China goes on offense | the weekly recap

Whew. It’s been a hell of a couple of weeks on the US-China front. And frankly, I’m having trouble knowing where and how to start, in terms of wrapping up where things stand at the end of a very volatile fortnight.

• While I’m at it, I guess I should add that it’s good to be back!
• I took “a couple of weeks off” of writing my weekly wrap over the summer, and that somehow stretched into about four months…same with my running routine.

The headline takeaway for me, at this point, is that with its latest moves on the export control front – announced last week – China has for the first time gone on offense in the US-China trade war.

• The clear corollary is that the Trump team is – for the first time in any of its trade negotiations – playing defense, a position they are clearly not used to.

This new dynamic has led to a heightened – and unusual – amount of public jockeying and recriminations between the two sides, as both teams adjust to their new roles, and both claim that the ball is in the other’s court in terms of finding a path forward for negotiations.

At this point, both sides are indicating that the all-important Xi-Trump summit, slated for late October, is still on – but both sides’ expectations on what should or will happen next seem worlds apart.

I’m going to try and quickly lay out how we got here, and then (probably ill-advisedly) hazard a guess at what may happen next.

How we got here:

• The US and China agreed to their most recent trade ceasefire at meetings in Madrid, on September 14-15 – the idea was to suspend sky-high tariffs for 90 days.
• As part of that agreement, China would accelerate rare earth shipments to the US, and the US would suspend forthcoming trade measures it had previously planned.
• Since then, the US has implemented a series of tweaks to its China trade policies and enacted a substantial widening of certain trade sanctions, to include companies affiliated with previously blacklisted Chinese firms (the so-called 50% rule).
• The US side saw these as small adjustments to already existing or already announced trade measures – not new punitive actions.
• China, however, perceived the moves as reneging on the US promise to suspend further trade actions – with the most egregious move (in China’s view) being the 50% rule adjustment.
• In turn, China responded last week with a dramatic expansion of its export control regime.
• Various elements of this expansion were meant as 1) retaliation against the US moves since the Madrid meetings, 2) an opportunity to significantly expand China’s export control authority, thereby changing the power dynamics at play, and 3) additional leverage in upcoming negotiations between Xi and Trump.

It was point #2 above that saw China move from reactive retaliation to proactively staking claim to significant chunks of key global supply chains – a move that shocked both US and other Western officials.

• The US saw this export control expansion as both unprovoked and hugely escalatory, causing US President Trump to threaten 1) a new round of additional 100% tariffs on Chinese exports, 2) additional curbs on exports of undefined US software, and 3) to cancel his upcoming meeting with Xi Jinping.
• As feverish backchanneling took place over last weekend, China’s Ministry of Commerce (MofCom) released a wide-ranging Q&A explaining the rationale behind its export control expansion, underscoring that the intent is not to disrupt the flow of goods globally (but rather to ensure control over dual-use applications), and claiming that it had communicated these moves in advance to the US side.
• Donald Trump posted a message on Sunday seemingly indicating that he would back off from his promised retaliation – and in the early part of this week, Trump administration officials indicated that the Xi-Trump meeting was still set to take place in a couple of weeks.
• Since then, though, top US negotiators have accused China of 1) trying to tank the global economy and 2) aggressively posturing – threatening yet more trade actions – in recent exchanges between the two sides.
• US officials also laid out their expectations that China would not, in fact, implement its new export control regime, in order to get trade talks back on track.
• China’s MofCom has since responded by claiming that the US is 1) purposefully mischaracterizing its actions in private negotiations and 2) fearmongering the export control expansion, to cause panic among other Western governments.

Got all that? Good.

So where does it leave us? As the week draws to a close, negotiations appear to officially still be in place, but the two sides’ expectations around what happens next could not be more different.

US officials’ insistence that China roll back, or refrain from implementing, the new export controls are a non-starter for Beijing.

• If this is a hard requirement from the US side to keep negotiating, then talks will be dead in the water.
• China’s overarching goal in crafting these new rules was to enact a strategic expansion of its export control capabilities. Beijing’s desire to retaliate against US measures served as a catalyst for the move, but it was also a convenient pretext to roll out controls that would have come at some point regardless.
• So the direction of travel for Beijing’s export control regime is set, and it won’t go into reverse.

Meanwhile, it remains to be seen whether mooted US efforts to craft a coordinated response among its partners will be in any way successful.

• While many governments – including across much of Europe – view China’s expansion of export controls as a dangerous move that will weaponize significant chunks of key global supply chains, they aren’t exactly thrilled with Washington’s own approach to trade policy either.

