Trump Meets Xi — But China Has NEVER Been Stronger

Thanks, Scott. Great to be on this side.

Well, firstly, thanks so much, Scott. It's great to be here. I want to put this in context. This is the second state visit that Xi has taken to America. The first was in 2015 when President Obama was in the White House, and he's the only Chinese president in history to have two state visits under his leadership. This again is to reiterate how important and symbolic this visit is. My sense, and I just actually watched his speech in the White House, is that he came with three main items on the agenda. Number one, he does want an extension, or rather a delay, on the $14 billion arms sale that was originally intended for Taiwan. This has become, I think, a big issue in China. Not spoken about as much in the US context, but certainly in China, it's a prime issue. Number two is an extension, which he did get, on rare earths and tariffs. Scott Bessent just announced the other day we're going to get a two-month extension on those issues. And number three is the AI issue, which came up more in Xi's speech than Trump's. Xi was talking about the fact that both countries are leaders in AI and that they have both the capabilities and responsibilities to work together to put controls in place for humanity. I think that is quite significant for Xi to come out and say that during his speech. Again, I think this is going to be one of the top issues for the Chinese. For Trump, it's a bit more simple. And here I really refer to the geopolitical impulse that Trump has. He hasn't had a great year. As you know, Scott, on the foreign policy front, the Middle East is a mess. We've got Brent north of 100. Diesel prices are flaring, not just in the States, but globally for American allies. So he needs a win on China, and he needs to show that this bilateral relationship is good and stable and friendly under his leadership. That, I think, is his main modus operandi going into the summit.

Yeah, I mean, I ran the numbers actually from Xi's last state visit in 2015 with Obama. The nominal GDP has doubled, from around $11 trillion to north of $20 trillion today, and the defense budget spending has almost doubled. China is in a, as you mentioned, Scott, very different position economically, militarily, geopolitically, and technologically than it was in 2017 and even 2015. And that changes, I think, the balance of power in the relationship. It means that right now, compared to 2017, the relationship looks more like peer competitors as opposed to the US being clearly the dominant figure. That, I think, is what is motivating Xi to again address the relationship very much in terms of these two leading partners, these two leading powers that decide the fate of the universe, of the planet. That is very different rhetoric from 2017 or even 2015. And one last thing that I will end on, which is that compared to 2017, China has found a way to achieve a degree of supply chain resiliency and really reroute trade so that it is not as asymmetrically exposed to US sanctions, to US tariffs, to US technological export controls. That, I think, has been a big quantum shift in the relationship and means that China is less likely to make concessions than it did, say, in 2017.

I would look at it across a number of domains. Firstly, China doesn't like geopolitical instability, especially affecting energy. It is an energy-dependent country, unlike the Americans. It imports a great deal, you know, almost half of its net gas and oil from the Middle East, largely through the Strait of Hormuz. So it is quite exposed on that front, but it's shown that it has enough buffer through, you know, strategic reserves and stockpiling to withstand that. So there's that energy piece where it is somewhat vulnerable, but it has found workarounds to protect itself. In that regard, it doesn't like the conflict. On the geopolitical front, I think in general this is going to be great for China if we extend it to medium to long term, because it means that now not only do the Middle East potential partners in the region — here I'm talking about Saudi Arabia, I'm talking about the UAE, I'm talking about Qatar — they are going to be questioning whether or not they should put all their eggs in one basket with regards to the America relationship. And here again, I suspect that there's going to be more bilateral trade investment flows between China and Middle East Gulf partners. That Chinese technology companies will do well, that Chinese AI stack will be preferenced to some extent by these partners. And that's going to be a big geopolitical, call it technological trade win for China. And the third issue, I think it will also be a good point in China's favor, which is the allies around the Middle East here. I think about the European Union. I think also about other energy-dependent Asian allies to the Americans — South Korea, to some extent Japan, Australia — they're going to be relooking at their relationship with the Americans because they are, rightly or wrongly, blaming the oil supply shock on the Americans. And they will believe that more now than ever they need to find workarounds, either by improving the relationship with China, as you've seen Carney's done that, the Australians have done that, or by setting up, you know, multilateral framework works without the Americans. Here I point to EU plus Canada talks, for instance. So in general, I think if we zoom out beyond this year, call it the next two years or more, geopolitically, trade-wise, technology-wise, this is going to be great for China and it's probably a negative point to the Americans.

