Export Controls to Take Center Stage

The Wall Street Journal reports Export Controls to Take Center Stage at U.S.-China Trade Talks

Export controls—a major concern for industries worldwide—are moving to the top of the agenda of trade talks between the U.S. and China on Monday.

The trade war between Washington and Beijing has in recent weeks veered away from tariffs, focusing instead on each country’s restrictions on material or products the other side desperately needs.

When President Trump’s negotiators sit down with their Chinese counterparts in London, the U.S. side is set to press Xi Jinping’s representatives to speed up exports of rare-earth minerals and magnets containing them as they agreed to in Geneva last month. The Chinese team, on the other hand, will push Washington to remove recent restrictions on the sale of jet engines and a variety of technology and other products to China.

Since the talks in Geneva in May, trust between the two sides has eroded as each accuses the other of undermining the agreement reached there to pause sky-high tariffs.

Trump nonetheless sought to strike an optimistic tone before Monday’s negotiations, saying on Friday that talks with Beijing were “very far advanced.” He had described a phone call with Xi on Thursday as “very good” and said “there should no longer be any questions respecting the complexity of rare-earth products.”

At the center of the recent flare-up in tensions is what the Trump administration has said is China’s violation of the Geneva agreement. During the talks there, He removed a final sticking point by agreeing to U.S. demands that China resume rare-earth exports. Yet since then, Beijing has dug in its heels, slow-walking approvals of licenses to export the minerals critical in manufacturing modern cars, chips, F-35 jet fighters and other products.

China has blamed the U.S. for the breakdown, seeing a warning against the use of some artificial-intelligence chips from China’s Huawei Technologies as a renewal of U.S. aggression, and complained to Washington that it undermined the trade deal.

Some analysts point out that it would be hard for the administration to walk back measures specifically aimed at protecting national security—the traditional purpose of export controls. These analysts said export controls historically haven’t been used as leverage for trade negotiations.

Back from the Brink

With talks scheduled between Trump and Xi, the latter has the upper hand. However, Trump’s actions will ensure that all sides lose.

Asia Times comments Xi calls Trump’s bluff and wins, time and time again

China’s Xi Jinping and US President Donald Trump spoke over the phone Thursday (June 5), the first known formal contact of the Trump 2.0 era. Though signs of détente were few, the fact that the leaders of the world’s two biggest economies are speaking at all marks progress.

The Chinese side seems far less impressed by the Thursday call, which officials suggested was perfunctory and vague. As Cornell University economist Eswar Prasad puts it, the “asymmetry” in Beijing’s and Washington’s reporting of the call suggests that Xi held to a tough line and Trump “didn’t get much acquiescence” to his demands.

So far, Xi has taken a go-slow approach to trade deal negotiations. Efforts by US Treasury Scott Bessent and Trade Representative Jamieson Greer to convince markets that a pact was in the works, imminent even, haven’t been reciprocated from the Chinese side.

By the time Trump backed down, cutting the tax to 30% on May 12, it was too late. This likely explains why Team Xi came forward with zero concessions in the days that followed what Trump World called a “truce” between the two biggest economies. On May 30, Trump declared that Beijing had “totally violated its agreement with us.”

But then on June 4, Trump made it clear Xi’s inscrutability is keeping him up at night. In a thirsty 2:17 a.m. social media rant, Trump declared: “I like President XI of China, always have, and always will, but he is VERY TOUGH, AND EXTREMELY HARD TO MAKE A DEAL WITH!!!.”

Gita Gopinath, the International Monetary Fund’s (IMF) first deputy managing director, warns that the shock from Trump’s trade war is worse than Covid-19.

“This time the challenge is going to be greater for them compared to the pandemic,” Gopinath tells the Financial Times. “During Covid, central banks were moving in the same direction… easing monetary policy very quickly.”

“I’m operating under the assumption that some major elements of Trump’s tariff policies will remain intact in one form or another,” says Stephen Roach, economist at Yale University.

“Hopefully, they won’t be as severe as threatened earlier, but they will nonetheless impose meaningful taxes on most US imports, with an especially steep penalty on those coming from China.”

