
And thanks everybody for listening to this part of the pod. Please do stick around for an excellent conversation with Sean Stein, President of the U.S.-China Business Council. We get into another look at where we are in U.S.-China and all the volatility and what we expect to happen next, and especially sort of how businesses are thinking about all this. So, I think it’s really important conversation. We recorded that conversation, just for context, on Tuesday, October 21st. So, stick around for that conversation. You won’t want to miss it. Otherwise, thanks for listening.
I’m joined now by a very special guest that we’re very excited to have on the podcast that is the President of the U.S.-China Business Council, Sean Stein. I just want to introduce him quickly. Sean, before going to the U.S.-China Business Council, most recently served as the Board Chair at the American Chamber of Commerce in China and is the Chair Emeritus of the American Chamber of Commerce in Shanghai. He also co-chaired the China Public Policy Practice at the law firm Covington and Burling, where he advised international businesses on political risk, public affairs, communications, and U.S. and China government relations. Previous to his work in the private sector, Sean previously served for nearly three decades as a U.S. diplomat, including as Consul General in Shenyang and Shanghai, and he also served on the China Desk at the State Department at the former Consulate General in Chengdu.
Sean, welcome to the podcast. It’s great to have you on.
Sean Stein:
Great. It’s an honor to be here. I’ve always admired Trivium, and so it’s great to be included. You know, the funny thing I was just going to add is I think, like a lot of folks that have been doing China, I rolled into China for what was supposed to be two weeks in 1999, and it’s now 2025. And I spent what I thought was going to be two weeks, and then it was going to be two years, and it’s now sort of going on, you know, two and a half decades. So, that’s kind of my China story is I got there and the gravitational pull of the tractor beam kept drawing me back.
Andrew:
Yeah, I hear you. I was meant to move to China for one year in 2011, and then ten years later, my wife, instead of having calling me back to the States, ended up moving to China. And so same sort of story. The gravitational pull is strong. But before we get to sort of, we’re going to talk about the latest in U.S.-China. You all do a lot of work, of course, working on that relationship and helping especially businesses navigate that relationship. But can you tell us, before we jump into the meat of this stuff, just a little bit more about USBC, what you all do for our listeners?
Sean:
Yeah, USBC was actually created back in 1973 as a project to part of the State Department. The Department of Commerce, and the White House to try and figure out how do we get U.S. business engaged in U.S. business input on China. So, we’ve been doing this for a long time. So even though China is our middle name, we’re American company. And so pretty much just about any big American company you can think of that’s in China, they’re probably a member, and we probably work with them, as well as a lot of smaller and medium sized companies as well. So, if we think of the issues, you know, in the press today, we have agriculture, we’ve got companies you’re involved with, you know, soybeans or meat or protein, but also semiconductors or tech or life sciences or pharmaceuticals or logistics or professional services.
So we very much cover the gamut of the U.S.-China sort of commercial relationship. And I think that helps us to be effective because it means we get insight from all of our different member companies in every sector. And that makes us useful to the U.S. government when they’re trying to identify what are the key non-tariff barriers we need to work on with China, or what’s happening with the playing field? But the same thing on the Chinese side, when they’re like, you know, what are the real points of pain for multinationals? We can talk to them. So, it gives us really good access, I think, on both sides, and let’s just kind of play this intermediary role that both sides value the types of insights that we’re able to offer.
Andrew:
Yeah. And we at Trivium really highly value your work at USBC. You guys are really good at what you do. And I think, obviously, U.S. companies are caught in the middle of all this U.S.-China back and forth, which is what we’re going to talk about today. And hopefully, you can bring us sort of your own personal perspective, but also sort of not that you speak for your members, but you know what you’re hearing from businesses on this front. And I thought on that side, I just start sort of with the issue of volatility. There’s been a lot of volatility in the U.S.-China relationship for a while now and in the past few months. In particular, how do you think about that volatility and how are you hearing businesses talk about navigating it? And based on those conversations, where do you think we currently stand?
Sean:
Yeah, no, it’s funny to use the word volatility. I don’t know if you’re a deadhead, but I was just in Seattle meeting with members, we had a lot of big member companies in Seattle, and I was driving between two remote sites and couldn’t get my phone to connect to my rental car, and it played, I’d never heard it before, but it’s a song by Grateful Dead that is one of the refrains is called Truckin is what a long strange trip it’s been. As I was getting ready to like scan to go to the next station, I was thinking, you know what a long strange two weeks it’s been in U.S.-China., what a long strange one month it’s been, what a long, strange sort of nine months it’s been. So, yeah, you’re right. Volatility is the operative word. But the reason why I think it’s been so volatile lately, but also from the beginning of administration is there’s been this fundamental contradiction in U.S.-China policy. There’s been a couple of them, but one of them has been the president has never been as hawkish on China as the rest of the administration.
