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00:00Washington is dealing with a much more more assertive Beijing. China is prepared
00:06this time around. It has put tools in place to respond to U.S. measures. It has
00:12reduced its dependence on U.S. imports and has reduced dependence on its
00:18exports to the United States by forging relations with other countries,
00:24particularly increasing its trade flows with Southeast Asia. And it's increased
00:29its self-sufficiency as well as it's identified its choke points where it
00:34could hurt the United States. That was Wendy Cutler there, the Vice
00:41President of the Asia Society Policy Institute in the latest flare-up,
00:46unexpected flare-up, looking at where markets are right now in terms of the
00:50U.S.-China trade conversation. For more analysis on where we go next as far as the
00:55relationship goes here, let's bring in Eurasia Group's China practice head and
01:00former U.S. diplomat David Mealy here with us on set. Quite timely and perfect timing,
01:04really, to have you join us. Thank you so much for taking the time. So why are we
01:09here? Like, why is this happening all of a sudden? Yeah, well, thanks, David. Thanks,
01:14Yvonne, for having me today. I'm glad I happened to be in Hong Kong. Why are we here? Well, I actually think
01:19the two sides were on a good path towards having the meeting at APEC and then for Trump to travel
01:26to China next year. And I'm still optimistic about that. But along the way, there was this closing of
01:32a loophole on the U.S. side, this new 50 percent rule that came out. And the Chinese saw it as more
01:39than perhaps it was intended to be. And then now we have the new Chinese release of these rare earth
01:46elements and related technology export control rules. And then President Trump has responded
01:52with his threat on tariffs. So it's been a back and forth that I think really reflects how concerned
01:58each side is about communicating where its pain points are and the necessity of the other side
02:05to help drive this car between those pain points. You mentioned some of these loopholes.
02:11Can you defy for what is actually new and what's not new in these curbs in particular?
02:16Well, so the new U.S. rule essentially expands how export controls apply to subsidiaries that are
02:24tied to Chinese companies. And by some estimates, the number of affected companies goes from something
02:31like 1,200 to over 10,000. So it is a significant new rule. It is impactful. Whether the U.S. intended for
02:42it to come across and be understood that way, I am not sure. I think they, you know, they think about
02:48these things for a long time. And maybe it is correct that from their point of view, they were
02:53just tightening things up.
02:55Does it change at all the likely scenarios at the APEC meeting, assuming that that meeting still goes ahead?
03:01I'm going to go with it. It does not change APEC. I think the two sides are already signaling that
03:07they want that meeting to go on. President Trump's post on Truth Social overnight suggested this as
03:15an episode that I think he called it a bad day or something close to that, that they will get past.
03:22But perhaps it will delay the process a bit for getting to the transactional trade deal that we're
03:28all anticipating. I mean, at Eurasia, we're still holding to our call that the two sides will reach
03:35this deal. I think it's likely to be on the occasion of whenever Trump does get to China. But I do wonder
03:42if APEC, the result of that, will be the two sides agreeing they need some more time just to hammer
03:48things out, hammer out, what the actual meaning is of each of these moves that the U.S. and China
03:54have made and come up with reassurance that the outcomes of these export control moves, it will
04:01not affect the reliability of industry getting what it needs to function.
04:07I mean, I'm just wondering what could come next. I'm just wondering in terms of, you know, now that we
04:13see the threat of 100 percent tariffs in the U.S., in terms of China's response, what do I
04:18look like? Is this this TikTok deal in jeopardy? Are soybeans continue to be a sore spot?
04:24So I think that's what would come next, would be a reminder of all the ways that each side can
04:30inflict pain. Let me step back, though. I was just in China for two weeks, talked to a lot of my
04:35old government contacts, people in think tanks, businesses, and so on. And I came away with the
04:41impression that the Chinese really feel they can work with Donald Trump, that they see him as pragmatic,
04:47as transactional, as somebody who shows respect to President Xi. And what they really want to get
04:54to is getting to more stability and predictability in the relationship that they envision could last
05:01through Donald Trump's term. Do they feel like they have the upper hand, though, China, right now?
05:05They felt they played the rare earths issue last April very well. That was clear. But they also
05:11know that the U.S. holds a lot of cards. And we saw some of those cards last April, actually, when
05:16Trump responded with the controls on the chips and on the jet engines, on the ethane gas. So actually,
05:23I think what both sides know is neither can move in a direction that serves its sole advantage. Each side
05:30has very serious pain points. In my head, the timeline moves into next year when, possibly,
05:38to your point, Donald Trump makes a trip to China, possibly. And then the U.S. midterms are rolling
05:43around. How do you think the U.S. midterms might affect Donald Trump's orientation?
