US Just Hit China With Knockout Blow? | Trump on China | Chinese Economy: Trade

Trump talks to Xi, US China tech war deepens, & Paul Krugman on China's trade surplus

China Update provides listeners with the most up to date political, economic, and geostrategic analysis on China - so that you are on top of the world's number 2 economy.   These podcasts are based on hundreds of articles, think tank reports, government statements and other resources in English and Chinese every week. The views and analysis are all my own and I produce the podcasts. 
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Episode Transcript

Speaker 1 (00:00):
Hope you Sunday everybody. Welcome to another episode of China Update,
where it provides you with the most up to date political, economic,
and geostrategic analysis on the world's number two economy. My
name is Tony. Let's jump in. We normally take Sundays off,
but today I had to put up an extra episode
because there has just been so much to cover from
this week. So this episode is going up today, then
went back to regular episodes tomorrow. On Monday. There's also

(00:21):
another special episode going up four Channel members and Patreon supporters.
But with this episode here, we're going to cover the
most salient points from this week, so we're ready for
a new week of updates from tomorrow. According to an
exclusive story published by US base The Wall Street Journal yesterday,
President elector Donald Trump has expressed interest in traveling to
China early in his presidency, a move that could help
rebuild his strained relationship with Chinese leader General Secretary Shooting Ping.

(00:45):
The two leaders, who have had fought interactions over trade
and tariffs, spoke by phone on Friday, marking their first
conversation since the election. Trump has hinted that he might
visit China within his first one hundred days. Although no
official plans have been confirmed, the visit would come at
a critical juncture, with Trump having promised steep tariffs on
Chinese imports, potentially up to sixty percent. China, facing economic pressure,

(01:07):
is eager to engage in negotiations to mitigate these tariffs.
In addition to trade, the conversation between Trump and She
touched on other issues, such as fentanyl trafficking into the
United States, TikTok, and the contentious Taiwan situation. Trump's remarks
on social media suggested optimism about solving global problems, with
She emphasizing a desire for cooperation. While Trump's inauguration is

(01:29):
set for Monday tomorrow, she has opted to send Vice
President Hanjung as his representative and not attend in person.
Trump has been to China as president before. Trump's visit
to Beijing in late twenty seventeen came a few months
after meeting she jumpin face to face for the first
time at Mara Lago, his Florida estate. He toured the
Forbidden City and took in a peaking opera performance. In

(01:51):
a social media post on Friday, Trump expressed quote President,
she and I will do everything possible to make the
world more peaceful and safe. Next up in staying on
the theme of US China having big developments in the
US China technology war from this week, specifically AI technology
and advanced semiconductor restrictions which Washington rolled out against China

(02:13):
and others. On Wednesday, the US Department of Commerce issued
two rules restricting pr C access to advanced semiconductors, one
to update export controls on advanced computing semiconductors and another
that places additional entities in the PRC and Singapore on
the entity list. The new measures call for chip producers
like TSMC and Samsung Electronics Co. To step up their

(02:35):
scrutiny and due diligence of customers, especially Chinese firms. That's
an acknowledgement that advanced semiconductors are still making their way
to China and Russia, including one incident where TSMC made
chips were secretly diverted to the blacklisted Huawei Technologies Co.
Which we covered at the time. According to the Commerce Department,
the curbs imposed sanctions on sixteen Chinese companies quote due

(02:59):
to their involvement in supporting or directly contributing to the
development of advanced computing integrated circuits that further China's development
of advanced weapons systems, weapons of mass destruction, and high
tech surveillance applications. And because these entities supplied Chinese public
security end users impose a risk of diversion to Huawei
in quote. US also added eleven firms to the entity list.

(03:21):
Seven of home are AI, Dialing, Jupoul subsidies quote because
these entities advanced the People's Republic of China's military modernization
through the development and integration of advanced artificial intelligence research
in quotes. The US is also expanding licensing requirements on foundries,
companies that manufacture chips for external customers, and packaging companies

(03:44):
seeking to export advanced semiconductors. Meanwhile, same day Wednesday, the
Netherlands introduced strict export controls of their own, requiring ASML
holdings in v and other Dutch semiconductor equipment makers to
apply for licenses with the government. Of course, Beijing is
not happy with any of these new rules. China's Ministry
of Commerce said that China firmly opposes the restrictions, expressing

(04:07):
quote this action exemplifies the generalization of the concept of
national security and the misuse of export controls and has
severely hindered normal trade between countries, undermined market rules and
international economic order, and affected global technological innovation in quote now,
these rules that were rolled out on Wednesday were actually
building on the US Bureau of Industry and Security BIS

(04:30):
introduction of the so called Framework for International Intelligence Diffusion
last week, a sweeping regulation that titans export controls on
AI chips and models designed to curb exploitation of loopholes
by bad actors while favoring US hyperscalers, Microsoft, Google, Amazon, etc.
The framework categorizes countries into three tiers with varying access levels.