Yeah, I didn't even mention that. You're completely spot on correct, Scott. One of the big industry or sector winners of this conflict is Chinese green tech. You're seeing in a number of countries, the UK for instance, Australia, Chinese companies are coming in top three. I wouldn't be surprised that by next year, you know, China's dominating in a lot of these countries in the G7 and beyond in the West as the biggest automobile exporter, which who would have thought 10 years ago that that would happen, but here we are. And with oil prices remaining elevated potentially for longer, this really incentivizes your consumer to shift towards cheaper Chinese EVs and hybrids.

So here I sense within China and the elite circles there is a lot of consternation and conflict because, you know, again, this is based on, you know, regular travels to China, talking to people close to policy. My sense is that President Xi Jinping has invested a lot personally in this relationship with Putin in Russia. That some elites in China may not agree with the extent to which he has hitched himself to the Russia cart, but the Chinese also don't want to give up on what they consider to be a strategic partner in the region, mainly a partner that is distracting the West, Europe, call it, and America from focusing or fixating too much on China as the threat. There has been a level, I do believe, of cooperation in some categories and aspects of dual-use technologies. Here I point to trucks, to drone parts, even though the Chinese categorically deny it. But I do think that that relationship, you know, even you expand it to semiconductors, to other technological devices, has been designed to help the Russians withstand some parts of the conflict or find workarounds because, as you know, a lot of countries have put in export restrictions and sanctions on Russia. If I zoom out, I don't think the Chinese, even though they talk about wanting to be involved in, you know, a multilateral peace deal or framework, that they want to be too involved in this. They have their own crosses to bear, so to speak. They're fixated on East Asia, mainly the Taiwan question, making sure that they have supply chain resilience, technological wherewithal and dominance in the arena militarily across the Taiwan Strait. So I don't suspect that China will invest more than it currently has. I think we've reached the status quo. We won't see any more commitments from the Chinese. But I will again reiterate the fact that Xi and Putin have a very close relationship. Xi has met with Putin more than any other foreign leader in his time in office. So that shows you the extent to which the two are committed partners.