05:47Well, I think both Presidents Trump and Xi are extending themselves a bit by planning on these two
05:54meetings. And I mean, they're clearly working towards getting to a deal. But for both of them,
05:59they're going to have some pushback from people in their capitals. For Donald Trump, we can already
06:05see from the hawkish elements that there is a lot of concern about what he is going to do next. So
06:10whatever he does, he is going to have a strong motive to make sure it is successful. And that gives
06:16me optimism about the implementation of a deal. The midterms will be part of that. But it's more than
06:22that. China is hosting APEC next year. The U.S. is hosting the G20. Along the way, there are going
06:29to be a lot of opportunities for people to meet at the ministerial level. And then at the end of the
06:35year, there's going to be opportunities for leaders to get together at the leadership level. All of this,
06:40I mean, from my experience working, you know, basically 30 years on U.S.-China, nothing works for
06:46this relationship like scheduling high-level meetings. That gets, no, it gets the bureaucracies
06:51on each side to kind of sit up straight and figure out what's possible. And I think that's
06:56actually setting us up potentially for a good 2026 if they can get to a deal, if they can get past this
07:02episode, and if they can implement well. Where does Taiwan fit into all this?
07:08Whereas, well, you know, we saw what looked like some gestures from Donald Trump in recent months.
07:15The lie transit of the United States did not happen. Defense talks were downgraded. You know,
07:22there were some other measures as well. The Chinese are clearly looking with high hopes to Donald Trump
07:29to give them reassurance that the United States is moving away from what they felt was the quote-unquote
07:36hollowing out of Taiwan policy, of U.S.-one-China policy in the Biden days. And so I think now what
07:44they are hoping for is that at minimum, Donald Trump, when he visits Beijing or at some point
07:50around that, makes a very clear public reaffirmation of U.S. policy. And that will allow them to feel
07:58that the U.S. is not implicitly sending signals to the Taiwan leadership that it is going to,
08:04that it's going to tolerate what the Chinese fear will be provocative moves by President Lai.
08:10I mean, it sounds like an oxymoron to get more clarity on the strategic ambiguity sort of policy,
08:16but how much goodwill do you think Donald Trump is able to get for U.S. companies
08:24if he leans in that direction and gives China what they want?
08:29I am hesitant to suggest that Donald Trump is going to actually act in a way that links a trade deal
08:37or actions to help U.S. companies to what he does on Taiwan. I think Taiwan exists on its own merits.
08:45It is the most important issue to the Chinese. Remember, when Trump and Xi have phone calls,
08:50we always learn that no matter what the central element of the call is, the Chinese always raise
08:56Taiwan. It is their number one priority to move that forward. And so I think Donald Trump recognizes
09:03that in this region, cross-strait issues are a source of potential instability. He does want an
09:10overall productive relationship with the Chinese. And I think it is those issues alone that will drive
09:17how he responds on Taiwan. That said, the gestures over the summer were probably to some extent a reaction
09:24to an understanding that after the tit-for-tat that occurred last April, a path towards the two
09:31sides getting to a trade deal and stabilizing the relationship had to occur against the backdrop of
09:38no major flare-ups over Taiwan. Of course, with some things to monitor, we have the plenum coming up.
09:43We also have this 15, five-year plan. What are you going to be watching out for the most? Do you think
09:47some of these external threats that China is seeing right now, does it change the playbook in any way?
09:52I think when we talk about these external threats, what's really motivating China is it doesn't want
09:57to have to think about those because it has internal business to take care of. When I was in China in
10:02these recent weeks, what I heard the most about was this concept of involution, this idea that there is
10:08this destructive downward spiral of competition that is affecting not just sectors in the economy
10:15but now pushing through the entire economy. I think what we want to look for for the fourth plenum
10:22and for the 15th five-year plan is what China plans to do about this. I expect we will hear that
10:29they will express determination to act here, to address deflation, to address falling margins,
10:38to address youth unemployment, to address cannibalization of R&D expenditures. Issues
10:45like this that come out of involution. They are very concerned but it is very hard to follow through
10:50and I will be looking to understand what exactly they see as their tools and what they will be doing
10:55about this. Do you get a sense that these domestic issues are at the very top of their priority and not
11:01so much all these, let's call them distractions on the trade front. What do you think is top of
11:07their priorities as far as your understanding goes from the people that you talk to?
11:10My understanding is like all countries, they are thinking about their own country first and domestic
11:17issues first. They are actually quite happy with how their economy performed in the first half of
11:24last year. But they know that the consumer stimulus that they employed can't be effective forever.
11:30They know this involution issue is there. They know that exports are a top source of growth for them
11:36and they are hitting resistance with the United States and eventually with the EU and other markets.
11:41So now they need to turn inward and focus on the property sector, on youth unemployment, on consumer sentiment,
11:47on involution. And I expect that we are going to see determination on that front.
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