And so, at different times, we’ve got the president trying to take the steering wheel, driving the car of U.S.-China relations and other times he’s doing other things, and other elements are trying to steer this relationship. And so, part of the problem is if we just say he’s not as hawkish, that doesn’t quite capture exactly what we mean. One of the areas is in the area of technology, right? We’ve got a lot of members of the U.S. national security community that’s very obsessed with data security threats of national technology, of technology for the United States. The president does not share those views. We’ve seen that with TikTok. We have seen that with ZTE. We’ve seen in how he wants to approach other issues. And so whether you think the president is right or wrong, there’s a different view between the president and some parts of the administration.
I think the bigger problem, and maybe the bigger difference is I think the president’s vision of rebuilding or building national strength doesn’t require containing China or holding China back, where for much of the rest of the administration, some other people in the administration or some other people in administration, those two things go hand in hand. You can only build the United States if you’re containing China. So, it doesn’t matter which side of the argument you’re on. The fact is the president is not necessarily the same place as some of the other people in administration. So, what does this mean? It means that on the one hand, it may appear that, you know, the trade czar with China is Scott Bessent, and the Secretary of the Treasury, which, you know, there’s a long history of the Treasury secretary, secretary playing the lead role in China negotiations, and the long with, of course, with USTR.
But if we look at the big things that have happened in the relationship on trade since, say, Geneva, those haven’t been driven by the Treasury Department or by USTR. They’ve been driven by the bowels of the Commerce Department. And the Chinese response is coming from their Commerce Department. So, it’s almost like we’ve got this conflict. It’s sort of this lower level. And again, and then we have the president will react or will have Bessent react or other things. And then we have this policy spiral where things will happen that surprise the president, and he gets the rest of the story and it comes. So, I think one of the sources of this roller coaster effect has been there is no one view of what we should do on China within the US administration.
I think the other is, not to belabor this point, but the two sides are really lousy at talking to each other. You’ve been doing China a long time. I’ve been doing China for a long time. And I just don’t remember when the last time was that the Chinese side was so bad at reading the signals coming from the U.S. side, and the U.S. so bad at reading the signals coming from the other side. And so how both are surprised at different outcomes. And so, the inability to communicate, the inability to read signals, that also means we get this tat, tit for tat kind of a spiral that could be unnecessary in an environment where there’s better communication and better understanding.
Andrew:
Yeah. You make a bunch of great points there. I remember and Trump one, it took the Chinese a long time to figure out that the Treasury wasn’t really driving the train that time, that it actually was USTR and Robert Lighthizer, but they were so used to that linkage normally being or the communication channel normally being through Treasury, that it took them a while. Eventually they figured it out. But I guess I’d just have you maybe expound on, if you can, what do you think the Chinese make of that? I think, obviously, their system has its internal coordination challenges, but I think maybe less so than the U.S. side. And how credible is it when the White House goes or Treasury goes to the Chinese and says, “Well, here’s our intention,” but then commerce is over there doing something else? What do the Chinese make about that, do you think?
Sean:
So, I tend to be charitable in all this, and I think both sides are suffering from massive amounts of projection. So, when the Chinese look at the American side, they assume there is incredible policy coherence. That all of the US government is on exactly the same page with a master plan for what we’re going to do on the China relationship. And you know that’s not true under the best of circumstances. Under normal circumstances, much less right now, where the National Security Council isn’t particularly empowered to ensure that everyone’s on the same side, but the Chinese assume that it is. So, their question is, “Were we misled by Mr. Bessent? Or were we not? Or is he a reliable interlocutor?”
I think they have a hard time accepting the idea that there could be this policy decoherence. I think at the same time, we see a little bit on the other side, if we look at what the administration was saying just last week about the rare earths role, they’re like, maybe MOFCOM wasn’t coordinated with everybody else. Maybe they surprised President Xi. Well, I kind of wonder if there was a bit of projection there. You know, maybe they don’t always coordinate any better than we don’t. So, I think that comes down to being one of the reasons why they misunderstand each other.
Andrew:
Yeah, I fully agree and feeds into that volatility point that we started with. But I guess then that leads to the question of after a pretty wild couple of weeks, where do you think things currently stand? It seems as though negotiations are still, they haven’t totally fallen apart. And the Xi Jinping and Donald Trump meeting for late October seems to still be in train. Is that how you’re saying things that at least we haven’t fully fallen apart and the two sides are trying to get back to the table?
