Xi Bets Trump Detente Will Lead to Future Wins on Chips, Tariffs

In the early hours of Wednesday, Donald Trump declared that Xi Jinping was “VERY TOUGH, AND EXTREMELY HARD TO MAKE A DEAL WITH!!!” Some 36 hours later, the US leader said he got what he wanted: A commitment to restore the flow of rare earth magnets.

It’s less clear what Xi got in return, apart from putting a lid on further punitive US measures. One of the few clear takeaways appeared to be an assurance for the US to welcome Chinese students, a major issue in China but also not one that would explain why Xi got on the phone after making Trump wait for months.

By taking the call now, Xi appears to be betting that a reset in ties will lead to tangible wins in the weeks and months ahead, including tariff reductions, an easing of export controls and a generally more civil tone. The biggest sign of that was another round of talks that will now include US Commerce Secretary Howard Lutnick, who is in charge of curbs on the sale of advanced technology to China.

Whether Xi will get any of that, however, now hinges on a famously erratic Trump administration in which views toward China differ drastically.

“This call provides tactical de-escalation for US-China relations,” said Sun Chenghao, a fellow at the Center for International Security and Strategy at Tsinghua University in Beijing.

“However, China’s core demands — equal sanction relief, reciprocal enforcement mechanisms, and an end to tech containment — remain critical for sustainable agreements,” he added. “Without substantive US adjustments in follow-up talks and policies, the consensus may not translate into long-term stability.”

Investors were sceptical that relations between the world’s biggest economies were finally on track, with China’s CSI 300 Index little changed on Friday. While the two leaders spoke just days before Trump’s inauguration, Xi had kept his US counterpart waiting for a phone call ever since as tensions rapidly escalated, with tariffs climbing well beyond 100% before the two sides agreed to lower them in Geneva last month.

In recent days, Trump had looked like the more desperate of the two, seen by his repeated requests for a call capped off by his social media post at 2.17am on Wednesday. The call next day finally ended the longest post-inauguration silence between American and Chinese leaders in more than 20 years.

“We’re in very good shape with China and the trade deal,” Trump told reporters on Thursday after the 90-minute conversation. “I would say we have a deal, and we’re going to just make sure that everybody understands what the deal is,” he added.

The big immediate problem for the US was a lack of rare earth magnets essential for American electric vehicles and defence systems. After the Geneva meeting, the US side believed it had secured the flow of these materials, only to be disappointed when China kept its export licensing system in place, saying that exporters to the US still needed to apply just like everyone else.

China, in turn, felt betrayed by a fresh wave of US restrictions on AI chips from Huawei Technologies Co, software for designing chips, plane engines and visas for upwards of 280,000 Chinese students.

“Both sides felt that the agreement in Geneva was being violated,” said Gerard DiPippo, associate director at the RAND China Research Center. From the White House’s perspective, he said, “China committed to send the magnets.”

Although Xi flexed his muscles with the rare earths restrictions, he also has reasons to come to the table. China’s economy is expected to slow sharply in the second quarter and come under pressure into the second half of the year, according to Morgan Stanley economists led by Robin Xing.

“Now the China pendulum is swinging back from ‘political principle’ of standing firm against the US to ‘pragmatism’ in support of a still fragile economy,” said Han Lin, China country director at The Asia Group. “In other words, Beijing wants to de-escalate, and as long as there is a face-saving path for Xi to do so, now is better than never.”

Xi can point to several things that indicate more is coming. The addition of Lutnick in upcoming trade talks, led in Geneva by Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer, signals Trump may be willing to consider reversing some of the technology curbs that threaten to hobble China’s long-term growth ambitions.

Xi’s statement after the call also made clear he expects the US to “remove the negative measures taken against China”, which could include warnings against the use of Huawei's Ascend chips and restriction on the sale of chip design software to China.

The two leaders also exchanged invitations to visit each other’s country, events that will build momentum toward stabilising the relationship with agreements on thorny issues spanning trade, export controls and people-to-people exchanges. Trump said their wives would also come along, adding to the positive optics.

It’s significant that Trump agreed to visit China first, according to Bert Hofman, professor at the East Asian Institute at the National University Singapore and former World Bank country director for China.

“Xi probably realised that a call would be in the Chinese interest given the eagerness of Mr Trump to have one,” he said. “This will accelerate talks and hopefully extend the truce beyond August,” he added, as the tariff reductions agreed in Geneva will expire in early September.

But some analysts advised against being overly optimistic, pointing out the lack of details on key trade matters.

“There doesn’t seem to be a deeper agreement that would prevent either side from taking additional negative actions, even as talks proceed,” said Kurt Tong, a former US consul general in Hong Kong and a partner at The Asia Group.

That fragility is compounded by Trump’s transactional approach to foreign policy and ties with China in particular. In January 2020, when Trump signed a Phase-One trade deal with Beijing, he said the relationship between the countries was “the best it’s ever been” before it quickly unraveled following the spread of Covid-19 around the globe.

“It would be unwise to bet that Trump has a vision for further negotiations that he won’t abandon suddenly later on,” said Graham Webster, who leads the DigiChina project at Stanford University.

Another area where Xi could see an early win is on the issue of fentanyl. Any deal to cooperate in blocking the flow of the drug to the US could immediately bring down American tariffs on Chinese imports by 20 percentage points.

While the call helped to stem the negative trajectory of the relationship, the next two weeks will be crucial to confirm whether the truce will last, according to Wu Xinbo, a professor at Fudan University in Shanghai. He said China expects to see more progress on tariffs and US tech curbs.

“The call in itself is not a reward,” Wu said. “What’s important is what will come out of the call.”

Source: Theedgemarkets