China’s Ministry of Commerce (MOFCOM) just announced a sweeping new package of REM export controls, claiming extraterritorial jurisdiction over the entire AI chip supply chain in the process.

To find out more, ChinaTalk interviewed Chris McGuire, who served as Deputy Senior Director for Technology and National Security at the NSC during the Biden administration and was on the pod last week talking Nvidia vs Huawei, and

, author of Chip War who is now on substack!

We discuss…

What the new export controls do, and how on earth China plans to enforce them,

How the restrictions will impact the semiconductor supply chain, the auto industry, and manufacturing more broadly,

What concessions China is hoping to extract, and how the US should approach upcoming negotiations,

Xi Jinping’s tolerance for economic pain,

How rare earths friendshoring could undermine China’s leverage.

It was weirdly difficult to find photos of rare earth manufacuting in China. Source.

**Chris McGuire: **Last night, the Chinese announced a significant expansion of their controls on rare earths (translation by CSET here). We’ve been seeing this trend develop — it’s the kind of lever that the Chinese have been pulling harder and harder since 2023, when the first controls were implemented. Obviously, they’re dominant in the rare earth space, though it’s much lower on the value chain than where the US is dominant in the technology space. Nonetheless, it’s an area where they’re trying to exert leverage and influence.

The controls were quite expansive, and people are still digesting them. Broadly, there’s a large swath of rare earths and magnets that are now controlled. The regulations also expanded the end-use controls onto a variety of specified applications. Defense purposes are one category, but they also specifically named semiconductor manufacturing.

The controls very much mirrored US regulations. Basically, any use of Chinese rare earth for the production of a logic chip at 14-nanometer or below, or a memory chip at 256 layers or more, is captured. Additionally, any product that contains Chinese rare earth content exceeding 0.1% of the total value is captured anywhere in the world. This mirrors the US de minimis rule, where anything with US content that fits the description is controlled to China for certain very specific items. China is now saying that any product with even a very small amount of Chinese rare earth valuation is controlled, and the ability to make products for certain end uses is controlled no matter what if you’re using Chinese rare earths.

Crucially, there’s an extraterritorial element to this as well, which was not the case in some of their previous controls. It’s very expansive. The legal analysis suggests it would impact basically the entire technology supply chain. The potential implications would be significant. Obviously, there are big questions about the practical reality and enforcement — whether they can actually enforce this, whether they intend to, and what their ability is to actually get firms to comply.

You have some sectors where there’s very heavy usage of these rare earths, requiring large quantities and therefore large suppliers. The semiconductor industry actually uses smaller quantities, so enforcement might be a little different. Nonetheless, this represents a significant expansion of the scope of their controls. It’s notable in the lead-up to the APEC conference and also following the US 50% rule that came out a couple of weeks ago.

**Jordan Schneider: **Whoever in China is copy-pasting the regs that Chris wrote is more than welcome to come on ChinaTalk and show us how it’s really done.

**Jordan Schneider: **Chris Miller, what’s the potential industry impact?

**Chris Miller: **The impact of how this would play out if actually implemented is complicated and hard to understand. We should separate the impact of actual implementation from the negotiations that are probably going to ensue before implementation. We should tackle both of those.

The interesting dynamic to me is that if you look at the use of rare earths in the chipmaking process, they’re predominantly — at least magnets are — used in the machines that make chips, where magnets are indeed required. Although many of these companies have done a fair amount of stockpiling, it’s not the case that if you stop selling magnets, the chip industry grinds to a halt. Maybe it gets more complicated to build new tools for expansion.

The other direct chip industry impact that the regulations called out was non-magnets — other rare earths that are used in some of the materials and consumables. They specifically mentioned sputtering targets, for example. It’s really unclear how strong of a position China has here. We’ve just never run the experiment in real life. It’s possible that China can really limit production of these items, but we’re also talking about really small volumes. It’s also possible that if China does implement the controls, there are ways to source from other companies or source secretly in ways that China can’t detect.

All that’s to say, if China actually carries the controls out, it might not be as immediately impactful in the chip industry as China hopes, with a pretty wide uncertainty interval. But we should probably turn to the question of what it means for the rest of the economy if China carries them out, because that’s where you would have probably pretty disruptive impacts.

