U.S.-China trade talks are continuing in London today with the focus on Beijing's export restrictions of rare earth magnets that threaten to hit the brakes on manufacturing of autos, high-tech and defense gear. The S&P 500 is edging back toward its record high as markets see little doubt that President Trump will get a deal done, given the disastrous consequences for the economy if he doesn't. The main question is what Chinese President Xi Jinping's asking price will be.
The Wall Street Journal reported on Monday that Trump authorized Treasury Secretary Scott Bessent and fellow U.S. negotiators to walk back recent U.S. moves to suspend exports of jet engines, chip-design software and ethane. However, some on Wall Street think Beijing is in position to demand a much broader reversal of chip export controls. The longer negotiations extend, the bigger the deal may turn out to be.
What Will China Demand For Its Rare Earths?
It's "unrealistic," wrote Christopher Wood, global head of equity strategy at Jefferies, "for Washington to assume that China is going to ease up controls on rare earths if the U.S. does not do the same as regards exports of U.S. tech products."
China views U.S. export controls on chips and chip equipment "as the equivalent of a declaration of economic war against China, since it amounts to a deliberate effort to prevent the upgrading of the mainland economy."
"Sensitive U.S. export controls could be on the table as bargaining chips" in the U.S.-China talks, wrote Ulrike Hoffman-Burchardi, chief investment officer of global equities at UBS Global Wealth Management.
However, positive news this week may not be the end of the story, Hoffman-Burchardi adds: "On rare earths, we think China could ease export controls in the short term, but this leverage could be used again if tensions re-escalate."
"Hopes the U.S. might relax certain chip export rules to China" could help give Nvidia a lift, Ipek Ozkardeskaya, Swissquote Bank senior analyst, wrote early Tuesday. "Nvidia has had to halt shipments of China-specific chips due to those restrictions, so any progress on that front can't come soon enough."
Scope Of Trade Talks Deal
It's possible Beijing will make limited demands for easing chip controls this week, knowing that its leverage over the U.S. and other global trading partners isn't going away quickly. "U.S. efforts to diversify rare earth supply may gather pace, but building capacity outside China will take years and remains both costly and difficult to execute," the UBS strategist wrote.
Along with easing rare-earth curbs, Beijing also could give Trump some other victories to dilute the focus on the U.S. potentially giving up technology viewed as critical to national security and America's artificial intelligence leadership.
Beijing could make a full-fledged effort to halt the flow of fentanyl and related precursors. Trump has also eyed a shift in control of TikTok's U.S. based operations.
U.S.-China Ceasefire Ends Aug. 12
The focus of U.S.-China trade talks has clearly shifted from tariffs to export controls. Both sides agreed to slash tariffs by at least 100% of the value of imports in the truce announced on May 12. Broad-based U.S. tariffs imposed on Chinese imports in President Trump's second term now stand at 30%, down from a peak of 145%.
Beijing, which retaliated with a tariff as high as 125%, agreed to cut it to 10%.
When the U.S.-China ceasefire ends, the default plan is to impose an additional 24% reciprocal tariff on China, as announced on April 2.
In accusing Beijing of seriously violating the May 12 deal, Trump notably omitted new threats to retaliate, including by raising tariffs.
The Trump administration "appears intent on avoiding a return to extreme tariffs, though sector-specific levies may rise after recent legal setbacks" that put the longevity of reciprocal tariffs in doubt, Hoffman-Burchardi wrote.
