U.S. and China raise stakes ahead of Trump-Xi summit
Top officials from both sides meet in Kuala Lumpur amid escalating tensions ahead of APEC
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U.S. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer are meeting with Chinese Vice Premier He Lifeng and other top economic officials in Kuala Lumpur this weekend, as both sides prepare for a Trump-Xi summit on October 30, on the sidelines of the upcoming Asia-Pacific Economic Cooperation (APEC) meeting in Gyeongju, South Korea.
Earlier this month, the PRC dropped something of a bombshell by announcing new restrictions on rare earth exports. In response, Trump threatened to slap 100% tariffs on Chinese imports, and even to cancel the meeting with Xi.
Both sides now seem to be escalating tensions to gain leverage in the talks. Escalate to deescalate.
With Washington reportedly considering new curbs on software-enabled exports to China and opening a probe into Beijing’s compliance with the 2020 trade agreement, officials from both sides will now try to cool tensions and pave the way for next week’s leaders’ meeting. Whether they succeed or not, in this war, any peace is unlikely to last.
Let’s jump into it.
— PC
Through the Lens
In Focus
I. U.S., China try to salvage Trump-Xi meeting in Malaysia
Top economic officials from the U.S. and China ended their first day of talks in Kuala Lumpur on Saturday, with a Treasury spokesperson describing them as “very constructive”.
The world’s two largest economies are looking to avert an escalation of their trade war and ensure that a meeting happens next week between U.S. President Donald Trump and Chinese President Xi Jinping.
The talks on the sidelines of the Association of Southeast Asian Nations summit will chart a path forward after Trump threatened new 100% tariffs on Chinese goods and other trade curbs starting on November 1, in retaliation for China’s vastly expanded export controls on rare earth magnets and minerals.
The recent actions, which also include an expanded U.S. export blacklist that covers thousands more Chinese firms, have disrupted a delicate trade truce crafted by U.S. Treasury Secretary Scott Bessent, U.S. Trade Representative Jamieson Greer and Chinese Vice Premier He Lifeng over four previous meetings since May.
He smiled and waved to reporters but did not comment as the Chinese delegation left the venue for the talks, Kuala Lumpur’s Merdeka 118 tower, the second-tallest building in the world.
China’s top trade negotiator Li Chenggang is also participating in the talks. A Reuters witness saw Li arriving alongside He earlier in the day.
About the talks, a Treasury spokesperson said: “They have been very constructive, and we expect them to resume in the morning”.
The Malaysian government and the U.S. and Chinese sides have provided few details about the meeting or any plans to brief the media about outcomes.
The three officials will try to pave the way for Trump and Xi to meet next Thursday at an Asia-Pacific Economic Cooperation summit in South Korea, a high-stakes conversation that could revolve around some interim relief on tariffs, technology controls and Chinese purchases of U.S. soybeans.
Minutes before the talks started, Trump left Washington for his tour of Asia and laid out several talking points for the meeting with Xi.
He said farmers, hit by a Chinese freeze on U.S. soybean purchases, and the democratic island of Taiwan, which China claims as its own territory, would be on the list of topics discussed. Trump added he does not have any plans to visit Taiwan.
Read: US, China seek to avoid trade war escalation, salvage Trump-Xi meeting in Malaysia talks (Reuters)
Related:
II. The Fourth Plenum
China’s top leaders on Thursday pledged to boost domestic consumption over the next five years, alongside widely expected plans to strengthen self-reliance in advanced technologies such as quantum computing and hydrogen power.
That’s according to a state media readout of the closely watched “Fourth Plenum” meeting for setting five-year development targets. China on Thursday also confirmed that Vice Premier He Lifeng, who participated in the plenary meeting, will visit Malaysia from Friday to Monday for U.S. trade talks — as anticipation grows over a possible meeting between the U.S. and Chinese presidents at the end of the month.
Despite broad calls to bolster China’s international influence and “safeguard the multilateral trading system,” the readout did not mention major countries by name as the meeting focuses largely on domestic development.