Sean:
So, I think that again, looking at the different sort of views within the United States, well, if we look at the continuing views in the U.S. government, there are folks who are like, “Well, you know, let’s hope that doesn’t happen,” because their vision for where the relationship needs to go may not match the president’s. But I think right now the center of gravity is pointing towards we’re going to get the two presidents meeting in Korea, and there’s some challenges on the schedule. But at the end of the day, they’re going to meet most likely. And so where we are is I think if we look at what does the president want, he is very clear about what does he want. He just said it in a press conference yesterday on Air Force One, you know, soybeans, fentanyl and exports of rare earths. Very, very clear.
I think there’s other things that he wants to he may not be talking about. He may want help rebuilding some of the U.S. industry. He may want investment, he may want other things. But those are the three things you mentioned. If you go to the Chinese side, what does the Chinese want? You know, I’ve been telling people that, yeah, if we have to prioritize the top three things that they want, the first would be stability, and the second would be stability, and the third would be stability. But if you go to number four, number four it would be maybe tariff release, maybe some export control relief. Number five would be investment in the U.S. And they want investment in the U.S. because their companies want to go global for the same reason that IBM and GM wanted to go global 30 and 40 years ago. They want to be close to markets close to customers, want to have more developed supply chains, etc. and that’s something that China sort of sees as yet sort of manifest destiny.
And so I think they view that as if they could get some reasonable investment in the United States, I think they also think that would help with public relations, and they would see that as being sort of a net positive. So, I think what the Chinese want more than anything is to get out of this roller coaster because they have enough challenges to deal with on their own economy. They’ve got enough things they want to work on. And this is a needless distraction, I think, for them. But on the U.S. side, I think we’ve got things that the president wants. Unfortunately, the things the president wants happens to be things that the Chinese want.
Andrew:
Yeah, well, if I can pick up on that, so for he past few months, what I’ve been hearing from the Chinese side, and from many other countries actually, was they were actually unclear what the president wanted. What does Donald Trump want out of these negotiations? But, as you said, this week, he very clearly laid out at least three things, as you say, there may be others, but that’s some action on fentanyl, soybean purchases, and shipments of rare earths to the U.S. So, now at least it seems that both sides are pretty clear with what they want, which is great. But what of those do you see as sort of the most low hanging fruit? Where can we actually get some traction to move forward in the bigger negotiations, which are going to be much more complex and likely take time? But where should these two sides start, do you think?
Sean:
They should absolutely start with fentanyl. There’s no other place to start. Not only is it a national tragedy in the United States, but the Chinese have acknowledged that they could do more in fentanyl and they would be willing to do more on fentanyl, but there’s a problem. And to understand the problem, you have to understand the history, which I think isn’t terribly well known because I think the Chinese have done a bad job telling the story. And if we roll the clock back to Trump 1.0, we had a massive fentanyl problem in the United States, and Trump wanted to do something about it. And he went to the Chinese and said, “Hey, China, I need you to ban the export of fentanyl.” And, you know, it took some coaxing and cajoling and pressuring, eventually said, okay. And then the U.S. said, “But yeah, we need something more. We need you to ban the export of all fentanyl analogs that exist and all analogs that will yet be invented.” And China agreed.
I know, because I was in the U.S. government at the time, that that worked. Back then, fentanyl trade was we were seeing large numbers of seizures of little boxes the size of playing cards that were being mailed, all from Shanghai, where I was, to different places in the U.S., and they get picked up by the Postal Service, and ta-da, it’s surprise, fentanyl. And so China stopped. And that was how fentanyl moved largely to United States was that way. And again, so I remember in the U.S. government, that was effective. There were three measurements that were being used on how things were going. One of them was seizures. Seizures were down. Street price was up and availability was down. So, the three measurements were working.
But then what happened? In the view of the Chinese, so me not defending the Chinese view, but they say that as soon as that was happening, then we started to hear talk out of the White House that we have a new opium. This irritated the Chinese, and they went to the Trump administration and said, “Hey, some top cover, please.” They didn’t get any. So they said, “Okay. Well, we’re done, we’re finished. We’re going to keep doing what we did, but we’re not going to do anything.” So then what happens? Markets evolve. You know that better than anybody. And so it now starts to being traded in precursors and traded in APIs. So now we get this burgeoning trade going along those lines.
So, in San Francisco, they go to the Biden administration, or the Biden Administration goes to them. President Xi says, “Yes, we will work with you on fentanyl.” And they do. The Biden administration may have played small ball. They could have done more. The Chinese perhaps could have been more enthusiastic. But in the end of the day, they cooperate on fentanyl. And the Biden administration was happy. And then what happened? We had a report that came out that said the real reason we have this fentanyl problem is it’s subsidized by the Chinese government. The Chinese go to the U.S. government, they say, “Hey, you guys know this isn’t quite right. You know, top cover, please.” And they said, “Yeah, we’ll give you some top cover.”
