I think it's really fascinating how we've seen on the trade side, as we've just been discussing, in areas like soybeans and rare earths, really China and America can't seem to catch a break. They've been slugging it out in all types of different arenas, but in basketball, things are going a lot better. This is a rather interesting situation.
Welcome to China Decode. I'm Alice Han and I'm James Kynge. So in today's episode of China Decode, we're discussing Trump's war of words with Xi heating up after Beijing clamps down on rare earth exports, why the NBA returned to China for the first time in six years, and how Chinese surgeons pull off a world first: a pig-to-human liver transplant. It's a lot of exciting topics, James, but I know that you've probably been very busy like I have in the last few days, mainly because of the whole rare earths shenanigan. It's been really frantic.
Actually, this is a massive story for us, Alice. We're both in the China commentary business. And I must say, if I could just start off with a few top lines, it seems to me that if you're looking for one choke point, one issue that might do more than anything else to decide the superpower rivalry between the US and China, it would probably have to be, at this stage anyway, rare earths. It really is that important, it seems to me. And the reason is that China has a stranglehold. It processes about 90% of the rare earths that are used around the world. And these days it restricts the export of about 12 of the 17 rare earths that are known to exist. Now these rare earths, they all come with long names. I'm not going to belabor it, but they're all crucial to all kinds of things, you know, from smartphones to defense systems to all sorts of electronics that we use in our daily lives. But anyway, Alice, as we've mentioned, I know you've been spending a lot of time on this. Could you tell us, you know, why is China putting restrictions on the export of rare earths, not only to the US, but to everybody around the world? And why are they doing it now?
Well, thanks so much, James. First, let me backtrack a bit and say I'm sure it's the same for you. I've had more back and forth with my clients and interested individuals in the last few days than I would say since April. So that gives you a sense of how dramatic and drastic both the Chinese policy was and how it was interpreted. So again, to give the listeners a bit of context, this is a big escalation on the US-China trade and tech front. President Donald Trump is now threatening economic retaliation against Beijing after China moved to expand export controls on five additional rare earth minerals. The US president blasted Xi Jinping on social media, calling China's move hostile and saying he no longer sees any reason to meet with President Xi during his upcoming trip to Asia. That was the mood music as of Friday. But of course, in Trump world, things move and progress very, very rapidly. Since Friday, we've seen a bit of, I would say, a walk back, a withdrawal on both sides, a de-escalation attempt. And certainly Donald Trump's tweet this Monday, I think, gave markets less cause for panic, because he basically tweeted this morning, 'Don't worry about China. It will all be fine. Highly respected President Xi just had a bad moment. He doesn't want a depression for his country and neither do I.' And I think since then, people watching this believe that we're in a de-escalation moment. And certainly, if you look at the S&P, which dropped 2.7% Friday, it's probably walked back some of that decline as of Monday. But certainly I think people were taken aback by both China's policy, which I'll get to in just a bit, and obviously the rapid 0 to 100% escalation of tariffs that Trump was threatening on the back of these export restrictions.
Now firstly, I want to give everyone a sense of what these export restrictions are, because I think there's still a lot of confusion about what these export restrictions entail, and secondly, why rare earths are still so critical, so to speak, for the global economy. So on the first level, I would say these export controls have been part of a way in which the Chinese government is formalizing an export control regime that is very much mimicked on what the US has done over the last few years, ever since the Trump administration. So as of 2020, we saw the announcement of these export control law frameworks, and they were designed to basically give China more strategic control on the exports of what they consider high advanced core technologies. The move on Friday was, I think, significant because it meant that five of the remaining critical minerals that were not yet subject to export controls were added to the list, as you correctly identified, James. Basically all rare earths are subject to export controls as of December the 1st. And China basically has this licensing framework, meaning that companies that are seen to be exporting critical minerals, or even parts of critical minerals within a bigger technology like semiconductors, will have to get approval from MOFCOM. And I think what really shocked a lot of people was the fact that even, and I was looking into the details of this, even a good or a technological product that has 0.1% content of Chinese rare earths is subject to these export restrictions. So effectively it increases the scope and depth of China's control. And certainly, again, to go on to the second element of this, rare earths are so significant not only because China dominates about 90% of the higher-end heavy rare earths and 70% of the complete total rare earth mining, but also because they are so critical in different components and different technologies around the world, whether it's defense-grade equipment, semiconductors, data centers, heavy magnets used in EVs and batteries. These are basically, I would say, the DNA of a lot of the technologies that we use today. And it's going to take a couple of years for the US to follow Japan's path. I would say, if you remember the Senkaku Islands incident back in 2010, where Japan had to learn very quickly after a rare earth embargo was put upon it by China to create its own domestic supply chain, the US and other countries are going to have to do so as well. But certainly I think this has been a bit of a wake-up call for Washington. They were definitely caught by surprise. But I also think, and I'm curious what you think here, James, that Beijing was caught by surprise as well, because it didn't expect the Trump administration to go so aggressive in response to this. My own, and you know, forgive me if it's a little bit of a contrarian view, my own view is that they wanted to announce this to give them future optionality if trade talks weren't to go well, so that they could deploy effectively the rare earths card. And at the same time they are trying to do, I would say, a formalizing of these export control frameworks ahead of the fourth plan and 15th five-year plan, where I think a big focus will be on trying to indigenize and securitize China's supply chains. But I'm curious what you think about this. I know that there's a lot of different views out there as to why China timed it right now and what China's intent was.