Yeah. Well, I agree that swapping Taiwan for AI controls is a very asymmetric deal. I doubt that that happens. I think it is in the US's interest to some extent to delay the $14 billion that they promised in arms sales to the Taiwanese because remember, Scott, we're in this world in which many conflicts coexist and American munitions as well as arms are being depleted in the Middle East conflict. So my understanding is that there is a delay partially because of what's happening in Iran. I do think that on the Taiwan issue that people in the West are very fixated on the analogy of what's happening in Iran and what's happening in Ukraine. But you know, you've got to understand China in the context of its own political and intellectual context. And the Chinese look to 1997 as a success story of peaceful handover of Hong Kong to the mainland. If you recall, this was the British government handing over effectively through political means Hong Kong as a special administrative region to the mainland. And I do still believe that in elite circles in China, that is what they hope to do, that there is some kind of a political negotiation and deal whereby Taiwan becomes Hong Kong 2.0. Things change a little bit when we think about American power relative to China, especially if you buy the idea that America is in decline and that American deterrence is in question, which is something that we are actively debating, as you know, Scott, in the West. Even then, I don't think that Trump is the same kind of risk-taking profile as, say, a Putin. He, in the short term, will be incentivized to help, or you know, through political interference or through rhetorical support, the KMT party. If you recall, the KMT tends to be the pro-mainland, pro-cross-strait relations party. They haven't been in power for quite a bit. There is an election early in 2028, and the Chinese in the short term, I think, are putting most of their eggs in the basket of trying to get them reelected. The odds are pretty slim. I think they're still in favor of the opposing incumbent party, the DPP in Taiwan. But in the short term, that means that the Chinese are focused on political tactics as opposed to military ones. Beyond that, I think it really is an open-ended question and will rest quite heavily on what the Chinese perceive to be American military capabilities in the region and deterrence credibility. And if Trump shows that he is willing to give over Taiwan for, say, something else that comes down the line, maybe and only maybe then will I think China act. The good thing about being president for life in Xi's case is that you have the luxury of time. He's about — he's 72 this year. I believe that he will want to obviously renew the next five years at the next party congress in October 2027. That gives him a bit more runway. The Taiwanese have understood for quite some time that they can't 100% rely on the Americans, and so they've been finding workarounds in terms of, you know, weapons from Europeans, for instance, from other partners, say South Korea and Japan, to try to bolster their defense capabilities. I think they've also been quite smart to make sure that they are still a porcupine in the sense that, you know, 90% of high-end chips are still made by one company, largely TSMC in Taiwan. This is high-end, under 3-nanometer chips. This means that if Taiwan falls, it's not just the US falling, it's the global economy effectively. You look at the way the S&P is constructed, the AI capex, it all is heavily reliant on TSMC being able to continue to produce chips. So the Taiwanese are banking that that alone will help them ensure that there is some degree of deterrence from the West.

My sense is yes, in the short term. They look to that and they look at the fact that the short war is a fallacy. I mean, if we think about Ukraine, we think about Iran. So the markets, as you know, Scott, people in business like to think this is going to be over and done because it's way too costly for both sides to continue. But there is a — you know, you go back to class, there is a center of gravity that leads towards conflicts going on for a longer period of time until either or both parties' political will dies. And my sense is, to your point, Scott, that an amphibious assault is going to be way harder — and you talk to anyone smart on this issue in the military or in military circles, it's way harder than a land invasion or incursion because here you've got to make sure that you've got enough troops to land on what is quite a rocky promontory, the cliff side facing from Taiwan facing the mainland, to make sure that they're entrenched enough to allow for the safe convoy of ships and PLA onto Taiwanese soil. You've also got multiple actors in the region. Remember, you've got South Korea, you've got Japan. This may force Japan to nuclearize in terms of its defense capabilities fairly quickly. The smart people on the street are saying that the Japanese have reduced their lead times to get basically nuclear weapons to a couple of weeks if not a month. So this again is something to take into consideration. It's not going to be an easy conflict. The Chinese haven't launched a major military conflict since the Vietnam War. When the Americans left in the late '70s, there was, remember, the Sino-Vietnamese border conflict. And they are getting rid of their top brass military officials through the latest purges. So all these signs point to the fact that I think in the short term the Chinese are banking more on the political move, political manipulations, interference, as opposed to military moves. Now, they will continue to do the military exercises to again show the Taiwanese their show of force and to show the Americans and the Japanese and Koreans, but I just don't think, given what is happening all around the world, that the Chinese think this is a good time and that they have the ability to make this a swift victory.

Yeah. They're not spending a lot of their treasure and blood on foreign conflicts. And that is, I think, one of the historical lessons that the Chinese have basically learned from the Americans and the British before that, is that any imperial overreach that costs you blood and treasure is probably not worth the squeeze. You go back to Chinese imperial history again, the Chinese don't tend to launch foreign conquests. They tend to have a tributary system in which countries come to them and offer them riches in exchange for Chinese trade. In the case it was silk and spices and porcelain. The only time China really had a history of military conflict was the Mongols coming in and capturing China, becoming Sinicized, effectively becoming the Yuan dynasty. So to your point, Scott, the Chinese understand their history. They look to their own history in the West and they just do not believe that conflict, unless it can be achieved intelligently, swiftly, is worth the squeeze. Hong Kong is a great example of this. They did not send in PLA troops in 1997 to take over Hong Kong. They negotiated with the Brits to hand it over diplomatically.