**Jordan Schneider: **Yeah, let’s start by playing out the scenario where they actually do the thing, and then later on we can discuss what the leverage is here. I just got a text — “Jordan, if you’re doing an emergency pod on this, is the PRC going to send MOFCOM export compliance officers to hang out in Indonesia?” Maybe they’ll actually be better at it than we are. How could this actually manifest in practice if they really wanted to push the button on these regs?

**Chris McGuire: **That’s a big question. The problem the PRC has had is that there’s a secondary market here that they don’t have as much insight into. Obviously, they’ve tried to centralize control over the rare earth market to reduce the ability of firms to just buy rare earths through cutouts or similar channels.

Ultimately, look, there are two things. Take firms like TSMC that are using rare earths for production — theoretically, that’s not allowed without a license. They could apply for a license. If they didn’t apply for a license, the PRC could try to send an end-use check to Taiwan. I don’t think that would go over too well.

Alternatively, they could try to say, “Well, TSMC is clearly violating because there’s no way you could sustain production without rare earths” — although, as Chris said, they very well might have a very large stockpile. But then again, what’s the leverage that they have over those companies? Are they going to say, “Sorry, TSMC, your products are no longer welcome in China”? I don’t really think so. That’s a very empty threat, and obviously, that would cause more pain.

That point actually highlights where the United States and allies still have fundamental leverage in this space. We talked about this a little last time, but the tit-for-tat here is dangerous. It’s notable that there was an agreement on rare earths and minerals, and that appears to have been — I don’t want to say gone by the wayside — but obviously the Chinese are ratcheting back up on it.

There does need to be a US response. Because of these dynamics, the US does have escalation dominance in this space. We can talk about specific options, but a lot of the products the Chinese regs are targeting are ultimately very critical to the Chinese economy and ones that they cannot source domestically. Cutting those off is probably not realistic for the Chinese. If the United States and others were to cut those products off to China and to no one else, there would be a lot of pain felt.

I’m skeptical of the idea that this shows the Chinese have escalation dominance in this space. I don’t think they do. But it’s incumbent on the United States to show that they not only have tools to respond, but they’re also willing to use them. Our lack of willingness to respond forcefully to some of this stuff before is why we’re in the situation we’re in, where the Chinese feel empowered to ratchet back up on rare earths.

**Chris Miller: **I agree with you, Chris, that the US has escalation dominance in the sphere of semiconductors. We could shut down much of China’s chip production domestically because they require a larger share of materials and consumables than we require from them.

But what we saw in April was that China bet it could respond in a different sphere. We impose tariffs, they impose magnet controls. That had a big impact on the automotive sector, for example. My worry is less about the semiconductor-specific dynamics and more about what happens if China follows through with this. What’s the impact on the rest of the manufacturing base in the United States, which, as we know, does need magnets and other materials that are mostly sourced from China?

In April and May, we found that the White House was very sensitive to any disruptions in the auto supply chain — not surprisingly. That, to me, is where the uncertainty lies. What happens if these controls ricochet through other segments of the economy where it’s less clear that the US has this position of escalation dominance? Then you end up with a standoff: the US threatening to escalate in one sphere, China threatening to escalate across the manufacturing base. Who feels most compelled to back down? Who feels most able to bear economic cost?

I don’t know the answer to that, but I worry about it.

**Chris McGuire: **I don’t disagree with that. There are ways the US can escalate in other areas as well. I agree that if you’re focused very narrowly on semiconductors, obviously the US has more escalation dominance in that space. But what I was thinking about is broadly in the technology industry — the United States retains escalation dominance, and that’s a much broader area and sector where there could be much more immediate pain felt on the Chinese side than in semiconductor manufacturing or some of the other measures that were imposed before, like airline parts.