China must “vigorously boost consumption,” the meeting readout said, according to a CNBC translation of the Chinese. The leaders elaborated on the need for consumption with calls to balance it with “effective investment” and “adhere to the strategic point of expanding domestic demand.”
“New demand will lead to new supply, and new supply will create new demand,” the report said. The leaders also called for effective implementation of policies to support businesses and “special actions” to boost consumption.
The tone indicates that China’s policymakers are taking a closer look at the relationship between economic supply and demand than they have in past years, said Zong Liang, former chief researcher at the Bank of China.
Read: China vows to boost domestic consumption, tech self-reliance in next five years as Fourth Plenum wraps (CNBC)
Related: China Sees Lowest Attendance at Plenum Since Cultural Revolution (Bloomberg)
III. Overcapacity and China’s model
The fundamental problem is that by rewarding speed and scale over productivity and differentiation, the internal plumbing of China’s political economy incentivizes businesses to produce too much stuff. Although that has always been the predictable outcome of China’s political and financial system, the dysfunction was kept in check during much of China’s spectacular rise. Changes in the Chinese economy since 2020, however, including the cratering real estate market and a crackdown on private businesses and investments, have compounded the structural incentives that lead to overcapacity.
The result is not only damage to China’s trade relationships but also plummeting company profits, significant deflationary pressure, and constraints on innovation. Over time, cutthroat price wars also spill into the labor market, with firms freezing wages or cutting jobs, which weakens household spending, deepens China’s structural slowdown, and makes growth even harder to sustain. Without significant reforms, China risks repeating earlier missteps as it tries to move further up the value chain and into advanced fields such as artificial intelligence and biotechnology—potentially with even greater consequences for its economy.
China’s tendency to overproduce starts in an unlikely place: the Chinese Communist Party’s performance and promotion system. In the CCP bureaucracy, local officials are evaluated primarily on their ability to deliver growth, employment, and tax revenues. But China’s largest single tax, the value-added tax (VAT), is split evenly between the central government and the local government of the place where a good or service is produced, not the place where it is consumed. Since the system allocates tax revenue to regions based on production, it rewards the decision to build larger industrial bases. Local Chinese officials try to retain as much upstream and downstream activity as they can to expand their tax base. (The U.S. tax code, by contrast, apportions much of the corporate tax base to where companies’ customers are, rather than where firms produce goods, so the tax base is more evenly spread across jurisdictions.) This feature of the Chinese tax system explains the proliferation in China of “full stack” industrial clusters: EV assembly lines are located near battery production facilities, and solar panel factories are integrated with raw material and component suppliers.
This system effectively encourages provincial and municipal leaders to act like industrial investors or venture capitalists. And in many cases, it has produced profound efficiencies. Over the past decade, for instance, Hefei, the capital of Anhui Province, has poured about $25 billion of state capital into various struggling companies, including the EV maker Nio and the flat-panel display manufacturer BOE, to great effect. By acting as an early investor and bearing the initial risk, Hefei stimulated about $96 billion in follow-on investment and generated around $9 billion in tax revenues. The Hefei model has since been widely imitated, with other provinces racing to assemble their own industrial clusters.
But Hefei’s success rested on unique conditions—namely, that the city invested in companies that were relatively mature already. When other provinces have tried to replicate the model, especially in high-tech sectors that Beijing has signaled support for, they have often lacked the same foundation; as a result, many of the projects have underperformed, creating fiscal stress for local governments. But provincial officials have continued to rush into these industries because earmarked subsidies from the central government effectively make Beijing a co-financier. Provinces pour in matching funds, offer discounted land and utilities, and guarantee quick regulatory approvals to secure money from Beijing and eligibility for central government support. After Beijing released its 14th Five-Year Plan, in 2011, which designated EVs, solar panels, and batteries as “strategic emerging industries,” provincial five-year plans started to read like carbon copies of one another, each promising the same clusters in the same industries. This is the logical outcome of a tax and subsidy system that rewards scale over selectivity.
Read: The China Model’s Fatal Flaw (Foreign Affairs)
Related: China’s innovation paradox (Financial Times)
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