And the top cover was sending out Ambassador Burns to tell people in China, “Hey, this isn’t true.” The Chinese felt burned. So, now what Chinese have told us at very high levels is, “We could do more. But right now, we’re doing exactly what’s recommended by the U.N. And for us to do anything more, we want to talk about it with the Trump administration and make sure we’re all on the same page.” To this day, there haven’t been meaningful conversations between the two sides. But China is ready to act if they can talk to the U.S. But here’s why it matters for trade. So, sorry for that long trip down memory lane. Because when you talk to the Chinese right now, they will say we are spending a huge amount of money buying soybeans from South America and putting it on bulk container vessels and parking it out in harbors for months at a time so we can have soybeans in the off season.
So, of course, you get Brazilian soybeans in the U.S. Spring and you get American soybeans in the U.S., so that keeps them going throughout the year. Now they’ve got to store them someplace. And so, they want to do that, but they say, you know, “How could we possibly do that? Because we had these retaliatory tariffs on American soybeans that make them too expensive?” And those retaliatory tariffs, they were put on because of, Andrew? Because why?
Andrew:
Because of our tariffs on China.
Sean:
Our tariffs on fentanyl.
Andrew:
Oh, on fentanyl. Oh, okay,
Sean:
On fentanyl.
Andrew:
I missed it. You teed it up for me.
Sean:
I’m sorry. Yeah, I apologize. And so that’s the issue. So, the Chinese want to do something on fentanyl, they can’t do something on fentanyl. It would let them buy soybeans. So, we had a made for TV or made for a Hallmark card moment that we’ve got a confluence of interests. That’s where to start.
Andrew:
And that, as you say, allows not only gives China political cover to roll back its tariffs on soybeans, but also gives them the number one thing outside of stability that you said, which is relief on tariffs, which is you could take off the 20% fentanyl tariffs.
Sean:
Yeah. So now why is that hard, right? It’s hard because of obvious reasons. Fortunately, the Trump administration has said our tariffs on China are 55%, other people may say that it’s at 30%. But if you take off 20% tariffs for fentanyl, then depending on who you ask, you’ve got somewhere between ten and, do the math for me, and 35% tariffs. And then the question is, is that a big enough differential. If you are a decoupling or if you’re a hardcore? Is that enough to convince people to invest in Vietnam instead of China, or is that enough to cause supply chains to move? Answer, no. And our answer is, you know, what we don’t need is decoupling.
What we need is de-risking. And so we should lower the tariffs on China and on other countries. But that’s what makes it hard is lowering the tariffs on China to a rate equal to the UK is politically hard in the United States. Whether or not it’s the right thing to do is a different question. But the optics are very hard for the U.S.
Andrew:
Yeah. Well, the way you lay it out, maybe you should be in the negotiating room because that sounds like a pretty straightforward path to build some trust between the two countries on kind of the low hanging fruit issue. But I also want to then get to maybe one of the stickier issues, which is the rare earth controls. Obviously, we saw a couple of weeks ago now trying to expand its export control regime quite dramatically. The U.S. saw that as a unilateral escalation. China sees it differently. But interested in how you think about the rare earth controls and how maybe your businesses, your members are kind of thinking through that issue in terms of the availability of rare earth magnets and rare earths into the U.S.
Sean:
Yeah, nobody loves this. Everybody hates this, and they hate it for a lot of reasons. One of them is if we go back to when China first starting to put export controls on minerals, so go back a couple of years to on gallium and germanium, and then later graphite. Each time they did that, there were massive frictional problems to get to the point where they can go from putting a control on to giving an export license. So, months would go by and no licenses. That happened on an even larger scale earlier this year when they started to go after rare earths. And so lots of businesses, almost every business we’ve talked to at one point or another that uses rare earths has had challenges getting adequate supplies of rare earths. So, anything that happens on the Chinese side that puts that supply chain in jeopardy is something that is absolutely problematic.
But I think where the business community might have seen things a little bit differently than some in the administration is nobody was surprised. Everybody has seen rare earths becoming a problem for years. And early on in the administration, when people would be briefing the administration, including us, and the administration would be laying out their plans, and we’d always say take retaliation into consideration. They would come back and say, “How could they possibly retaliate?” During Trump 1.0, they went after agriculture, our farmers were fine, our economy did fine. And so they would say, “Well, how are they going to come after us?” And item number one was always, you know, rare earths. And number two is pharmaceutical APIs. And number three was PCBs, and other stuff, and then they sort of would go from there.