Roach adds that “I still suspect that tariffs surviving the current legal skirmishes are likely to be onerous enough to have negative impacts on global trade, with especially adverse implications for the US and China.”

The bottom line, Roach notes, is that a “protracted period of policy uncertainty essentially freezes business decision-making on capital spending and hiring, with negative repercussions for income generation and consumer demand; consumer purchasing power should be further constrained by tariff-related price shocks. Uncertainty remains the enemy of decision making.”

For one thing, headlines about Trump’s having caved on tariffs as Wall Street stocks plunged are grating on the president and his inner circle. So is the #TACO narrative — the idea that Trump Always Chickens Out on import taxes.

Since the 1980s, Trump observers have known that nothing angers him more than being perceived as the “loser” in any negotiation. This partly explains why he signed — and loudly touted — a trade agreement with the UK, an economy with which Washington has a trade surplus. It betrayed a desperation to highlight a trade deal of any kind, no matter how minor.

First, it was swooning stocks that had Trump delaying his “reciprocal” tariffs. Then, the chaotic surge in US Treasury yields forced Trump to step back from the brink once again.

From Beijing’s perspective, Trump backed off because he’d overreacted in the first place. As JPMorgan Chase CEO Jamie Dimon puts it, the tariffs were “too large, too big and too aggressive” for the US economy’s own good.

Trouble is, Trump has a 40-plus-year track record of arguing that tariffs are the answer to virtually every economic problem imaginable. Yet as economists know, sizable tariffs can also be stagflationary.

At the same time, US officials are learning that Trump’s chaotic Phase One process prompted China to pivot to other markets. Today, China’s top trading partner is the 10 Association of Southeast Asian Nations, followed by the European Union.

All of which means Trump’s hopes of pulling off a massive, world-changing trade deal are slipping away, even after his declaration after Thursday’s call that such a deal is on the horizon. And if he’s wondering who’s to blame, all Trump needs to do is look in the mirror.

Deals, Where Are They?

Japan is proving to be in no hurry to negotiate a bilateral pact, just six years after the last one with Trump 1.0. Prime Minister Shigeru Ishiba has made it clear Tokyo will negotiate at its own pace — not in haste.

In Seoul, South Korea’s new president, Lee Jae-myung, says he has no intention of rushing to the negotiating table. He’s far more liberal than his predecessor Yoon Suk Yeol.

Stephen Roach vs Gita Gopinath

Gopinath, the IMF’s first deputy managing director, warns that the shock from Trump’s trade war is worse than Covid-19.

Gopinath’s view is over the top. I suppose if China canceled all rare earths with the world for six months, we could have a covid-like reaction, but that’s like expecting nuclear war.

Roach’s more pragmatic view is similar to mine.

“I still suspect that tariffs surviving the current legal skirmishes are likely to be onerous enough to have negative impacts on global trade, with especially adverse implications for the US and China,” said Roach.

Who Can Break Deals?

If Trump can break deals and have export controls, why can’t China?

Immediately after Trump chickened out and walked back tariffs on China to 30 percent, he turned around and poked China with student visa bans and more export controls.

China put a quick end to that Trumpian tactic by withholding magnets. The result is best described as an emergency action in which Trump phoned Xi setting up the meeting described above.

Irony of the Year

I discussed the Irony of the Year on June 4 in Automakers Consider Moving Some Parts Production to China

China has a magnet stranglehold that causing some seemingly strange discussions.

Understanding Rare Earths

China produces 60 percent of the world’s rare earths but processes nearly 90 percent, which means that it is importing rare earths from other countries and processing them. This has given China a near monopoly.

Two-TACO Trump Day

TACO Trump is a term coined by a Financial Times columnist. It stands for “Trump Always Chickens Out.”

On June 5, I noted a Two-TACO Trump Day on His Call to Xi Over Rare Earth Elements

Trump is hyping up his call with China’s Xi. But chalk up 2 more TACOs.

Take the idea that Trump’s 5D chess plan will be another David vs Goliath story with Trump playing the role of David, and put it where it belongs, on the Sunday funny pages.

Humorously, Trump negotiates with himself and always concedes. So, expect more TACOs, but with everyone losing.

No one wins trade wars.

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