(04:54):
Tier one, the United States and eighteen major allies granted
the broadest access. Tier two, country with mixed US relations
such as Singapore and Brazil, face stricter camps, and Tier
three arms embargoed nation including China see the strictest restrictions.
The structure imposes camps on GPU purchases, introduces a validated

(05:15):
end user VEU program to regulate entities eligible for chip imports,
and establishes new controls on AI models training AI models
requiring over one times ten to the power of twenty
six flops equivalent to twice LAMA four five B is
restricted to Tier one nations. Closed weight models of the
scale are also barred from export. US based AI and

(05:38):
chip research firm Semianalysis, in an excellent pieceless Week, observed
that the rules explicitly favor US hyperscalers, ensuring their dominance
in the AI compute market. They also jeopardize the business
models of tier two data center operators, particularly in regions
like Malaysia, India, Brazil in the Middle East, where AI
infrastructure investment may decline. Tier three nations, primarily China, face

(06:01):
significant barriers to acquiring AI compute resources through both hardware
and cloud services. Now let's enter this part on the
AI restrictions in the tech war with some extracts from
a piece by Ben Thompson at Stratkei called AI Diffusion
Regulations Closing Loopholes. The objections quote what is missing is

(06:22):
the closing of the loopholes in terms of providing semiconductor
manufacturing equipment. That absence is particularly pressing in the light
of these regulations, which provide a massive incentive for non
Tier one countries to find alternative sources of chips, which
in the long run means China purely Chinese manufactured chips
are not very competitive. However, Highway's AI chip appears to

(06:44):
have been manufactured by TSMC, while smic's seven nanometer chips
are still very low volume and almost certainly very low
yield and made almost entirely with Western equipment. China's ability
to make its own AI chips with its own equipment
is to many years away, and any progress in that
regard will likely be devoted entirely to China's own domestic demand. Still,

(07:08):
this does lay the groundwork for a long term decline
of US chip dominance. Countries want chips and they don't
want to be told what to do with them. In
this somewhat cataclysmic view of the world, there was value
in the loopholes we talked about above. They were pressure
valves of assort. Sure on, it was pain for China
to get GPUs on the black market, or to rent

(07:32):
cloud GPUs, or get TSMC to make chips for a
Huawei shell company. But all these failures were examples of
China's benefiting from TSMC's chip making prowess, which itself is
dependent on Taiwand's unmarred existence. There is a world where
the Commerce Department actually does close all of the loopholes,
and the US gets AI on chips made in Taiwan

(07:54):
and China doesn't get anything. What then, is the most
rational move for China, particular if they assume that AI
will transform military capabilities In quote next up, we have
one more development to cover, but just quickly, if you're
getting some value from today's episode of China Update, I
have a tremendous favor to ask. That is just the

(08:15):
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(08:38):
In fact, I restrict sponsored features so that the majority
of the support comes directly from individual subscribers. Thank you
so much, everybody for the ongoing support. Next up, and
finally for today. As we discussed in yesterday's exploration of
Friday's economic data, one of the few bright spots in
the numbers was Chinese trade, specifically China's export performance. Early

(09:00):
this week, we discussed China's record trade surplus of almost
one trillion US dollars, and I explained why this isn't
as positive as one would think. Well, the following day,
Nobel Prize winning economist Paul Krugman Penderpiece called China's very bad,
no good, trillion dollar trade surplus. It's a sign of weakness,
not strength, in which he made several of the points

(09:20):
I did, plus some others. We will in today's video
by examining some of this article, which is worth a
read in full for those who have the time. It's
too long for us to unpack it or here, but
we will touch on a few selling points which we're
now quoting directly. Last year, China ran history's first trillion
dollar trade surplus. Here's one of the many charts circling

(09:40):
this one from Bloomberg. Should China be celebrating its achievement? No,
this surplus is a sign of weakness, not strength. A
symptom of China's apparent inability to grapple with its fundamental
economic problems. But China's trading partners won't be celebrating either.
Giant Chinese trade surpluses create problems in other countries too.
When China's attempts to export its problems, but that's what

(10:03):
this amounts to, will meet a protectionist backlash. In fact,
this would have happened even if Trump weren't about to
take office. I often run into people who believe that
a successful economy, when achieving rapid productivity growth and leading
and cutting edge technology, will both run big trade surpluses
because it's so competitive and attract lots of foreign capital

(10:23):
because it's such a good investment. But that arithmetic is impossible.
In fact, when an economy surges past its rivals in
productivity and technology, it usually does attract a lot of
foreign investment, but that means that it runs a trade deficit,
not a surplus. Conversely, when nations experience huge declines in
trade deficits or increases in trade surpluses, it's usually because

(10:46):
something bad has happened. The Chinese economy is having big
problems adjusting to the prospect of slower economic growth. Extremely
high rates of investment are no longer sustainable in the
face of diminishing returns, Yet the government remains unwilling to
do the obvious and promote higher consumer spending. Running big
trade surpluses is one way to compensate for weak domestic demand,

(11:07):
and China has been promoting big trade surpluses by weakening
the value of its currency. Without question, China's big trade
surplus is helping to keep its economy afloat for now.
But the weak yan policy is almost certain to backfire
big time because the rest of the world won't accept
these surpluses for very long. Regional job loss in the

(11:28):
face of import surgeons generate a powerful political backlash, so
the rest of the world just isn't going to accept
China's attempt to export its way out of policy failure.
Trump would probably slap high terrace on China no matter what,
but that giant surplus means that Europe, the UK, and
probably everyone else will do the same. But while the

(11:49):
response to China's trillion dollar surplus could and should be
much smarter than I fear it will be. That surplus
is bad news for China and a problem for everybody else.
It's a sign of inability to grapple with the nation's problems,
and it won't provide economic relief for very long. Here

(12:09):
ends the direct quotes and to day's episode of China Update.
Thank you so much everybody for watching. Have a good Sunday,
have a rest for weekend, and I will see you
for a new week of China Update to morrow. On Monday,