They can talk about cooperating while not cooperating. That is what I think will end up happening. That they will both say, 'Hey, you know, we're going to work towards humanity because we're the two main powers with pretty much, I would say, most of the AI capabilities at this point.' And this will be great for world peace and for our bilateral relationship. I do know for a fact that there are some members of the US administration — here I point to Scott Bessent, the Treasury Secretary, who I think would want the legacy of being a Kissinger on AI arms controls in the way that Kissinger and his successors were over the SALT nuclear talks between the Soviets and the Americans. But he is fighting an uphill battle because both Trump and certain key members around him still believe that AI regulations are a bad thing. We should allow innovation at all costs. And as a result, we're unlikely to see the kind of regulations needed to even help a bilateral governance structure. And then I go to the Chinese side where it's almost kind of the polar opposite. The Chinese care a lot about regulation, especially domestically. We've seen them as a first mover on a lot of deepfake AI technologies. Just recently they announced legislation that's put into law about regulating AI agents because they don't want them to be rogue or amorphous or anonymous agents. They need to have registration with the Chinese government. And there is concern of this sort of misalignment in AI. There's going to be draft regulation, I think, coming down the pipeline in the coming year or so to mitigate those risks internally because now we've opened the Pandora's box in terms of these rogue autonomous agents. We just saw this hack from OpenAI into Australian Medicare healthcare records. That's probably the first major OpenAI hack into a foreign government. So the Chinese are very concerned and want to regulate, and they want to say that they're working with the Americans, but neither side is willing to agree on a framework, even though I think the low-hanging fruit is for them to come together and talk about some level of arms controls or controls over what they call CBRN risks — here I point to chemical, biological, radiological, and nuclear risks that may be attendant to the use of AI or AI agents. That would be a low-hanging fruit, but I don't think we get there until we have some major biological disaster or, you know, call it an AI version of COVID 2.0. Only then will we see, I think, both sides forced to take a stance. But we're in this very difficult situation where it's all rhetoric and no substance.

You understand human history and human psychology, Scott. Most of the people who were very passionate about nuclear arms controls had lived through, experienced World War II, had seen what nuclear weapons do. And again, call me a cynic or an old person, I just don't think we get there until we see some major accident. It could be biological, it could be chemical or nuclear. And then it will force the two main superpowers in AI to come together and issue some kind of governance structure because the Chinese — none of them are incentivized to lead on global AI governance. And then one party here, I'm talking about the Americans, don't even care that much about AI regulation, even if Bernie Sanders is calling for it. The key person, Trump, doesn't really believe in it, and we'll have to wait until we see a major incident, which is sad.

Well, it hasn't really gotten that much coverage in mainland, to be honest. Most of the mainland coverage is about how, you know, Xi is a strong leader coming to America. This is the second state visit he's had under his leadership that he's coming, and the two countries will, you know, want to ensure AI peace and stability. That has been the main sort of coverage of the issue. Some discussion about Taiwan. I think it's kind of flown over the heads of most Chinese people. But I will say, and here I'm pointing to the midterms, that Chinese media and sort of the intellectual elite understand that after the midterms, Trump's kind of in gridlock, especially if the Dems take the House. There will be a lot of impeachment, you know, risks. Maybe nothing really gets done legislatively. And the Chinese are hoping that that takes some oxygen out of any kind of attempt to, you know, launch legislation against China. And there's some discussion, going back to AI, I think quite an early-day discussion about how do the Americans make sure that China isn't using offshore data centers, training basically its models on chips in Southeast Asia and the Middle East that they get access to via those data centers. There's also discussion about whether or not they can legislate restrictions on American companies using open-source models coming out of China. I think the Chinese hope that if the midterm outcome isn't favorable to Trump, that the domestic issues will be so dominant that there won't be a lot of legislative actions against the Chinese.