US-China tariffs and export controls; Google in China trouble again

PRC officials had their New Year’s holiday disrupted by President Trump’s announcement of new tariffs on all PRC imports into the US.

As soon as President Trump’s additional 10% tariff on all PRC imports, and the ending of the $800 de minimis exception, took effect at 12:01 AM ET time February 4th, the PRC announced a portfolio of responses designed to highlight the multiple ways they can hit back against the US, while also showing “restraint” to allow for negotiations to intensify to forestall an intensification of the ongoing US-China trade war. The PRC government announced:

Additional tariffs of 15% imported coal and liquefied natural gas originating from the United States;

Additional tariffs of 15% Crude oil, agricultural machinery, automobiles with large displacement, and pickup trucks;

Export Controls on Items Related to Tungsten, Tellurium, Bismuth, Molybdenum, and Indium;

The addition of PVH and Illumina to the unreliable entity list;

The publicizing of an already underway investigation into Google for suspected violation of antitrust laws.

There had been talk Tuesday that President Trump would speak with General Secretary Xi sometime today, but now there are reports the call is not happening Tuesday. The Executive Order announcing the US tariffs - Imposing Duties to Address the Synthetic Opioid Supply Chain in the People's Republic of China – contained the following clause:

Should the PRC retaliate against the United States in response to this action through import duties on United States exports to the PRC or similar measures, the President may increase or expand in scope the duties imposed under this Executive Order to ensure the efficacy of this action

The same clause was in the EOs announcing tariffs on Mexico and Canada, but those two countries quickly offered concessions in order to win a 30 day reprieve for further talks.

Xi did not make concessions and instead moved straight to retaliation. Even though the PRC responses, clearly designed to highlight the range of ways the PRC can return economic fire, are relatively restrained, the question now is whether Trump will ignore the retaliation he warned against and move to talks with Xi to try to both at least delay a worsening of the trade tensions and agree on a visit to the PRC to talks with Xi, or if he sees the PRC response as a challenge that he needs to respond to by increasing or expanding in scope the duties just announced.

The consensus seems to be that Trump will pause and try to work with Xi on a bigger deal. But Xi just called his bluff and so he may be sensitive to any appearance of weakness.

Summary of today’s top items:

1. PRC responses to the Trump’s declaration of 10% tariffs

2. Investigation into Google - The State Administration for Market Regulation (SAMR) gave no details about Google’s alleged issues in its one sentence announcement of the investigation. Even though Goggle long ago pulled its web search business out of the PRC, its Android OS has significant market share and the company generates billions of dollars in revenue each year selling ads to PRC firms marketing outside China. The Financial Times reported today that this investigation started in 2019, was paused, but was then reopened in December. The FT also reports that the regulators may now also open a formal probe into Intel. Given Huawei’s success in building a mobile operating system, who needs Android when Huawei’s Harmony OS is a good enough indigenous replacement?

3. China on Rubio’s agenda in Panama and El Salvador - US Secretary of State Marco Rubio is visiting Panama, El Salvador, Costa Rica, Guatemala, and the Dominican Republic. The readouts from his Presidential meetings at his first two stops - Panama and El Salvador - have both mentioned his concerns about the influence of the PRC. The US threats to take back the Panama Canal may be been parried for now by Panama President Mulino’s promise to not renew the country’s participation in the BRI, and Bloomberg reports that his government is “is weighing the possibility of canceling the contracts held by Hutchison Ports PPC” for operation of ports near the canal. The PRC has been on holiday so the reaction has been muted so far, though expect that to change. The PRC Ambassador to Panama did write an article for a leading Panama newspaper titled “America, Please Learn to Respect” in which he criticized the US pressure.

4. US show of force with the Philippines - The US and Philippines held joint air patrols in the South China Sea, including flying B1-B bombers over Scarborough Shoal/Huangyan Dao, according to a Philippine Air Force spokesperson. The PLA Air Force also conducted a patrol in the airspace of Scarborough Shoal/Huangyan Dao. This joint US-Philippines air patrol just two weeks into the Trump Administration is an interesting signal both to the US treaty ally and to the PRC.

5. DeepSeek and US export controls - The success of DeepSeek, and the triumphalist narrative campaign around its models being a sign of failure of the US export controls on semiconductor exports to China, have sharpened the debate in DC about the efficacy of those controls and their future. It has led to a strange bipartisan coupling, with Senators Hawley (Rep) and Warren (Dem) sending a letter to Howard Lutnick, nominee to head the Commerce Department, decrying loopholes and a lack of enforcement of the controls. The Washington Post obtained a copy of the letter:

“Multiple administrations have failed — at the behest of corporate interests — to update and enforce our export controls in a timely manner. We cannot let that continue,” they wrote in a letter provided exclusively to The Washington Post, calling DeepSeek “an export control failure.”

The Trump Administration has nominated Jeffrey Kessler to be Under Secretary of Commerce for Industry and Security, a critical position that oversees the Bureau of Industry and Security. Kessler is currently a partner at the law firm WilmerHale. He was Assistant Secretary for Enforcement and Compliance at the US Department of Commerce for two years during the first Trump Administration. I do not believe he is preferred choice of the semiconductor industry.

6. Wu Qing in Qiushi on developing capital markets - CSRC head Wu has an essay in the February 1st issue of Qiushi titled “Striving to Create a New Situation for High-Quality Development of the Capital Market 奋力开创资本市场高质量发展新局面”. He reiterates many of the key themes of the recent attempts to reform and strengthen the capital markets, but it is still an interesting read, including:

Developing new quality productivity has become a key focus for promoting high-quality development. Innovation requires a more flexible and inclusive financing environment, and the unique risk-return mechanism of the capital market can effectively promote the formation of innovative capital, stimulate entrepreneurial spirit and innovation vitality, and is very important for assisting industrial transformation and upgrading, promoting high-level circulation of technology, industry, and finance…

Economic development, technological revolution, and the prosperity of the capital market are interdependent. In today's world, finance is a must-win area for major power competition, and the capital market is even more "pulling one hair and affecting the whole body" in modern financial operations. From the evolution of the financial structure of various countries, especially major developed countries, the importance of developing direct financing has been continuously increasing, and the capital market has increasingly become an important manifestation of a country's core competitiveness…

Strengthen proactive communication with the market, improve the news spokesperson system and other mechanisms, and timely respond to market concerns. Improve the responsibility system for public opinion guidance, and consolidate the reputation management responsibilities of listed companies and industry institutions

Thanks for reading.