Why the latest U.S.-China tech fight may be the biggest yet

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Hey, welcome back to Politico Tech. I'm your host, Stephen Overly, and on this show, I break down tech, politics, and policy. with the people shaping our digital future. Tensions between the U.S. and China are inflamed yet again. And again, the tech industry finds itself in the crossfire. The latest split started last week.

when Beijing said it would restrict the sale of all products that contain rare earth magnets and metals from China. Now, these rare earths are found in every high-tech product you can imagine. from microchips to iPhones and electric vehicles. And China essentially controls the global supply of them. That gives Chinese President Xi Jinping tremendous power.

over the U.S. and the world economy. And he has now signaled he's ready to use it. That's left the U.S. and President Donald Trump looking for leverage of their own. including new threats of tariffs and export controls on Chinese goods and software. Liza Tobin has followed these ups and downs of this relationship for years. First as a CIA analyst.

and later as China Director on the National Security Council under President Trump and President Biden. Now, she's the Managing Director at Garneau Global. where she coaches companies on the geopolitical risks that lie ahead. On the show today, Liza tells me why she's never seen more uncertainty in the U.S.-China relationship. and why she thinks the next few weeks will prove pivotal. Here's our conversation.

Liza, welcome to Politico Tech. Thanks, Steve. Great to be on. So we're in this very precarious moment, it seems, in the relationship between US and China, although we've had many precarious moments over the years. How do you size up? The moment we're in now, do you feel like we're on the precipice of a new trade war? Yes, Steve, that's right. We are on a knife's edge in U.S.-China relations. Right now, I think...

I see the widest spectrum of possibilities in terms of which way this could all go that I've seen really over the last couple of decades that I've been watching China. So right at this moment, you know, mid-October. I could imagine things going in many different directions and at one far end of the spectrum, I could see even... tacit U.S. capitulation to China, sort of an acknowledgement at a strategic level that they have us, that they have supply chain dominance.

technology dominance and that we just need to kind of admit that. So tacit capitulation could look different ways. It could be closed in the language of some kind of big deal or grand bargain. But important to note, there's another extreme end of that spectrum that I see as possible, and that's a swing back towards decoupling. And of course, the first time President Trump was in office when I worked for him.

In 2020, during COVID, you saw this massive swing towards decoupling in March 2020. In the spring of 2020, the world economy had been hit by COVID, and the president really saw. China and Xi Jinping personally as responsible for ruining the global economy, ruining his reelection chances. And that caused him to say, look, you know, we just need to cut this off. We need to we need to go cold turkey. And so.

You know, that's a really wide spectrum of options. And I think going forward over the next couple of weeks, it could easily kind of be teetering on this knife edge. And you're going to see an ebb and flow where it may be some escalation and some de-escalation and really keeping things on that knife's edge.

China has imposed or is planning to impose these new restrictions on the export of rare earths. And not just the minerals themselves, but products that include them. It's pretty broad what China is threatening here. I mean, if we were just to take a step back, I mean, if all of these restrictions go into place...

How big of a hit are we talking about here? Like what kind of chokehold does China potentially have the U.S. in? Yeah, so a couple of points. One, this is targeted at the United States, but it's also global. So it's the intention here by MOFCOM is that this is going to be extraterritorial. So they're saying that. If there are Chinese rare earth components, rare earth minerals, even, you know, 0.01%, even sort of a small amount of these anywhere in the world being used.

that that company has to seek an export license from Moffcom. And it's pretty clear they're not going to grant it if it's for defense purposes. If it's for civilian use, and it kind of depends, it will be a political calculus on Beijing's part. It is sort of a proximate response to something the United States had done about a week prior when when.

The Commerce Department in the United States published something called the Affiliates Rule, which was basically a tightening and a broadening of our own export controls. That was also broad and global, kind of a regulatory cleaning house and closing loopholes and sort of something that was kind of boring and bureaucratic on the surface, but actually over time will have a big impact.

by broadening export restrictions that will hit a lot of Chinese chip-making companies, as well as other companies. But I think maybe the impact will be strategically biggest on the chip-making firms. When China came back and reacted, they used the Commerce Department's action as a pretext to say, you know, how dare you tighten your export controls over right in the middle of the trade talks? We were pushing you to.

remove all that. And so that's a pretext. But the breadth and the intricacy and the detail of the MOFCOM regulations, you know, these things are pages and pages long, multiple parts. indicates that this isn't something they cooked up in a few days in response to what the U.S. Commerce Department did. This is part of an ongoing effort over several years. to develop an export control system that both mirrors and responds to the US and also tries to deter the US.

and deter countries around the world from aligning with the United States and kind of basically dial up the pressure to accept the notion, and this is Chinese propaganda notion, that China is a superior technology power, that China is winning the air race, that China is becoming the world's leading power across all metrics. And so in terms of thinking about how these things are going to play out.