For instance, if the Chinese are saying you need a Chinese license to make any 14-nanometer chip in the US, a reciprocal measure on the US side would be requiring a US license to ship any 14-nanometer chip to China. That would have a pretty dramatic impact on the entire Chinese economy pretty quickly. That means no iPhones, no computers — and not just those chips, but any products containing those chips. It’s not to say that all those would be banned, but the US would be saying, “Hey, we need a license,” just as the Chinese are saying they need a license. That’s actually a pretty tit-for-tat move, but it’s a pretty high pain point on the Chinese economy. That would have big ripple effects.

You could always escalate that further. Is China going to retaliate on APIs? Is the US then going to impose financial sanctions on banks and dollars? Yes, there’s further up the chain that we could go — that’s probably the highest place up the chain. But even expanding the space a little broader than just semiconductors, there are places where we underestimate the amount of pain that — or, sorry, overestimate the amount of pain that — the Chinese would be willing to tolerate. It actually might be more painful than people think.

**Chris Miller: **Yeah, that seems to me to be a key question. My mental model is that the Chinese are usually willing to tolerate more pain than we are because their political system allows them to ignore short-run impacts on living standards to a much greater degree. It seems to me that anything involving manufacturing supply chains, the Chinese have a stronger position considering their willingness to tolerate more pain than we do.

I’m not sure it’s credible for us to say we’re going to impose controls on a broad range of chips, since, as you say, that would begin implicating smartphone supply chains and much else. I wonder whether the US eventually says, “Actually, we’re better off retaliating or threatening retaliation in a sphere that’s not in manufacturing supply chains — it’s in a political or military or financial domain.” We’ve learned a lot over the last couple of months about the White House’s willingness to stomach economic pain and Beijing’s.

**Chris McGuire: **There’s a question of what people would do and a question of what they should do. But basically, an equivalent measure here — an equivalent license requirement in an equivalent part of the sector — has the advantage that you’re not expanding the box that much. If they’re going to be targeting the advanced chip sector, then you respond with reciprocal measures. Then any move that targets things outside of that means the other side is escalating, not you. It’s actually pretty easy to justify as a reciprocal move. If they’re going to require a license, we’re going to require a license. But that license requirement would potentially pose more pain on the Chinese side than on the US side.

As you said, maybe there are auto firms in the US that are more impacted. But there are also Chinese auto firms that would be pretty impacted by that. What’s the impact on BYD going to be if all of a sudden they can’t source from TSMC until they get a license? Same with Xiaomi, same with NIO.

The Chinese perceive that they have the ability to take moves like this and reshape the game board and exert their leverage over the United States without receiving tit-for-tat actions back that really cause them acute pain. They were willing to do it before, and now they’ve shown they’re willing to do it again. Without a strong reaction back that shows we’re willing to apply acute pain too — acute short-term pain, not long-term strategic pain, because as you said, Chris, we would clearly lose that — but acute short-term pain, I don’t see how this dynamic changes. But there is a way to remind the Chinese that we have a lot of big levers to pull in this space as well.

**Chris Miller: **That makes sense. The other key dynamic here is that the Chinese now clearly believe — and the rest of the world has increasingly bought into the thesis — that they have a durable long-term position in their dominance over rare earth mining, but especially refining. One way to look at this is: what’s easier to replicate, a rare earth processing facility and mining for heavy rare earths, or an EUV tool? We’re betting on the latter. Big steps that would show China’s making the wrong bet if it’s betting on processing facilities — and help the rest of the world realize that this is not a real credible threat over the long run — would shape how the rest of the world responds to this.

**Jordan Schneider: **Yes, it’ll be a very funny kind of flip if everyone who makes the argument, “Oh, putting export controls on China is just making them indigenize faster,” doesn’t apply the same logic to the rest of the world figuring out how to refine some rare earths and build diamond saws or whatever else is on that list. What’s good for the goose should be good for the gander, especially now that we have an administration where the continuity in terms of state capitalism and industrial policy seems to be stronger than one might have guessed going from Trump 1 to Biden and into Trump 2.

**Chris McGuire: **Yeah, completely agree. It’s worth reiterating that we obviously do need to dramatically reshore and friendshore rare earth production. The good news is that it seems possible.

Meanwhile, we’re talking about $10 billion just to bail out farmers in the context of the short-term trade deal. In the context of some of these US-China dynamics, it actually wouldn’t be horribly expensive. If that’s what it takes to get us out of this mess, then that should be a no-brainer.