But I do think that the challenge has been that on the U.S. side, from the beginning, there’s been an overestimate of the leverage that tariffs give us and an underestimate in how much leverage the Chinese might have coming back. But the business community that’s been on the ground in China for decades knows trying to play hardball and weren’t surprised by this. So, it’s not good news. We’re in a worse place than we were. But the Chinese are now at least making some positive statements about how they intend to implement it that are designed to ease the Europeans, and designed to ease the U.S. government’s concerns, and especially designed to ease the concerns in the business community. And while we’re very glad to hear their plans for making it easier and ensure that rare earths flow, you know the proof is in the pudding.
You know, we’ll believe it when we see it. But I do believe that they’re sincere in trying to ensure that companies and enterprises that don’t have dual use concerns and don’t have dual use concerns, I think they are committed to trying to figure out how to get them rare earths, but that’s still a hard frictional problem to run through.
Andrew:
Yeah, I want to get to the retaliatory piece in a minute, but I just wanted to follow up on the rare earths piece. The U.S. administration has been talking about how China, either they don’t want China to implement the latest export controls or they might roll them back. I mean, our view would be much like here is we saw this coming and that the export control regime is not going to be rolled back. They’re not going to go into reverse. They will likely commit to accelerated licensing and make sure that actual shipments take place. Is that how you view it? And if that’s the case, is that a sort of a sticking point in the negotiations? How does the U.S. come back to the table in this, what I view as kind of a fundamentally altered negotiating reality now that this export control expansion has happened?
Sean:
Yeah. So, I think that you’re absolutely right that at no point have we seen either side meaningfully rollback any export control. So, the negotiation is going to have to be, how is it implemented. And like everything else, the proof is going to be in the pudding. And so, the three things that we’ve been telling the Chinese they need to do, and they’ve been receptive, are things that are really hard for them to do. And that is white list, green channels and general licenses. And so our sense is the space for negotiation is not going to be China rolls back its controls on rare earths. China has sort of staked out this position that is going to make that really hard to do, but it’s going to be, how is it implemented? And just if I can go down this rabbit hole a little bit, you know, one of the problems we’ve had, you know, since Geneva, is the two sides never fully agreed on what was agreed to in Geneva. the U.S. side, and I’ve spoken to them and I believe them, they said, “What we agreed to was we would roll everything back to pre-April 2nd, but did the US reserve the right to continue to take steps to protect its national security?”
The Chinese side, with equal energy and vigor, say, “That is not what we agreed. We told them we would not go to Geneva if it wasn’t going to be a complete freeze.” And so the Chinese feel as strongly about their side as the U.S. side. I don’t know who’s right or it was strategic ambiguity, but at the end of the day, we got what we needed out of Geneva, which was an end to triple digit tariffs. And so one from the trade war, okay, we’ve got a ceasefire, but we still had this problem with export controls. And that’s how we got into this problem with rare earths. We can spare the history of why that ended. But what happened in Madrid is, at least according to the Chinese side, which would’ve been much more voluble talking about it, but we did get some hints from Secretary Bessent in his press conference is the two sides came much closer to an understanding on what we agreed to.
We saw this in Secretary Bessent’s press conference where he said, “We didn’t talk about, you know, lifting previous export controls. Instead, we made promises about what we weren’t going to do.” In other words, we were going to show some restraint, maybe not stop, but show some restraint on the export control sanctions realm. And when I talked to the Chinese, the Chinese say, they said, “Well, okay, if that’s how it’s going to be, then we will take that position too. We also will take prudent steps to protect our national security.” Agreed? Ta-da. We’re done. And so that was one of the outcomes that was seen as positive from the negotiations. But then in the eyes of the Chinese, not in the eyes of the U.S., the U.S., right out of the starting gate, did a couple of things that called into question what they thought was agreed to in Madrid. So, they immediately react with investigations into companies for potential antitrust violations, investigations into dumping on analog and legacy chips.
And they launched this massive investigation, or an anti-discrimination investigation, which sure looks an awful lot like a 301, into the U.S. treatment of the semiconductor industry that is setting, it’s just planting, and look at this is sort of a cluster bomb. That when this anti-discrimination investigation is completed, we can have this bomb that drops out lots of landmines for companies all across the landscape. So, that’s a really big deal. But then we also kind of follow through on this ship building 301 and then we had the affiliates rule, which was, as we see it, there’s businesses. It was sort of a bond that the U.S. dropped on the U.S. business community. So, that’s where we are.
Andrew:
So, that’s where we are. Lots of miscommunication, which I think you’re 100% right fundamentally is coming up the works is the wrong word. But we have these meetings, there’s positive outcomes, and then both sides come out with totally different expectations about what happens next. I mean, one of the things that you mentioned post Madrid, that the U.S. did that they thought was fully onside, but the Chinese took exception to was what you called the affiliate rule or the 50% rule, which is we’ve talked about before on the pod, but it was out of the U.S. Department of Commerce basically expanded the entity list.
