Incremental signaling and evidence since Trump’s surprise threats against China on Friday suggest that the two sides will seek a pathway to de-escalation.
First, Trump’s Truth Social post at midday on Sunday was cryptic but de-escalatory in tone. The fact that Trump went out of his way to praise Xi suggests that a meeting between the two leaders later this month will go ahead:
Don’t worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn’t want Depression for his country, and neither do I. The U.S.A. wants to help China, not hurt it!!! President DJT
Second, China’s Ministry of Commerce (MOFCOM) issued a statement overnight (English translation HERE). The tone is measured and does not threaten immediate retaliation. This may slow down the action-reaction cycle while the two sides seek an off-ramp.
Third, and more substantively, the MOFCOM statement strengthens our earlier view that China’s October 9 rare-earth controls were mainly a response to the U.S. Commerce Department’s implementation of the “50% rule” on September 29 (see our Friday note HERE for more context). In other words, Beijing perceives that the US violated the terms (perhaps implicit) of the rare earths truce agreed in London in July.
This matters because it should be politically feasible – if not guaranteed – for the two sides to restore the London truce, at least temporarily. For the US, this would likely mean amending the 50% rule or signaling a light touch in implementation. For China it would mean taking a light approach to how it implements the more provocative aspects of the October 9 announcements – in particular, that China will demand to approve all exports of goods (made anywhere in the world) with at least 0.1% of Chinese-origin rare earths by value, and that Beijing will also reserve the right to approve exports of rare earths for the production of semiconductors at 14 nanometers and below.
The most important near-term signposts will be:
- Indications that the Trump-Xi meeting later this month will take place as planned. The channel between the two leaders is critical for finding an off-ramp to the current dispute.
- Signs that Treasury Secretary Bessent and Commerce Secretary Lutnick are engaging with Chinese Vice Premier He Lifeng on the substance of an agreement to de-escalate.
As we noted on Friday, both leaders have strong incentives to de-escalate. Beyond the damage that would come from tariffs and tit-for-tat supply chain measures, Trump seeks Xi’s approval for a TikTok deal and to explore Chinese purchases of U.S. soybeans and Boeing planes.
What could thwart de-escalation? The biggest risk is that Trump and his team decide that the U.S. must demonstrate resolve to Beijing, which is riding high on the confidence that Xi Jinping has a higher political pain tolerance and better cards to play than Trump. Some in Washington view China’s October 9 moves as essentially putting a gun to the head of the U.S. semiconductor and AI sector, demanding a tough response. That was Trump’s tone on Friday though it seemed to soften over the weekend.
It is also possible that Beijing will demand more than Trump is willing to give on export controls – e.g., not only a softening of the 50% rule but also assurances that the U.S. will loosen or not further tighten restrictions around high-bandwidth memory chips and/or semiconductor design and manufacturing tools, both of which are critical to China’s efforts to develop a domestic AI stack. We are also not certain how Beijing views the recent U.S. imposition of shipping fees for Chinese-made and operated ships, and whether Beijing would seek reversal of those fees (which would be very unlikely) as part of a rare earths truce.
Finally, even if the two sides find an offramp, the latest episode reaffirms our view that a U.S.-China “grand bargain” is unlikely. The two sides are having a hard enough time maintaining a fragile truce on technology controls, which span national security and economic concerns. That battle increasingly looks like a stalemate, but it still gives both capitals strong incentives to “de-risk” from a reliance on the other as an end-market or (even more so) major supplier. That leaves some areas open to compromise (such as soybeans) but makes an expansive trade or investment agreement very difficult.
From Beijing’s perspective, Trump is refreshingly less ideological and more transactional than traditional U.S. presidents, but also less predictable. And as U.S. midterms draw closer, Beijing will increasingly focus on what U.S. policy toward China will look like post-Trump. And as we have recently emphasized, China’s leadership is currently feeling very confident in its ability to handle Trump and in China’s position in the U.S.-China rivalry, which also reduces the temptation to make major concessions to Washington.