It’s good that the administration is spending time, energy, and effort prioritizing this. They just need to keep doubling down on it. But we also have to recognize that the world doesn’t stop until we get there. The world keeps going, and we have to keep using our influence even while we’re in a little bit of a trickier situation.

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A nickel mine in Sulawesi, Indonesia. Source.

**Jordan Schneider: **I wonder if any other country is going to try to squeeze an American choke point in order to get a better trade deal, or if this is really a China special.

**Chris Miller: **There aren’t that many real choke points in the world economy. We’re going to find out how much of a choke point rare earth refining actually is. It’s only in the last couple of months that the world has made a serious effort to diversify. My guess is that it’s a choke point only in the short run. Outside of TSMC, Samsung, and SK Hynix, the number of durable choke points are actually pretty limited.

**Chris McGuire: **The tooling companies sit below that, but I would agree.

**Jordan Schneider **If China wanted to pop the AI bubble, what would the move be? I was joking to Chris McGuire after our last show that once China really starts to internalize Chris’s narrative that Huawei can’t compete with Nvidia in the medium term, then lights will start going off in Western data centers or what have you. I’m curious — specifically in the high-end compute ecosystem and what you need to build that out — that stuff is packaged in Taiwan, not China, right? I’m not sure if there are any direct links. Are there?

**Chris Miller: **A lot of the components of a server do still come from China. The companies involved all say they’re trying to diversify, but when you get the cables, resistors, and capacitors, there’s a lot that is sourced from China. Now again, are those durable choke points or short-term choke points? That’s an open question. But if you wanted to cause short-term pain, there’s no doubt that China could.

**Chris McGuire: **Yeah, there definitely were some packaging facilities for advanced chips a few years ago in China, but most of those have been sourced out. People have seen that’s no longer a really viable location. But yeah, that’s right. There are undoubtedly still places in the supply chain where removing a node would hamper production. But the number of places where you could do that and hamper production for years — not months, maybe even weeks — is relatively limited.

Frankly, even rare earths is a bigger one because it’s more structural, but with a serious political push, it’s probably something that could be addressed. In one to two years, you could at least get some pretty serious production back online. It does require real coordination and resourcing, but it’s possible. That’s not the case with a lot of the higher-value things.

Yeah, it’s not impossible. You could throw a lot of rocks and create a lot of irritation. But are you going to completely knock down the target with that strategy? I’m skeptical.

**Chris Miller: **Jordan, you should tell us how much pain Xi Jinping is willing to suffer. You’re the China expert, after all.

**Jordan Schneider: **Well, at a meta-societal level, he thinks that Chinese individuals and Chinese society have enormous tolerance for pain. This is his life narrative, right? An incredibly painful upbringing and then a lot of the cultural stuff as well. COVID — keeping that on through Omicron much longer than other people — is probably a relevant data point here. Maybe I’ll record a better answer afterwards.

**Chris Miller: **This is the key question. If the White House’s willingness to tolerate pain is a low amount and China’s is a high amount, then if you’re the US, you’ve got to find a strategy that takes into account that asymmetry, and that’s hard.

**Jordan Schneider: **It’s interesting, though, because the White House has a lot of tolerance for pain on many different dimensions. What all the tariffs have done to the American economy is pretty dramatic, and that’s something they have, by and large, settled in on. I don’t necessarily think that what China’s going to do on rare earths is going to change bond yields to the extent you saw in late April.

**Chris Miller: **Isn’t that what they’re threatening? You could say the opposite. Tariffs — the way we’ve phased them in after the April shock — have increased inflation very marginally and will have an impact on corporate margins. But you can’t see that in any macro data unless you look very carefully. Whereas when there were threats to auto supply chains functioning, there was an immediate political reaction from the US.

I worry that if China actually implements these as they say they’re going to — assuming negotiations and US threats around them fail — then the impact could again be pretty substantial on the industrial base. Not semis-focused, but more everyone else uses rare earth magnets. That’s why the US has got to think about the potential asymmetry of willingness to bear cost when devising a strategy. That’s why Chris is right that you’ve got to escalate back in ways that would inflict a fair amount of pain to equalize the dynamics.