There are the technical details and a lot of lawyers all over the world are studying those. But first and foremost, it's always a political tool by the Chinese Ministry of Commerce as used by the Chinese Communist Party.

to pursue their broader ends. Well, I was going to ask you about what Beijing might be after here, because obviously there's the comment that this is just retaliation, but it's not lost on me or I think anyone else that... the U.S. and China are in the midst of these trade negotiations. And it seems like this is certainly a signal from Beijing of what they could do if perhaps those negotiations don't go their way. Right. Yeah.

That's a great question. What does Beijing really want out of this? And so you have to step back a few weeks, a few months. And one thing that the Chinese have been pushing the Americans to do in these trade talks is basically Get rid of all your trade restrictions on China. So it's like that storybook that a lot of us read as kids. You know, if you give a mouse a cookie, I don't think it's quite right to call China a mouse. If you give a moose a cookie, he's going to ask.

Ask for the whole thing, you know, the jug of milk and the whole box of cookies and eventually, you know, demand your whole house. Right. So that's what's going on here. They got the cookie of the Nvidia H20 chip when the Trump administration kind of. turned under pressure from NVIDIA and said, yeah, go ahead and sell that chip, which it had banned for export to China a few months prior. So that U-turn in export control policy was like a...

catnip for the CCP to say, hey, we can get something. Let's push for more. And each time the Trump administration makes these concessions, it encourages the Chinese system to push for more. So now they're saying we want their whole laundry list, like get rid of all your trade restrictions, your investment. screening restrictions, the chip sacked guardrails, your export controls on tooling and the tools to make these chips as well as the chips themselves.

You know, I don't know if they think they're actually going to get all this, but they certainly feel they're pushing on an open door. And the question is, will that door stay open or is the Trump administration going to slam it shut at some point? This episode is brought to you by White Claw Surge. Nice choice hitting up this podcast.

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I wanted to ask you about the Trump administration's strategy and what it could do going forward, because you've worked on these issues under President Trump and under President Biden. I mean... Is the Trump administration's China strategy where it needs to be to really respond effectively to these moves? Yeah. So the next couple of weeks are going to be critical. I think a key.

indicator that Beijing will certainly be watching to see if the Trump administration has resolved to push back and kind of put up that steel wall that's going to block. China's Leninist system for pushing and pushing and pushing on what it sees as an open door is, is the United States able to get other countries aligned with it to resist these?

extraterritorial, extrajudicial, global regulations. Because remember, according to how Moffcombe published the regs, they applied to the whole world, not just the United States. So Beijing is sort of... throwing its cards on the table and forcing countries to choose, are you going to align with the United States and countries like Japan and Korea and the Netherlands that have important...

choke points of their own in the semiconductor supply chain. And the U.S. has persuaded, cajoled and pressured them. to align with it over the years, not just Trump, but the Biden administration as well, say, go along with us and build this plurilateral system of export controls. So China hates that. So is the whole world going to kind of cave to MOFCOM's pressure and comply with Chinese law? Or are they going to stay aligned with the U.S.? So in the next few weeks, I think.

You'll either see the Trump administration sort of making progress, getting other countries, key countries, Australia, Japan, the Netherlands, the rest of Europe on board with a unified. front to push back against China's pressure on trade and technology, or you won't. I think the Chinese bet is that they have more leverage here. and they can persuade and coerce US allies and partners to align with it and to obey Chinese law rather than align with US priorities.

You said leverage, and that was kind of the word I was thinking in my head, too, was like, what leverage does the U.S. have at this point vis-a-vis China, especially when you're dealing with something like rare earths, which... many people may not realize, but are so fundamental to the building of modern technology. And the whole world really depends on them. And so China, it would seem, has quite the bargaining chip here. Yeah, certainly. So, yeah, the question is who has.

stronger levers? Who has stronger response options? You know, rare earths is clearly an important chokehold. And it worked once back in April, May timeframe to get the Trump administration to soften its posture on China trade. And so the CCP is going to keep, you know, recycling that and keep playing that. The leverage that the United States has, you know, there's a there's a number of things. But the key one here, I think, is on.

compute at scaling. So designing and making these AI chips, the NVIDIA chips, the AMD chips, these high-end chips, that's an American choke point where... China's chip making capabilities are trying really, really hard to catch up with the US, but it's an extraordinarily difficult technological challenge. And even though they're. pouring a lot of money and a lot of smart engineering talent into it. They're not anywhere close. So the thing about export controls is...

