US-China framework of agreed-upon measures; Zhangjiajie trash; AUKUS blowing up?
The American and Chinese negotiators agreed on framework of measures to get back to the framework they thought they agreed on in Geneva a couple of weeks ago. It sounds like the PRC side has agreed to resume exports of rare earth magnets to civilian end users for six months, but not military ones, which is not going to happen. The US will roll back the various measures it imposed soon after Geneva, including export controls around EDA software and industrial goods as well as student visa restrictions. I hear the US wanted a one year reprieve for the magnets, but the Chinese are smart and so why would they give up this massive point of leverage for so long? Other points of tension will certainly arise over the next six months.
The US did not agree to roll back any export controls put in place before the Geneva agreement.
President Trump posted about the outcomes earlier today:
The tariff rate of 55% may not be totally accurate, but it is in the ballpark.
Now we have to assume Xi has approved the deal, and hope that we do not get a repeat of the May 2019 blowup of what the US thought was a done deal.
In an interview with CNBC on Wednesday Commerce Secretary Lutnick said
LUTNICK: So, what happened is they set up the Geneva truce, if you will, right? Tariffs came down. But the Chinese had these rare earth magnets and they were slow rolling it. And so, we started putting on the United States when they weren’t delivering the rare earth magnets, we started putting on our countermeasures, right? We cut planes, ethanol, Marco Rubio put out that students may not be able to come to America. Scott Bessent put out, look, we’re going to go send subpoenas to all the banks. And we tried, we were at mutual assured annoyance, if you will. And then Donald Trump got on the phone with President Xi and he changed everything. He basically said, we’re friends. Let’s be positive. When America and China are working well together, it all works great for the world. Let’s go get this done. And that was the quote over and over again. President Xi by their side, President Trump on our side. And it was very positive. And we just worked very positively into the night to get this deal done. They are going to approve all applications for magnets from United States companies right away. Think of that language right away, you know, very much like the same day. And we’re taking them as they do that. We’ll take off our measures. And we’re in a great place with China. Really, really feels good. Now, President Trump’s got to approve the final wording. President Xi’s got to approve the final stuff. It’s not really wording. It’s really the deal. But both sides are really positive. I mean, I feel great about it.
In that interview with CNBC Commerce Secretary Lutnick also said they tried to get a reprieve on rare earth magnets export controls for other countries as well:
Remember, they only approved U.S. companies doing it. They wouldn’t let us. We tried to do it for the world. We tried to negotiate for the world. We tried to get it done. And they were saying, no, that’s our responsibility. We are willing to do this for America and only for Donald Trump and only for America. So, that was the agreement. This is an American agreement. If you’re an American company and you need magnets, they are going to approve it right away, which is what we needed. We tried for everybody else. But in the end, we did what we needed. And we will take off our countermeasures as they approve these magnets. We will approve their, we will remove our countermeasures and we’ll be good.
I guess they had to ask, but why would the US think the PRC would give up this leverage, while the US is trying to convince other countries to join it in trade and export control measures against China? The PRC's rare earths export control regime is brilliant. It can be wielded against any country that cooperates with the U.S. against China—on tariffs, export controls, or anything else - or enacts policies the PRC does not like. The U.S. and its allies sleepwalked into this huge vulnerability while the PRC repeatedly signaled over many years that they were building up massive leverage.
The official PRC statements on the talks were less effusive than Lutnick’s:
The two sides held candid and in-depth dialogue, exchanged views thoroughly on economic and trade issues of mutual concern, reached a principled consensus on implementing the key understandings from the two heads of state’s June 5 phone call and on consolidating outcomes from the Geneva economic and trade talks, and made new progress in addressing each other’s trade and economic concerns.
He Lifeng stated that this meeting was an important consultation guided by the strategic consensus reached by the two heads of state on June 5. China’s position on China-U.S. economic and trade issues is clear and consistent. The nature of the China-U.S. economic and trade relationship is mutually beneficial and win-win; cooperation benefits both sides, while confrontation hurts both. There are no winners in a trade war—China does not want to fight one, but it is not afraid to do so. The two sides should resolve economic and trade differences through equal dialogue and mutually beneficial cooperation. China is sincere in pursuing consultations, but it also adheres to principles. Going forward, the two sides must follow the important consensus and requirements established by the heads of state and further leverage the role of the consultation mechanism to continuously build consensus, reduce misunderstandings, and enhance cooperation. China reiterates that both sides should move toward each other, keep their word, follow through on their commitments with credibility and concrete action, jointly uphold the hard-won outcomes of dialogue, maintain communication, and promote the stable and long-term development of China-U.S. economic and trade relations, thereby injecting greater certainty and stability into the global economy.
Now that the US and other countries have had a painful lesson in just how much leverage the PRC has with rare earths and the very well designed export control regime, will we soon see a huge and fully funded effort to break that control? Or are US and allied policymakers still fundamentally unserious about this chokepoint?
And was anything accomplished with all the drama since Geneva?
Summary of today’s top items:
2. Most carmakers agree to pay suppliers faster - At least 17 firms have now pledged to pay suppliers within 60 days, though there is reasonable skepticism that some of them have enough cash flow to fulfill the pledge. Caixin had a less than optimistic take on the news:
Because prices are determined by market participants, unless the competitive environment fundamentally changes, these pledges might prove more symbolic than practical, a procurement executive at a carmaker said.
The executive warned that given some automakers’ own struggles with declining profits, meeting the 60-day target could lead to other cost-cutting measures, such as demanding lower prices from suppliers.
3. Beijing Summit of the Forum on China-Africa Cooperation - In a letter to the just completed Ministerial Meeting of Coordinators on the Implementation of the Follow-up Actions of the Forum on China-Africa Cooperation (FOCAC) that was held in Changsha, Xi said that “China is ready to negotiate and sign the agreement of China-Africa Economic Partnership for Shared Development to implement the zero-tariff treatment for 100 percent tariff lines for 53 African countries having diplomatic relations with China”.
The declaration from the meeting indirectly criticized the US:
II. We agree that the frequent occurrence of unilateralism, protectionism and economic bullying has created severe difficulties for the economic and social development and the improvement of livelihood in African countries and other developing countries. This is a pressing challenge that members of the Global South including China and African countries must address.
III. Given that certain countries’ attempt to disrupt the existing international economic and trade order by tariffs undermines the common good of the international community, we call on all countries, the United States in particular, to return to the right track of resolving trade disputes through consultation based on equality, respect and mutual benefit. The international community should give prioritized attention to the economic difficulties and development challenges faced by African countries. Development assistance to African countries should be effectively increased, not unilaterally slashed, to provide continued support to help African countries improve people’s livelihood, reduce poverty and boost economic and social development.
4. EU-China - What will the EU have to do to get the flow of rare earth magnets resumed?
5. Trash dumping at Zhangjiajie - The case of dumping of trash in karst caves at Zhangjiajie is so bad politically that the Hunan Party Secretary had to go personally inspect the cleanup, and on Wednesday the Ministry of Ecology and Environment (MEE), in coordination with relevant departments, held a video conference on the rectification of illegal dumping and disposal of solid waste and the management of municipal solid waste landfills.
6. AUKUS submarines on chopping block? - The Financial Times reports that the US Department of Defense is reviewing the AUKUS to determine if the “submarine and advanced technology development agreement” piece should be scrapped. PRC officials would be ecstatic if the Bridge Colby-led review makes that determination.