**Chris McGuire: **To be clear, you don’t actually have to inflict that pain. There’s actually a way that you have the threat, and it gets you to the détente without actually doing any of this. It’d be better if all of this went away. To be super practical, the Chinese license requirement goes into effect on December 1st. If we put into effect an equivalent license requirement on December 1st on 14-nanometer chips — it’s not draconian, but an equivalent license requirement on 14-nanometer or less chips in effect on December 1st — it’s very likely that we get to December 1st and both of those go away. It’s pretty similar to the massive tariff escalation that never actually went into effect.

The signaling is important. It’s also important to remind the Chinese that they can’t really operate with impunity in this space. Keep in mind, the biggest Chinese company by far by market cap is Tencent, which is wholly reliant on US technology still. The second biggest is Alibaba, extremely reliant on US technology. Huge moves that massively impact the two largest Chinese companies — not to mention everything under that — are going to alter Xi Jinping’s calculus for sure. He thinks we’re just not going to do that.

**Chris Miller: **I agree totally about the December 1st deadline being meaningful. This is clearly intended to be a move in advance of the negotiations. The question is, does the US have a countermove that’s credible?

**Chris McGuire: **One thing I’d note — any countermove the United States takes should be something that is a tit-for-tat escalation that they’re also willing to take off the table for the foreseeable future. A significant mistake would be to escalate with policy measures that are under consideration and that we independently judge are necessary for national security purposes — the ones in the hopper. But then they’re tied to this Chinese counteraction. If we just reach for what’s available, it very well could negate those measures in the future because they have to come off when the Chinese say, “Okay, we’re going to reduce or take off our rare earth controls.” But then we have no ability to actually execute that action in the future because obviously the Chinese would escalate.

It has to be something that we wouldn’t otherwise do, but we will do in response to this. That’s why a reciprocal license requirement that’s pretty broad is something that’s appealing to me and makes a lot of sense.

**Chris Miller: **One other point on the Chinese side — if they threaten it but don’t implement it because we’ve got some retaliatory threat that we then negotiate and both pause — but this is still hanging in the background, it might actually be a pretty dangerous strategy for China. If they’ve got this sword of Damocles hanging over everyone, people look at it and begin building their own rare earth processing facilities. We find out that after a couple of years, this actually degrades pretty rapidly.

It seems like a risky thing for China to threaten and not actually use. If we’re right that this degrades pretty quickly in terms of its durability as a choke point, then this might be something that, if you threaten it and don’t use it, it actually ends up going away.

**Jordan Schneider: **We’re just going to have a total flip of all the dynamics we’ve seen in the Chinese semiconductor ecosystem over the past three years. Every rare earth company in China is going to have the greatest Q4 of their existence. There’ll be stockpiling — all of this equipment is going to go abroad. We’ll have a big startup boom. Every investor and their mother is going to try to find a new diamond saw or boule manufacturing equipment.

A Chinese lab diamond factory. Source.

I hope people are paying attention. Even if this gets negotiated out of existence for the next six months or year or two years, the fact that this is on paper should wake a lot of folks inside Washington and in the broader financial startup investment community to the reality that this is a need that is going to come back at some point. Once you have a system that takes this stuff seriously enough to write the regs and convince everyone that we’re going to publish it and put it in your hand for the negotiation, yeah, it doesn’t just disappear.

**Chris McGuire: **Yeah, we’re definitely in a world where things get turned upside down sometimes. But look, to close on this — the Chinese are obviously evolving in how they’re using export controls. It’s really funny to see them literally mirroring the thresholds that are in our controls and the de minimis exception, which was a relatively recent innovation in our controls. They’re obviously reading them really closely and then just putting them back on us. Credit to them — we spend all the time thinking about it, and then they’re fast followers on the same thing and everything.

But you know, this dynamic is not new to the Trump administration. Obviously, there’s been a significant escalation. We talked about this a bit last time, but the Biden administration dealt with this issue too. The Chinese have evolved in their thinking. But my experience in the Biden administration was that clear and concise messaging behind the scenes was actually effective in deterring a more significant escalation in the rare earth space.

