BEIJING/WASHINGTON/NEW YORK, Oct 23 — Just a month after United States (US) President Donald Trump hailed "progress" in talks with China, the world's two most powerful nations are scrambling to salvage a planned summit of their leaders, now just a week away, while trading blame for a spike in tension.
Even if the talks between Trump and President Xi Jinping can be put back on track, experts say each side's belief that it has the upper hand, coupled with China's tougher posture, makes a narrow deal on a few issues the most likely outcome.
"China believes negotiations alone are insufficient and that effective countermeasures against the United States are necessary to prevent the US from exerting pressure," said Shanghai's Fudan University's American Studies Centre director Wu Xinbo.
At risk are a fragile truce negotiated over months and the world’s most important trade relationship, worth US$660 billion (RM2.79 trillion) a year.
"China's recent measures actually reflect a shift in its approach to economic and trade negotiations with the United States during Trump's second term," added Wu, an expert on ties between the two biggest economies.
A trade war that had simmered for months exploded into the open early this month, after Beijing dramatically expanded curbs on exports of rare earths in response to a US hike in the number of firms blocked from purchasing its technology.
China's move to tighten control over critical minerals, even beyond its borders, was a vast expansion of its toolkit for tackling trade disputes, underscoring Beijing's intent to wield its dominance over vital supply chains, experts say.
"This is a huge expansion of extraterritorial jurisdiction. There is surprisingly explicit language in the controls about this, specifically targeting a number of chips," said consultancy Trivium China's expert Cory Combs.
China, which turns out more than 90 per cent of the world's processed rare earths, modelled its curbs on US rules aimed at limiting other countries' exports of semiconductor-related products to the Asian nation.
The Trump administration was surprised by China’s salvo, said two sources familiar with its internal deliberations. Another source said officials were canvassing US companies to see how China’s measures would affect them.
Experts say that while Beijing subsequently sought to portray its controls as targeted, the framework had been prepared for a long time and would almost certainly remain.
Officials in Washington accuse China of waging "economic war", Trump has warned that the meeting might not happen, and each side blames the other for a sudden escalation.
It is a far cry from Trump's comments hailing "progress" on issues ranging from trade and TikTok to fentanyl smuggling and the Ukraine war, made after the latest round of talks in Madrid and a September telephone call with Xi.
'Economic war'
Trump has said he continues to plan to meet Xi in South Korea at the end of October on the sidelines of the Asia-Pacific Economic Cooperation gathering and expects to reach a deal, but reiterated his threat of 100 per cent tariffs if it is not successful.
Seeking a last-minute off-ramp, US. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng will meet in Malaysia just days before.
The meetings follow tough negotiations in European capitals, from Geneva to Stockholm, over trade, fentanyl, market access, and other aspects of ties, after which both sides traded accusations that the other side did not stick to its promises.
Trump's Cabinet secretaries view China’s move on rare earths as "full-blown economic war", said a person familiar with the administration's thinking.
"The prospect for escalation is severe. There is no easy fix, like another 90-day pause," the person added.
The White House and US Treasury Department did not respond to Reuters' requests for comment. China's Foreign Ministry and Commerce Ministry did not immediately respond to a request for comment.
The American Chamber of Commerce in China president Michael Hart said that part of the challenge is that each side believes it has the upper hand.
"In our discussions with Chinese officials, they express confidence in their economy and believe the US economy and political system are in turmoil. As a result, they feel they are in a strong bargaining position," he said.
Hart noted that the negotiations are challenging because US officials in turn feel confident about their own economy and believe the Chinese economy is weak.
'Flexible and pragmatic'
Washington's lack of a unified China policy complicates matters, said people familiar with the administration's thinking, citing a mix of punitive measures alongside easing on some chip sales and the deal on the social media app TikTok.
"People I have met in D.C. made it clear the Trump administration’s policies on China are fairly hawkish. However, they also acknowledged the President himself can sometimes be more flexible and pragmatic," said Hart.
While both sides prepare for talks, they are also diversifying their economies and developing new measures.
Trump signed a critical minerals pact with Australia on Monday that aims to offset Beijing's role, while Reuters reported on Wednesday that the US is considering targeting software-powered exports.
Officials say extensive sectoral tariffs are also being drawn up for semiconductors, pharmaceuticals and other key industries.
China, for its part, could resort to aggressive enforcement of its new rare earths controls, launch fresh antitrust investigations into US companies, or beef up tariffs, as it did in April.
Amid the mistrust, an optimistic scenario would be a follow-up to the Phase One deal of 2020, said one person familiar with the administration’s thinking, although deals to buy soybeans or other farm products could be within easier reach.
"The best-case scenario is confidence-building measures and more directives to negotiate a deal that could be launched in the first half of next year," said Peter Harrell, an international economics official in the Biden administration.