So, a control on the ability to export to certain companies who were on this list and said, not only are we controlling goods to entities on the list, but any entity that is affiliated with it by dint of that company owning 50% or more of a subsidiary, is now suddenly at it. So, it was a pretty dramatic expansion of the number of companies on the list. And I know you have strong feelings and thoughts about that move. So, talk to me about how you view that and how it’s impacting the businesses you’re speaking to.
Sean:
Yeah. So, the way that the 50% rule, the entity rule was explained within the U.S. government was this is a loophole. We’re fixing a small loophole. It’s a minor technical fix. And even if you look at the Federal Register notice, it says it’s going to affect fewer than 250, I forget the number 243 export license applications per year. In other words, this is an nothing burger. It was nothing of the sort. It was absolutely a bomb that they dropped, and they knew they were dropping this bomb. And in a way they knew and you know they were dropping a bomb. But the first thing that you pointed out is actually correct. It could have increased the number of companies that are listed tenfold, so an order of magnitude.
But the second thing that it did was even more important from the perspective of U.S. business and from their perspective on U.S. competitiveness globally. And so, when the Entity List was unveiled in 1997, it was designed explicitly, and ITA will tell you this on their website, to inform American companies about companies that pose a threat to U.S. national security. Maybe they’re proliferating weapons of mass destruction, maybe they’re drug kingpins, maybe they are something else. But the point is to inform the business community about who to be careful with. And so the way it was always structured was the U.S. government identifies threats, tells business, business avoidance them, all as well. What this does is it changes that completely. It now says it’s not our job, the government, to tell you who you can’t trade with.
There’s going to be tens of thousands of companies that you can’t trade with. And, you know, we don’t know who they are, but it’s your job to figure it out. And just to make sure you do, we’re going to put strict liability rules on that so that if you did not know, but it turns out that they were, you’re still responsible. Not being informed is not a defense. And then they’ve gone and done some prosecutions to show that they’re serious. So, it’s completely flipped the burden of proof as well as dramatically expanded the number of listed companies. So that’s the problem. But I know what you’re saying, Andrew. You’re saying, oh, boo hoo, hoo, hoo. Big companies, it’s hard to do compliance.
Okay. Yes, boo hoo. But that also gets every single SME that sells consumer goods that are covered and it sells electronics that are covered, or that sells life science products are covered. And then the kicker is, maybe we don’t care about corporate it, maybe we don’t feel sorry for them. But what does this do? It means American companies are no longer reliable partners. American companies have already stopped huge numbers of sales. And what happens to those sales? They go to the Europeans, they go to the Japanese. So, we’re not protecting U.S. national security because that stuff is still going to China. All we’re doing is, if someone was saying, well, we shot ourselves in the foot — no, we’re shooting ourselves in the head on U.S. competitiveness. And so this is a big blow against U.S. competitiveness. And I think it was designed to force American companies to pull back from China. This was designed to do that. But it was billed as a loophole. So, earlier I said, how do you know that, that this was not all aboveboard?
Under the normal rule-making process, BIS or some other, you know, U.S. government entity will say, “You know what? We’re thinking about publishing a rule. Here it is, have at it. Tell us what’s wrong. Tell us what’s good. Let’s go to a notice and comment period. Let’s have discussions. Maybe we’ll have hearings for an industry, and we’ll figure out how to really refine this rule in a way that makes sense and protects our national security.” That’s not what we got. We got it dropped on a Monday morning just before the government closed, no waiting period for implementation. It was in effect immediately. And just before the government closed, so the people who do outreach at BIS aren’t even there to tell you how to implement it. Right? And so this was not in good faith efforts to work with business on how do we protect national security. This was much more aggressive, but that’s not how it was sold within the U.S. government.
We’ve heard from multiple folks in U.S. government that they thought it was smaller. And so, the problem was the Chinese were not fooled that this was that. And so they felt, okay, this was big. We have to respond in a commensurately big way. And so, in the end of the day, American competitiveness, American companies, and ultimately American consumers and the economy pay the price.
Andrew:
Well, I want to pick up on one of the key points you made there about sort of the intersection between national security and competitiveness and kind of where that balance lies. Obviously, there’s been a move over the past, I don’t know, decade or so to prioritize national security over economic competitiveness or at least economic efficiency. So I kind of want to pivot to that bigger point, which is there’s a generally accepted deal in Washington that it is in our best interest, national security-wise, to decouple or de-risk economically from China. But the flip side of that is there are advantages and perhaps even imperatives for U.S. and other foreign companies to be operating in the China market. And I know you talk about some of these quite a bit, and I would love for you to just walk us through what you think some of those key dynamics are. Why do U.S. companies sort of need to be doing business in and with China?