Now obviously it’s out in the open, so the behind-the-scenes messaging probably needs to be done in public now first so that everyone’s on an equal playing field, and then you can move to that. As long as we’re not a step down, you don’t want to be negotiating from a position of weakness, which is where we’d be if we don’t do something reciprocally. But once you get to that position of equality, if not a position of strength, the quiet, behind-the-scenes messaging to the Chinese works: “Hey, listen, you really don’t want to go down this road because it can end pretty badly for you. There are a lot of tools that we could use to escalate that would be effective and would be pretty painful for you.” They would obviously never admit that, but their actions showed they recognize it, and it could still be effective.

**Jordan Schneider: **I know you were focused earlier on not expanding the box, but the two really resilient things are the chips and then the financial system access. That’s the other one that we haven’t really seen played, but it’s there and it’s not going away. It’s not like the Chinese haven’t tried to do RMB internationalization, but yeah, have fun selling this stuff to Iran and Russia.

**Chris McGuire: **That’s the sword of Damocles that’s hanging over all this. You can get to equal footing with reciprocal tit-for-tat escalation within the box. But then the private messaging can be, “Hey, we have things outside the box. You don’t want to go outside the box because if you go outside the box, we go outside the box. That’s a dangerous place to be for you.” Then you’re talking about the utility of the dollar and limitations there. We don’t want to be in that world either. That definitely gives them pause.

**Jordan Schneider: **What lessons from negotiating with Hamas and Bibi do you think Trump can take to the rare earths showdown?

**Chris McGuire: **Wow, I hadn’t thought through that one yet. You don’t want to be negotiating from a position of weakness. Going into APEC in a position of weakness — having the Chinese say, “We are putting our controls over your entire technology supply chain,” and we’re just saying we’re going to work it out — will be very difficult in an in-person negotiation with Xi. At the very least, his perception would be “I have the upper hand,” and therefore, he’s not going to give an inch on anything. That’s not something that’s Trump’s instinct either.

Don’t negotiate from a position of weakness, and also be firm. Look, the Trump administration put a lot of pressure on both sides, and we’ll see how this broader agreement pans out. No one cares at all what I have to say about the Middle East — I wouldn’t pretend to talk about it — but that said, if something holds, the Trump administration put pressure on Israel and on Bibi, and the United States actually has a lot of weight and leverage. That’s true in every relationship — our relationship with allies, our relationship with China. The United States really does have the ability, if it’s serious, to influence negotiations in big ways.

Other countries take advantage of the fact that we’re a little hesitant to escalate in big ways. The person who recognizes this dynamic the most is actually Donald Trump, who has been very willing to escalate in very dramatic ways in certain circumstances. We’ll see how it plays out here.

**Jordan Schneider: **Yeah, it’s interesting. The line Trump — Axios reported it — Trump saying to Bibi after he got Hamas to agree to their side of the deal: he’s presenting the points to Bibi, Bibi’s complaining about it, and Trump goes, “Why are you always so fucking negative?” It’s just brilliant.

**Chris McGuire: **Not an unreasonable question.

**Jordan Schneider: **But the interesting thing here is, what are the prospects for — okay, we have this escalatory path that Trump is working towards, and on the other side of this, we have this grand bargain that folks have been chatting about. The Chinese side put out this idea of investing a trillion dollars into the US. Unclear whether Congress is going to be cool with that, to be clear. Or the administration.

But I wonder if there are some neurons in his brain where that is the path. He’s very nimble in this perspective — he can be telling everyone that Lutnick is a communist spy who should be fired, and then three days later, he’s buying 10% of the company and Lutnick’s an American hero. I can see a world in which this escalates, but there’s also a path where this weirdly brings us faster to some big bear hug between the two countries.

**Chris McGuire: **Yeah, we don’t know, right? Who knows for sure? I won’t pretend to know. I don’t know what that grand bargain looks like. What’s actually in the concentric circle? What’s in the Venn diagram in the middle that’s actually in both countries’ interests and is big and substantive? I just still haven’t — I don’t know.