The theory of the case is that if you constrain China's access to sufficient compute power, these AI chips at scale, that that gap that the US leadership... will be able to lengthen because it will grow over time. So that's why the Chinese are so intensely focused on getting these controls unwound because... Getting access to more NVIDIA chips, more American chips, more chip making tools from countries in Europe and Asia and the United States, that will enable them to more quickly fill that gap.

between themselves and the United States. And it serves as sort of a bridge. I mean, eventually... Their ideal end state is to be at the top of the technology supply chain and control the entire AI stack and be ahead in chips and data centers and AI models and the whole stack. They know that they're not. close to that, at least on the hardware side, on the AI chip side. And so in the meantime, while they try to catch up until they can catch up, they need access to that American technology.

the other allied technology.

It's interesting because it sounds like, I mean, China is trying to catch up on the chips. And as you're saying, it's not close. The U.S. obviously right now wants to catch up on the critical minerals. But it's not close, candidly, right, to where China is in terms of. the production capacity. So you kind of have these two sides with their own advantages that for now need to maybe find a way to get along, perhaps. We'll see.

Well, you brought up a good point because the Chinese challenge on the chips is... a wickedly complex technological challenge. It's like maybe one of the hardest engineering challenge, scientific challenge in the world to try to replicate. EUV technology or NVIDIA chips or find some other way to do computing that is new and unknown. They're trying really hard, but it's a fantastically difficult challenge. The U.S. challenge is different. Rare Earth magnets are, you know.

They're less, much less technologically complex. This is a matter of political will and focus and choice and strategy. I mentioned earlier, it's a gray rhino. National security experts and minerals experts have known for years that this dependency in place, the nation just hasn't gotten its act together. So again.

Can the Trump administration work with key allies, Australia, Japan, others who have complementary advantages here, put the money in place? It's not really that expensive of a problem. Again, it's a matter of political focus. and will an effort sustained over time, you know, probably across more than one administration. So it's a political problem versus this really complex technological challenge that the Chinese face.

I know you said earlier that the kind of coming weeks will be very important and very telling. there's this expected meeting between President Trump and President Xi in South Korea. President Trump has suggested it may not happen. I wonder if you see that as kind of a pivotal moment and what you'll be watching for if they do meet. Yes, it's an important indicator. It's an important waypoint. We don't know yet if this meeting will happen at APEC.

It appears over the last few days that the Trump administration favors it, that they probably want to meet because they see it as a opportunity to kind of. calm down markets and send a signal of calm. But it's still unclear if the Chinese side will agree. So we'll see if our treasury secretary meets with his counterpart, Holi Fung, at some point in the next.

couple days or weeks before the end of October. And it may be that the Chinese side, that Xi Jinping waits until the last minute to confirm. Now, why would he do that? old Chinese playbook. It's been used against countless American administrations that you string us along in order to get more concessions. And so what are they doing? You're trying to trade.

They're trying to trade fake concessions on China's side for real concessions on the American side. A fake concession is just like, hey, we'll agree to meet. They're dressing this up as if it's a gift, some kind of gift to us just to talk. It's not. It's just this is what countries do. They should be talking to each other. It shouldn't be a concession.

They're often able to trick American negotiators into thinking that just having an agreement to meet is a win. A real concession that they would be looking for would be something concrete like the U.S. agreeing to unwind export controls or put our national security rules in place or, you know, bring down the tariffs or agree to a... I guess we've already agreed to a really bad deal on TikTok, but basically tangible, concrete concessions that would allow China to kind of continue accruing.

its comprehensive national power and working towards its own KPIs, which again are, how close are they to becoming the world's leading power? across all domains, technology, economics, finance, military, political, cultural, you name it. Well, a lot to watch then in the coming weeks, including this meeting. But Liza, thanks for being here on Politico Tech. Thanks so much, Steve. It was great to be on with you.

That's all for this week's Politico Tech. If you like Politico Tech, be sure to subscribe and recommend the show to a friend or colleague. And for more tech news, subscribe to our newsletters, Digital Future Daily and Morning Tech. Our producer is Norma Malichal. Fran Bandy made our theme music. I'm Stephen Overlay. See you back here next week.