Yeah. I mean, I think that China has short-term and long-term aims in this. And as you've said, I think the short-term aims are mostly about giving themselves leverage ahead of negotiations with Donald Trump over some kind of trade settlement between China and the US. As we mentioned last episode, Alice, you know, we saw the soybeans issue last time. In other words, China not buying a single soybean from the United States yet this autumn harvest in the US. That's one source of leverage. Now we've got this rare earth one, which is far and away greater than the soybean leverage, because as you've already said, these rare earths go into so many products that are essential for the US military-industrial complex. These are essential for the weapons that the US makes and uses to defend itself. And if there's anything I think that gets minds and pulse pulses really racing in Washington, it is precisely that. So the idea that China has a stranglehold over the ability of the US to make weapons. So that's another piece of leverage that Xi Jinping is giving himself. Then there's been a couple of other things, such as a retaliation by China on a US measure to increase port fees. So now China is putting port fees, increased port fees, on US ships going to China. So there's a whole load of different leverage which is being built up by both sides ahead of what we think is going to be talks to resolve these trade frictions and the tariff war, etc., etc. But at this stage we really don't know how this is going to be resolved. We're all assuming there are going to be talks, but if both sides keep on piling on the leverage, to me, it's more than possible that we'll just get into a slugfest. We'll just have one side slugging the other, and at a certain point maybe one or the other side may lose an appetite to reach a deal. So I think it's, I really think that this is a very major issue. Of course, it could all be resolved. You know, China and the US have been known to do this before: bring it to the brink and then bring it back to reach a resolution. But you know, at the moment this looks serious, I would say. Do you think it's going to go to a deal, or do you think that this is just going to be a big bust-up?
I don't think either scenario happens, and I think ultimately we'll get a deal that is no deal. In effect, both sides will agree to keep talking and to try to freeze any escalation in trade and tech-related sanctions. On the Chinese side, they think it's to their advantage if the status quo ante continues, because they've been able to largely, the additional 30% tariffs that have been put in place earlier this year, they have been able to find workarounds for the semiconductor sanctions. And ultimately they believe that they're in a position of strength again, which is why I think they hit hard to demand more, and I think they will demand more in Taiwan, where they might ask Trump to oppose Taiwanese independence, and they may demand more in terms of walking back some of these higher-end semiconductor restrictions. On Trump's side, certainly the people around him, like Bessent, will want to see tariffs not escalate for business and financial-related reasons. But it's worth bearing in mind that he's got a lot of hawks around him who've been remarkably silent thus far. I'm thinking of Marco Rubio, chief among them, who may use this as ammunition going to 2026 for a more hawkish posture. I want to end by saying that the way that I've always thought about this relationship is that this trade war is a divorce that neither the US nor China can afford. And so ultimately they've realized that decoupling is a settlement that they cannot afford. So they have to continue to be seen to talk, and unfortunately, talking is its own form of, I would say, resolution, meaning that both sides decide not to escalate. But I think as a result, we'll probably still have ongoing negotiations that deliver a degree of stability with some obviously volatility on the sides, like today, Friday's announcement. One thing that I do want to end on is something that I found very interesting, is that China is using a lot of the regulatory frameworks that the US has adopted. So the new export control actually is the first time China has used a foreign direct product rule, FDPR. This is a mechanism that was introduced in the US in 1959 and then recently used to restrict exports of semiconductors to China. So in a way, China is trying to mimic again what the US is doing in this kind of long dance of a divorce. But ultimately, I think both sides will keep talking. I think Xi and Trump will probably meet in Korea. There will be a lot of grandstanding, but there won't be a real formal deal, is my take.
My sense of this also, Alice, is that there's a bigger, longer-term shift here. And that is that, you know, China has shown itself now to be willing to weaponize its supply chain. I mean, its dominance in the rare earth supply chain is what allows it to use this leverage against the United States and other countries. But I think we should be clear that China has dominance like this in many different industries and many different supply chains, and we don't know in the future whether they might be willing to use that leverage as well. So China makes 80% of the world's solar panels. It makes about 70% of the world's wind power equipment, about half of all of the world's cellular modules. These are little devices that turn basically a piece of equipment into a networked piece of equipment. And it even controls about 35% of so-called legacy semiconductors. Those are the old form of semiconductors, more than 28 nanometers, that are used in most products. According to UNIDO, the United Nations Industrial Development Organization, China by 2030 will account for about 45% of all of the manufactured products in the world. So when that day comes, they'll have even greater leverage. And so this is why I think this is such a crucial issue. It shows the potential shape of things to come. It shows how China could use its massive trading power to really get geopolitical ends or to aim at geopolitical concessions. And it's taking on America this time, the world's biggest superpower. So we really need to see how this works out. You know, if China wins this, we're in a totally different world from the one that we were brought up in. I mean, to me, I've been following China's trade, you know, rise since China joined the WTO in 2001. I never thought that I would get to the day when China was potentially the boss, you know, beating America as it were, or dictating terms to the US. But we might just be there on this issue.