Massive Chinese investment in the US — first of all, there are a lot of people in the US system that have big worries about that from national security purposes. That’s why we have CFIUS. It’s why CFIUS has ramped up so many cases. But also from a domestic political perspective, Trump has campaigned since 2016 on “the Chinese are taking our jobs and our manufacturing.”

**Jordan Schneider: **If we’re kicking out the South Koreans, are we going to trade them for the Chinese?

**Chris McGuire: **Exactly. They want to reshore US manufacturing, US jobs, US businesses. If that’s the goal, then where’s the Venn diagram? The Chinese want to purchase more of our products, but they’ve actually purged a lot of our products, and there are certain things that we don’t want to sell them. I’m sure people will be able to craft some smaller thing like that Phase One trade deal last time and paint it as a bigger thing. But in terms of an actual large-for-large deal, I just don’t know what’s realistically on the table.

Personally, I don’t think the administration is actually that interested in the trillion-dollar investment idea. There are a number of people — potentially including the President — who see that’s not necessarily a good offer. Obviously, we’ll see.

**Jordan Schneider: **Yes, it would be like a big waving of the white flag from a domestic reshoring manufacturing perspective.

**Chris McGuire: **You’ll get a lot of US companies that would advocate against that too. How are US automakers going to feel about BYD opening up giant auto plants in Georgia? Probably not great. I’m pretty sure they’re going to make that pretty well known to the White House. They’re very good at that. There are a lot of forces here that will have influence and can’t be ignored.

**Jordan Schneider: **I’m curious from the primes’ perspective — they don’t need that much of this stuff to make the weapons. This seems like a solvable problem if you’re Raytheon or whoever.

**Chris McGuire: **Yeah, there are two ways of thinking about that. The first is: can you get enough through either stockpiling or secondary markets? Secondary markets — one way of putting it. Smuggling is what we say when the Chinese do it too. But there might be ways, when talking about smaller quantities, you can probably make that happen. Talk to someone who’s a deeper expert in the very particular materials.

The second thing is: as we’re expanding production of these things, presumably there’s a nonlinear impact on each amount of production. The first 10% of the materials is more valuable than the last 10%. It’s not like you have to — even if we need 50% of the world supply for some mineral, even getting to 20 or 30%, you’ll be able to cover your defense production base. You’ll be able to cover your critical infrastructure, and then the leverage goes down quite a bit. The primes could benefit much earlier in the reshoring process than others, just from a basic math standpoint.

**Jordan Schneider: **Anything else?

**Chris McGuire: **There are big questions about the implementation of this. With some of the US controls that we did — the bigger moves on export controls that the United States has taken over the years — it was pretty clear this was going to more or less stop the thing that we were trying to stop. There would be some small-scale smuggling, but it was going to move markets quite a bit and have some impact on the sector.

Whereas with this, there’s a lot more uncertainty about their control over the supply chain and how much various firms use and what the near-term impacts are going to be, as Chris was going through. Maybe the Chinese have mapped this out better than we have and actually know that this will be super painful in certain areas. But there’s also a lot of uncertainty on both sides here. The Chinese just don’t have a lot of levers or options, so there’s a reason they keep coming back to this bullet — it’s the one they have.

**Jordan Schneider: **If you are an expert in one of these rare earths that made it onto this list and you’d like to come on ChinaTalk or just chat anonymously about what the market looks like in your particular ecosystem, that would be really fun. Reach out: jordan@chinatalk.media.

**Chris McGuire: **Here’s one other thought — it’s interesting that China has actually also explicitly told their companies not to comply with some of our controls. They’ve told their companies those controls are illegal and not to comply with them — some of the end-use controls. We could do that with our companies, too. I don’t know how much that would actually change behavior because ultimately you need to put pressure on China to reduce the control. Firms may or may not want to actually get crosswise with the Chinese government.

But particularly ones that might not care about getting crosswise with the Chinese government — either because they don’t have a lot of sales to China or because they’re so indispensable that China needs them more than they need China — I don’t know, it could be helpful in signaling that not complying with the Chinese law is not going to get them in any legal trouble with the US. That could be something to consider. Lawyers should think about that.

