To escalate or not to escalate: The weekly recap

Welp. I had an entire weekly note written and ready to publish arguing that China might look to hold its retaliatory fire on the latest round of “Liberation Day” tariffs – preferring instead to let the dust settle a bit before articulating a response.

• But Xi Jinping had other plans.

On Friday – just before stock markets opened in the US – China announced another slew of retaliatory trade measures against the US.

These included:

• Applying a blanket 34% tariff on all US goods imports, effective April 10
• Banning sorghum from agricultural exporter C&D (USA) Inc., along with import restrictions targeting two US poultry exporters and a bonemeal exporter, effective immediately
• Adding a string of rare earth elements to its export control lists, namely samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium
• Adding 16 US companies to its Control List for dual-use exports, and 11 US firms to the Unreliable Entities List (UEL) (companies on these lists face restrictions on doing business in China or buying Chinese dual-use goods)
• Launching an anti-monopoly investigation into US biotech giant DuPont
• Launching an anti-dumping probe into imports of certain medical CT tubes from the US (and India)

The big question here is whether these moves should be seen as an escalation in the US-China trade war, or not.

• In my view, while the moves are certainly more aggressive than the last two rounds of responses from the Chinese, they continue to simply match – and carefully not exceed – the intensity of moves from the US.

On that score, these moves remain very much in line with the playbook that China has laid out in the early days of the second Trump administration, which can be characterized as:

• Hit back – and wait.

That said, what matters immensely more than my view on whether this move by China is escalatory or not, is the Trump administration’s view on that question.

• And here, I think it’s pretty clear that the US administration will see this as an escalation.
• Trump himself has already made his views known on social media, saying “China played it wrong, they panicked.” (In ALL CAPS, of course).

What’s striking to me is that the Trump team genuinely seems to have expected that China would sit back and take this broadside – something that is completely incongruous with how China has acted over the past seven years, since the trade and tech war started.

• The Trump team is also apparently surprised that China – and Xi Jinping himself – hasn’t reached out more proactively to try and kickstart negotiations in earnest.
• I wrote last week about some of the sticking points holding back a substantive leader-to-leader dialogue.
• And again, in my view, this seems like a misreading by the US administration of China’s incentives, approach, and resolve when it comes to the trade and tech battle.

Importantly, China has once again left plenty of avenues for de-escalation in this latest set of trade responses.

• The latest UEL and Control Listings are all pretty pro forma, for example, and from what I can see, the UEL listings didn't come with specific punishments for companies that were listed.
• And as Trivium China Co-founder Ether Yin argued in one of our recent podcasts, these listings provide the perfect negotiation tool – as China can offer to remove listed companies as part of any deal. 
• Meanwhile, on the export control side, China specifically targeted heavy rare earth elements (REEs) – leaving light REEs alone, meaning it targeted less than half the minerals it could have gone after in the REE space.
• The newly controlled REEs are also only on the export restriction list – requiring additional licenses – and not on the prohibition list, leaving further space for escalation, or for de-escalation via ongoing or increased license approvals.
• The US only imports small amounts of heavy REEs, as most of these are sold to the likes of Japan for further manufacturing use – and only then sent to the US.
• China is undoubtedly pressuring Japanese and other regional producers, but for now, we expect exports to Japan (and other non-US actors) to continue – not least because China isn't trying to ignite a full-on trade war with the rest of East Asia.

That said, the US now depends on China not trying to block Japanese magnet exports to the US – which, if it happened, would indeed be a major escalation by China.

• So there is plenty of room yet for the Chinese side to heighten – or to lower – tensions.

From here, I would argue that whether or not the US-China relationship appreciably worsens going forward will be a function of how Doland Trump plots his next move, as Xi Jinping is unlikely to opt for a proactively aggressive approach.

But for the moment, I remain quite pessimistic that this logjam will break – and that significant negotiations will begin – any time soon.

Andrew Polk, Co-founder, Trivium China

What you missed

Econ and finance

On Wednesday, the Party Central Committee and State Council released high-level guidelines throwing weight behind reforms to China’s price governance framework.

• China has spent the last four decades transitioning away from a planned economy and state-controlled pricing system, steadily introducing market-based pricing reforms.
• The guidelines push for a new round of price liberalization in key sectors including electricity, energy resources, water, and civil aviation.

Tech

On Tuesday, the Ministry of Education, along with cultural and cyberspace regulators, jointly released a new policy on enhancing the digitization of the Chinese language.

• The policy aims to generate a significant increase in “the proportion of Chinese in global digital spaces, cyberspace, and generative AI” by 2035.
• This will include standardizing digital formatting for less common Chinese languages, like ethnic languages and oracle bones.

On March 28, Chinese flying car startup Ehang secured an Air Operator Certificate (AOC) from the aviation regulator (CAAC) for its unmanned EH216-S eVTOL model.

• That makes Ehang the first company in the world licensed to commercially operate a flying car fleet.
• Most Ehang competitors are still trying to get an airworthiness certification, the step prior to commercial licensing.

Corporates

On Saturday, the state-owned enterprise (SOE) regulator (SASAC) told industry leaders it will begin “restructuring” central auto SOEs – a signal of mergers to come.

• SASAC Vice Chairman Gou Ping shared the news at the annual Electric Vehicle (EV) 100 Forum – a high-profile affair where industry leaders rub shoulders with top officials.
• Guo reportedly told the gathering that the goal of the restructuring is to “consolidate the industry and boost its competitiveness…and hasten the creation of globally competitive auto groups…[that] lead the shift to smart connected vehicles.”

Net zero

On Monday, the Politburo reviewed new regulations to strengthen ecological and environmental protection inspections.

• Xi Jinping has beefed up China’s environmental enforcement apparatus since coming to power – leading to major improvements in air, water, and soil pollution.
• Party honchos want more to be done, with the Politburo pledging to “strictly investigate and prosecute major cases of ecological and environmental damage and hold officials at all levels accountable.”

Politics

In a highly unusual move, two of China’s highest-ranked officials switched jobs this week.

• Former head of the Organization Department Li Ganjie is now head of the United Front Work Department (UFWD); and former head of the UFWD Shi Taifeng is now head of the Organization Department.
• There has been no official announcement of the switch, although the official bios for both men reflect their new positions.

Foreign affairs

China’s top diplomat Wang Yi was in Moscow this week to lay the groundwork for an upcoming visit by Xi Jinping.

• In his meeting with Russian President Vladimir Putin, Wang touted China’s commitment to an independent foreign policy, insisting that Sino-Russian cooperation “will not be swayed by external interference.” In his meeting with Foreign Minister Sergey Lavrov, Wang reiterated that China supports “all peace efforts” in Ukraine.
• Hours before the meetings, US President Trump threatened to impose secondary sanctions on buyers of Russian oil due to his frustration with the slow pace of progress toward peace in the Ukraine conflict.

US-China

On Wednesday, US President Donald Trump signed an executive order ending de minimis tariff exemptions for small-value packages entering the US from China.

• Carriers delivering shipments to the US can choose between a 30% duty based on the value of the package or a flat USD 25 tariff, which will increase to USD 50 on June 1.
• These fees will be applied in lieu of Trump’s other China tariffs, which are as high as 65%.

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.