Sean:
Yeah, I definitely want to talk about that. I also want to talk about what you said is there’s this consensus view that decoupling or de-risking is in the U.S interest. But I must say that what I think we have is we have, again, we have a continuum of views or a spectrum of views, and on one end we have decouple. But I think on the other end you’ve got de-risk. Everybody agrees, you know, we need to be able to make our own drugs, we need to be able to make our own semiconductors. There’s stuff we need to be able to do. But we don’t need to be decouple and make our own tennis shoes and our own shampoo. So, those are two very different things.
And so the question is where do we fall on that spectrum? Where’s sort of the optimal balance between national security and whatever? And so, one of the things that we find really frustrating, or I find frustrating in particular, is people on one end of the spectrum, everything is national security. If you drew a Venn diagram of U.S. engagement with China and you had another circle that was national security, it would look like a dinner plate, right? So that means investment, national security; joint research, national security; Chinese students, national security; Chinese tourist, national security; subnational cooperation, national security; all trade, national security; everything national security. But all of those things aren’t all national security all the time. All of them bear some kind of risk. But it’s not all national security all the time. And so that’s the challenge.
And so what needs to happen is a rational look at what do we need to de-risk? What do we need to be able to produce ourselves. What do we need our neighbors, you know friendshoring to produce? And that’s a discussion that we just haven’t had so far in this administration. But why do companies have to be in China? Well, lots of reasons. One of the things I’d like to point to is back when I was chair of AmCham Shanghai, we did a survey of our members and they were listing their top worries, which essentially was the question, asked in a more artful way that what keeps you up and night? And number one was U.S.-China relations.
And I think about number three or number four was rising and growing competition from Chinese companies. And so, we became fixated with this. And then we developed a series of questions that we ask about, okay, where is the competition coming from? What are Chinese companies good at and what are you good at? And this was a really eye opening exercise for us. Of course, when we surveyed our companies, American companies had better products, and they recognized we had better products. A lot of them recognized we’ve got better product development, meaning we’re able to build in safety, you know, manufacturing efficiency, all that stuff in all at the same time. In every other category that we surveyed, the plurality of American companies said, “You know what, our Chinese competitors maybe doing this better.”
And some of these things are things that aren’t going to surprise you, Andrew. And it was speed of adoption of new technology. Surprisingly, exactly no one, you know, 85%, 86% of companies said, “You know, the Chinese are better at that.” Or speed to market, big surprise, right? Who’s faster? Getting licenses and working with the Chinese government. You know, no surprises there. Adapting digital strategies, things like these. So, we saw that there are places where Chinese companies have a definite advantage and places that American companies have advantage. And so what we’re seeing is that, you know, time was a decade ago that more American companies in China were getting an ROI higher, in some cases substantially higher than their global average ROI.
And in that scenario, investment’s going where? It’s going to go to China because you’re going to get a higher ROI on it. But over the last half decade, those numbers have sort of switched. So, now we have more companies who are making less ROI globally than they are in China. So, it switched. And then a lot of companies, it’s now sort of hit that average of where they are globally. And so then the question is if you’re making less in China than you are in other markets, why are you there? And we’re seeing some really interesting answers. We’re seeing that a lot of companies are there because they want to see where their next global competition is coming from. You know, the easy-to-look example is, for three years, China was closed.
And then, ta-da, they open up after Covid, and the German car companies were all shocked at, oh, you know what? Chinese EVs. I was at the Shanghai Auto Show that year and talking to Chinese auto executives. And they were like, oh my God. They had not expected that. And companies don’t want that. They want to see what’s happening. Second thing that we’re seeing is we’re seeing companies are able to do some really quick innovation in China, whether it’s digital strategies and other things, then they’re able to then replicate in other markets. So, that’s another reason. A third reason is there are things you can do in China that you just can’t do anywhere else. And I was talking to a large company that I’m going to sort of obscure details of who it is, but in their business, if you’re supplying into a large Chinese manufacturer, any large global manufacturer, then five and six years ago, there was a standard timeline. They would talk about what their product was, and they would say, okay, we need to have working prototypes and designs and patterns in about six months.
And that was the timeline. That was a product development cycle. And they did very, very well. But then starting a couple of years ago, that timeline shifted to three months. And that was really hard for them to do. And so, they had to invest a lot of money back at headquarters to get fast enough to be able to innovate and create the model products in that three months. But then what happened is it went from three months to one month, and no matter how much they spent in the U.S., they could not get a working prototype and all the required stuff to China in four weeks. And so, their option was either we lose this market or we’re going to have to do something else. They invested and now have moved some prototyping and other things to China.