For their part, Chinese officials continue to accuse the US of hypocrisy and double-dealing, with MofCom arguing via a series of posts on its official X account that:

• The real problem is that the US keeps hitting China with new attacks on one hand, such as new port fees on Chinese ships and the 50% rule, while disingenuously engaging in trade talks on the other.
• Dutch court records from the recent Nexperia blow-up demonstrate that the US 50% rule has already damaged the rights of Chinese companies abroad.
• Thus, China is still willing to talk, but only on equal footing.
• And more broadly, the US exercises long-arm jurisdiction, so why shouldn’t China?

So as it stands, both sides are continuing to maneuver – seemingly in hopes of getting talks fully back on track – while they both also get accustomed to their new roles in the dispute:

• China in the driver’s seat, and the US trying to play catch up

The key sticking point, as I see it right now, is how the US can get back to the table in a way that doesn’t require it to simply accept the fact that China’s vastly expanded export control regime is a permanent feature of the new reality.

• It’s going to take some real creativity from both sides to find a politically palatable off-ramp, and restart negotiations under these new conditions.

That said, I’d still put solid odds on the chance of a Xi-Trump meeting moving forward in two weeks, around say 70+% – but the path to getting there just got a lot harder. 

Going forward, the bigger challenge is that both sides now appear to believe they have the upper hand in this battle.

• China sees its rare earths chokepoint as more potent, disruptive, and longer-lasting than the US semiconductor chokepoint.
• Meanwhile, the US side views China as economically weak – and unable to withstand sustained economic hostilities.
• Washington also expects the reimposition of an effective trade embargo – as well as pressing on unspecified other points of leverage – will cause China to capitulate.

The real question, then, is one of intent – whether both sides actually want a deal or not.

To me, that’s an open question at this stage – but its answer will ultimately determine where we go from here.

Andrew Polk, Co-founder, Trivium China

What you missed

Econ and finance

China’s deflationary pressures eased slightly in September. Per data released by the stats bureau (NBS) on Wednesday:

• Core CPI – which strips out food and energy prices – rose 1.0% y/y, the fastest rate since February 2024.
• On a seasonally adjusted month-on-month basis, PPI remained flat for the second consecutive month, meaning producer prices remained at basically the same level from end-July to end-September.

• That suggests Beijing’s anti-involution efforts are already staunching the downward slide of factory gate prices.

In an interview published online, Yin Yanlin – deputy director of the political advisory body’s (CPPCC) Economic Affairs Committee – warned policymakers that their “anti-involution” campaign may be doing more harm than good.

• For Yin, intervention in capacity and prices risks undercutting China’s innovation-led growth strategy: “If prices and capacity are ‘locked in,’ the gains from technological progress won’t show up, and incentives to innovate will weaken.”
• Yin said the primary problem isn’t involution, but weak demand: “In an environment of insufficient aggregate demand, it is unrealistic to expect the overall price level to rise simply by compressing capacity.”

Business environment

On Wednesday, Premier Li Qiang chaired a State Council study session on promoting high-quality development through upgraded standards – timed to coincide with World Standards Day.

• Li stressed that standards are essential to building a modern industrial system and a unified national market.
• According to the market regulator (SAMR), China launched 148 new mandatory standards projects and issued 106 new standards in H1 – up 131% and 58% y/y, respectively – focused mainly on consumer safety and emerging technologies.

Tech

On October 11, the Supreme People’s Court (SPC) released new provisions governing the types of cases that internet courts will hear.

• China’s first internet courts were established in 2017-2018 in Hangzhou, Beijing, and Guangzhou.
• The new provisions expand their jurisdiction to four new areas, including disputes related to data ownership, virtual property ownership, personal information protection and privacy, and unfair competition online.
• The internet courts will no longer have jurisdiction over disputes related to well-worn issues, like online defamation, online loan contract disputes, and rights disputes involving creative works published online.

On October 10, the FT reported that China’s customs bureau (GAC) has stepped up inspections of foreign semiconductor imports.

• FT sources indicate that these inspections started with the intention of ensuring Chinese AI firms weren’t ordering made-for-China GPUs, such as Nvidia’s H20.
• But they have since expanded to broader investigations of any chip shipments that breach US export controls, including investigations into companies that may have misrepresented import documentation in the past.

US-China

Shipping has emerged as a new front in Sino-US geostrategic competition. On Tuesday, steep new port fees took effect in both countries.

• The US fees on Chinese-owned, -flagged, and -built ships were announced back in April following a Section 301 investigation.
• China’s reciprocal fees on US-owned, -flagged, and -built ships were announced on October 10, with the Ministry of Transport releasing implementation rules only on Tuesday – leaving companies almost no time to prepare.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.