Trade officials from the US and China will meet in Malaysia on Friday to try to see if they can reach a compromise before a planned summit by their leaders just a week later.
Chinese Vice Premier He Lifeng is set to meet US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer in Kuala Lumpur from October 24 to Monday October 27. But it’s hard to say if the two sides will be able to come to an agreement they are ready to accept, given the tensions that flared in recent days.
US President Donald Trump is one of many Asian leaders flying to Kuala Lumpur for ASEAN’s annual summit and related regional get-togethers, before heading to Japan, to meet new Prime Minister Sanae Takaichi, and then South Korea for the Asia-Pacific Economic Cooperation gathering, and a possible meeting with North Korea’s Kim Jong-un.
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Even if the talks between Trump and President Xi Jinping can be put back on track, experts say each side’s belief that it has the upper hand, coupled with China’s tougher posture, makes a narrow deal on a few issues the most likely outcome.
“China believes negotiations alone are insufficient and that effective countermeasures against the United States are necessary to prevent the US from exerting pressure,” Wu Xinbo, an expert on ties between the two biggest economies, said.
At risk are a fragile truce negotiated over months and the world’s most important trade relationship, worth $660 billion a year.
“China’s recent measures actually reflect a shift in its approach to economic and trade negotiations with the United States during Trump’s second term,” added Wu, director of the American Studies Center at Shanghai’s Fudan University.
A trade war simmering for months exploded into full view in early October, after Beijing dramatically expanded curbs on exports of rare earths, in response to a US move to expand its export blacklist that blocks firms from purchases of its technology.
Rare earth controls ramped up
China’s move to tighten control over critical minerals, even beyond its borders, was a vast expansion of its toolkit for tackling trade disputes, underscoring Beijing’s intent to wield its dominance over vital supply chains, experts say.
“This is a huge expansion of extraterritorial jurisdiction,” Cory Combs, an expert at consultancy Trivium China, said. “There is surprisingly explicit language in the controls about this, specifically targeting a number of chips.”
China, which turns out more than 90% of the world’s processed rare earths, modelled its curbs on US rules aimed at limiting other countries’ exports of advanced computer chips to the Asian nation.
The Trump administration was surprised by China’s salvo, two sources familiar with its internal deliberations said. Another source said officials were canvassing US companies to see how China’s measures would affect them.
Experts say that while Beijing subsequently sought to portray its controls as targeted, the framework had been prepared for a long time and would almost certainly remain.
Officials in Washington have accused China of waging “economic war” and Trump has warned the leaders summit may not happen. Thus, each side blames the other for a sudden escalation.
It is a far cry from Trump’s comments hailing “progress” on issues ranging from trade and TikTok to fentanyl smuggling and the Ukraine war, made after the latest round of talks in Madrid and a September telephone call with Xi.
‘Severe risk of escalation’
Trump has said he continues to plan on meeting Xi in South Korea at the end of October on the sidelines of the APEC forum and expects to reach a deal, but reiterated his threat of 100% tariffs if it was not successful.
Seeking a last-minute off-ramp, US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng are due to meet in Kuala Lumpur tomorrow.
The meetings follow tough negotiations in European capitals from Geneva to Stockholm and Madrid over trade, fentanyl, market access, and other aspects of ties, after which both sides traded accusations that the other did not stick to its promises.
Trump’s cabinet secretaries view China’s move on rare earths as “full-blown economic war,” a person familiar with the administration’s thinking said.
“The prospect for escalation is severe,” the person added. “There isn’t an easy fix, like another 90-day pause.”
The White House and US Treasury Department and China’s foreign and commerce ministries did not immediately respond to Reuters’ requests for comment.
‘Each side believes it has the upper hand’
“In our discussions with Chinese officials, they express confidence in their economy and believe the US economy and political system are in turmoil. As a result, they feel they are in a strong bargaining position,” Michael Hart, president of the American Chamber of Commerce in China, said.
Negotiations are challenging, he added, because US officials in turn feel confident about their own economy and believe the Chinese economy is weak.
Washington’s lack of a unified China policy complicates matters, said people familiar with the administration’s thinking, citing the mix of punitive measures but also easing on some chip sales and the deal on social media app TikTok.
“People I have met in [Washington] DC made it clear the Trump administration’s policies on China are fairly hawkish,” said Hart. “However, they also acknowledged the president himself can sometimes be more flexible and pragmatic.”
Both sides developing new measures
While both sides prepare for talks, they are also diversifying their economies and developing new measures.
Trump signed a critical minerals pact with Australia on Monday that aims to offset Beijing’s role, while Reuters reported on Wednesday that the United States is considering targeting software-powered exports.
Officials say extensive sectoral tariffs are also being drawn up for semiconductors, pharmaceuticals and other key industries.
China, for its part, could resort to aggressive enforcement of its new rare earths controls, launch fresh antitrust investigations into US companies, or beef up tariffs, as it did in April.
Amid the mistrust, an optimistic scenario would be a follow-up to the Phase One deal of 2020, said one person familiar with the administration’s thinking, although deals to buy soybeans or other farm products could be within easier reach.
“The best-case scenario is confidence-building measures and more directives to negotiate a deal that could be launched in the first half of next year,” said Peter Harrell, an international economics official in the Biden administration.
Meanwhile, in related news, India has said that PM Narendra Modi won’t be attending the ASEAN summit, which is perhaps not surprising given the tension over tariffs and ties with Washington, but East Timor will be joining the summit for the first time ever as Southeast Asia’s 11th member.
Reuters with additional input and editing by Jim Pollard
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