And so now they’re able to meet this 3-to-4-week deadline that used to take them six months. So, now fast forward to today. The reason why that company was telling me that story was when they first started this investment in China, they thought this was just going to be a China phenomenon. Now they’re finding that their customers in Japan and their customers in Europe are also demanding the same rapid turnaround. And if they had not invested in China, then they would no longer be competitive in these other markets. And their point is — we spent tens of millions of dollars getting us fast and efficient as we could in the U.S. We could not meet the speed of the ecosystem here. And so sometimes there’s definitely global competitiveness for that reason.
So, there’s a lot of reasons why companies need to be there. But point of fact, if American companies were forced to withdraw from China tomorrow, then they would be less competitive globally, the U.S. economy would be weaker, and if you’re one of these national security hawks and you’re like, “That’s a small price to pay for national security,” well, it doesn’t help national security either, because most of those products are going to be backfilled by either Europe, Japan or in more and more cases, China. So there just isn’t an upside to that. And that’s why this debate about decoupling can be so maddening because you got to have bigger perspective. Decoupling then what? And that’s the problem is decoupling how? And that just isn’t part of the discussion.
Andrew:
Yeah, I 100% agree. I find the conversation maddening at times as well. And I think you nailed it when you said we’re not having the more specific conversations in Washington that need to take place in terms of, sure, everyone agrees we need to de-risk, but how much? And in specifically what areas and what inefficiencies, because of the de-risking, are we willing to live with, and how much do some of these dynamics truly impact national security? What isn’t national security? Maybe we should have that conversation. But those details, I think, have been lacking. Hopefully this conversation is starting to evolve. People are now obviously getting more serious about the rare earths piece, and you’re seeing some actual, more detailed policy conversations around that. And there, of course, is the announcement with the Australians just this week.
Yeah, I mean, we’re going to be talking about this for many months to come. I just want to end on one final thing, which is in China right now, the 4rth plenum is going on, the Party’s 4th plenum, and the plenum is designed to basically lay out the main principles or decisions behind the upcoming five-year plan. What are you sort of looking for? That plenum will wrap up on Thursday. What are you looking for? What are businesses looking for out of that process in terms of Chinese policy? Do you have anything you hope to see, hope not to see, or any other kind of views on that?
Sean:
I’m sorry that I was chuckling a little bit because this is your gotcha question, right? I had my gotcha question for you, like, hey, Sean, I want you to predict the outcome of something that’s going to happen in three days and let’s see if you’re right. It’s one thing for me to predict outcomes three months in advance so people can forget what I predicted. But what I would say is I would say two things maybe that I wish. But the first was last August, the NDRC held a roundtable with private companies, a lot of foreign companies to gather input for the 15th Five-Year plan. And so, a lot of our members and a lot of other multinationals were sort of in the room, and they kind of gave the wish list for business.
It was fair competition rules, stronger IP protection with greater policy support for domestic markets. And so, I think that’s what we want. What does that translate into, this greater policy support and fair competition rules? The Ministry of Finance has now been spending about two years on this project to create a national market in China, and creating this truly national market in China requires them to say that if there’s a procurement action happening in Hubei that they’re going to treat companies from Hunan exactly the same as companies or companies from Hubei, or companies from Sichuan.
What that also requires is they create the American company that’s manufacturing in Jiangsu the exact same way. And so, they made great progress in recent years in getting a legal structure on paper that says everything made in China should be treated equally, but in reality, that just hasn’t happened. So, that would be the first thing is clear guidelines in the five-year plan to strengthen this idea of a national market. The second one is something that I may have heard first from you, but that I’ve been sort of in fixated on lately is that, you know, last year, sorry, the last Five-Year plan, the 14th Five-Year plan, they didn’t have the fixed target for growth, but they did have a fixed target for inflation, which, you know, some targets they don’t actually hit. But having some sort of target for consumption because, as you know, one of the most important parts of the Five-Year plan is the policy signal it sends to officials at every single level.
And something to support consumption, I think, would be good for the Chinese economy, would be good for U.S. business, would be good for the nationals, and be good for the U.S. So, that would be something that would be wish list.
Andrew:
Well, those are great and sorry for the got you questions, but you did exactly what I was hoping for, which is, you know, we do this at our business — We don’t have to necessarily be right. We just try to create frameworks for how to think about this stuff. And so, if consumption’s there, it sends one signal. And if a consumption target isn’t there, it sends another signal. So, those are two great things. This has been a fascinating discussion, Sean, and I really appreciate your time. Well, I’ll look forward to continuing this conversation over time, but for now, we’ll leave it there. I know you’re a busy man and really appreciate you giving me this time on the podcast today, so thanks for coming on.
Sean:
Thanks. It was an honor to be here. I’ve been a big fan of Trivium for a long time and a fan of yours, Andrew. So, thank you.
Andrew:
Very kind of you to say. Appreciate it. And thanks everybody for listening. We’ll see you next time. Bye, everybody.
