After a few weeks of tit-for-tat tensions during which the US expanded its ‘Entity List’ to include blacklisted companies’ subsidiaries with more than 50% ownership, and China tightened its export controls of rare earths, both countries came to an agreement on Thursday.
The ‘deal’ made at the meeting between Presidents Trump and Xi is mainly about postponing the implementation of these new measures, plus a resumption of China’s agricultural imports in return for a halving of ‘fentanyl’ tariffs to 10%. The escalation was meant to demonstrate each country’s potential leverage as these measures would be impossible to enforce in the near term and could also cannibalise their own exporters. Postponing them keeps the threats alive but allows a more normal relation on the surface for near-term economic benefits. Under the surface, however, the US-China tech competition continues.
Agreement reached between the US and China
President Trump and President Xi met in Korea on Thursday and reached an agreement to lower the tensions by postponing the recent escalating measures by a year. These are the US ‘Entity List’ expansion, China’s rare earth controls, and the increases in port fees. In addition, the US 20% fentanyl tariffs which are applied to all Chinese imports will be lowered to 10%, resulting in an effective tariff rate of around 35%. China will resume importing agriculture products such as soybeans from the US.
Positive developments prior to the meeting
Since the initial truce was reached on June 10 – and extended in August –, there has been some progress and some setbacks. On the positive front, the US export ban on key chip design software and technology was lifted in the summer. Nvidia and AMD have been allowed to export AI chips to China in exchange for paying the US government 15% of their sales. Moreover, the potential deal on TikTok was proposed in September, allowing the social media enterprise to operate in the US with majority American ownership by leasing – and then retraining – the algorithm developed by the Chinese mother company.
US expansion of its ‘Entity List’ was an escalation
The setbacks revolve around policy actions by both countries that have escalated the tension. The first was the expansion by the US of its ’Entity List’ – blacklist due to national security concerns – to include subsidiaries with more than 50% ownership. The rule, issued on September 29, requires licences for US exporters to ship goods to subsidiaries of companies on the list. The new rule would specifically hurt Chinese companies as many operate with a myriad of subsidiaries. One academic study shows that 264 Chinese state-owned business groups have 55,929 subsidiaries. For example, a Chinese company that has been blacklisted due to its link to the People’s Liberation Army may have 500 subsidiaries, many of which have no link with the military. Some subsidiaries may have ownership higher than 50%, but some may not. As the rule encompasses all goods, it would prevent many Chinese companies from importing anything from the US. At the same time, compliance with the rules would be very costly for US exporters and regulators.
China responded with controls on rare earths
China’s response on October 9 was to tighten its rules on rare earth export controls. Besides requiring exporters to apply for licenses to export most rare earths, their equipment and technology, it also introduced extraterritorial controls, similar to the mechanism used by the US government, to restrict semiconductor exports to China. Foreign firms would be required to obtain Chinese government approval to export goods that contain Chinese origin rare earths. As rare earths are used in a wide range of goods, the rule would limit the ability of the US to produce many goods, hurting its businesses. At the same time, the implementation from the Chinese side is rather daunting.
Escalation measures are nearly impossible to implement
Both escalation measures would be almost impossible to implement in the near term, hence they just represent potential leverage that each country would like to communicate to the other. In other words, these are mainly threats. Both measures would also hurt their domestic companies as they would be very difficult to enforce and to comply with. So, both have ‘shown their cards’ and have demonstrated what they could enact to hurt each other.
The tech war continues
Postponing the escalating measures offers a possibility for both countries to have a more normal relation on the surface for near-term economic benefits, but also to keep the threats alive ‘just in case’. There is no change under the surface: both will make sure that they can achieve tech advancement with less and less dependence on the other.
China to forge ahead with tech development
China continues to forge ahead with its priority on high-quality development and technological self-sufficiency. In the communique of the recent Fourth Plenum meeting, which considered the new five-year plan – starting in 2026 –, these two topics came first on the list of major objectives. The former emphasises modernizing the industrial complex, while the latter promotes breakthroughs in core technologies, facilitate full integration between tech and AI and industrial innovation. China’s intention to become self-sufficient in advanced chips is also clear.
US to source rare earths from outside of China
The recent flurry of rare earth deals from the US side also confirms that it is serious about trying to become less dependent on China’s rare earth production and processing. These include the US-Australia deal, where the two countries will co-invest in critical mineral projects in Australia, a similar deal with Japan – although with no clear investment commitment –, the Memorandum of Understanding (MOU) with Malaysia to cooperate on critical minerals and a similar MOU with Thailand.