But as part of a package of responses, in addition to escalating, telling firms “we’re not going to be upset if you don’t comply with that Chinese law” — it’s actually, again, reciprocal with what the Chinese are doing.

**Jordan Schneider: **The US government is shut down. Are the people who need to come up with the package for this at their desks today, or are they watching one battle after another?

**Chris McGuire: **Who knows? It depends on agency to agency. I would say even when all the people are at their desks, the critical minerals talent in the US government is very thin. That’s actually a longstanding issue. There’s been some talent exodus on some high-tech topics recently, which concerns me. When I was in the White House, there were some people — particularly at the US Geological Survey, for instance — who are really good folks on this. I hope those people are excepted employees right now and are at their desks. No idea if they are.

But look, there are still diamonds in the rough in the US government — that’s a little harsh — but there are pearls of wisdom. In the critical mineral space, there are a few. But like many topics, it’s just a few. As this becomes more important, it is unbelievably critical that the US government has more people internally and at its active disposal who can give it unbiased, impartial, and thorough advice. The Chinese are looking at our technical measures and taking technical measures back, and we have to understand them and be able to respond.

**Jordan Schneider: **This is kind of weird timing from a macro diplomatic standpoint because we had Geneva, we had these nice talks, and then Trump got a little cranky. They’re not buying the soybeans. We had Bessent at Treasury start talking about maybe raising the heat on chemical stuff and airplanes. We had the 50% rule, which we talked about in the last episode, and then this comes out.

On the one hand, it makes sense for them to keep this as a card to maybe discuss in a negotiation as opposed to putting it out. But what’s your reflection, Chris, on what this thing means for the broader underlying tensions in the relationship?

**Chris McGuire: **Yeah, some of the things that happened post-Geneva — the soybean stuff is one thing, but the 50% rule, for instance, was not a response to the soybean purchases and reallocation to Argentina. Those were completely separate tracks. But what that shows is just how hard this relationship is to keep in a place that moves you towards this grand bargain. There are certain structural things on both sides, but particularly on our side — given that they generally benefit more from the free flow of capital than we do — that people think they have to do to rebalance the relationship.

Take the 50% rule. The way the Entity List worked and the fact that subsidiaries weren’t captured that were majority-owned — which was not how the Treasury rules work — is just obviously a broken system. In some ways, this is normal regulatory maintenance where good government should look at your authorities and how they work and say, “Is this achieving the intent of the authority and of our use of it?” The clear answer was no. If you list a company, you should block the exports to the company, and they shouldn’t just be able to make a carve-out right away. There was a move to fix that. That’s not a new policy intent. It’s not announcing that we are fundamentally changing our approach to the Chinese economy or our economic or technological or strategic relationship with China. It’s just saying we have a tool that’s not really working — we have to fix it.

But we can’t do that without engendering a pretty significant response the other way. That’s a big structural problem because it puts the United States in this position where we basically have to accept that we have either tools that don’t work or parts of the system that are clearly disadvantaging us. We either just have to take that and eat it — which works more and more against us — or we have to take those measures. Then you have to balance either getting in an escalation spiral or trying to avoid the escalation spiral through various deterrence messaging and things like that, which you can do. But either way, you’re not moving towards this “we’re super friends” grand bargain.

I just don’t think there’s a way to both correct the fundamental structural imbalances in the trade system — which every administration has tried to do for several years — and have a grand bargain that actually is significant and mutually benefits the United States and China. You kind of have to pick. Fundamentally, most administrations have ended up prioritizing the correction of trade imbalances.

**Jordan Schneider: **Oh, and mystery still abounds. The MOFCOM announcements were numbers 55, 56, 57, 58, and then it jumped to 61 and 62. There are potentially 59s and 60s. Did they get cut at the last minute? Were they too spicy?

Also, lab-grown diamonds used for decorative or jewelry purposes are not controlled by these export controls, which was very nice of them. MOFCOM, we appreciate you being respectful of cuffing season.

Oh, and if you are in the diamond saw industry, we’d love to have you on ChinaTalk to discuss!