U.S. and Chinese Officials Clash Over Export Controls and Tariff Threats in Malaysia

• Bessent, Greer meet China’s He Lifeng for fifth time since May
• Talks aimed at keeping Trump-Xi meeting on track, thwarting major trade war escalation
• China’s rare earths export controls a key focus for Kuala Lumpur meeting

KUALA LUMPUR/WASHINGTON, Oct 24 (Reuters) – Top economic officials from the U.S. and China are due to arrive in Kuala Lumpur on Friday for talks to prevent a trade war escalation and keep next week’s meeting between U.S. President Donald Trump and Chinese President Xi Jinping on track.

U.S. Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer will meet with Chinese Vice Premier He Lifeng to find a way forward after Trump threatened new 100% tariffs on Chinese goods and other trade curbs starting November 1 in retaliation for China’s vastly expanded export controls on rare earth magnets and minerals.

Sign up here.

The talks, due to start on Saturday on the sidelines of the Association of Southeast Asian Nations Summit in the Malaysian capital, are the fifth meeting between He, Bessent and Greer since May, shifting from European cities to a key Asian exporter dependent on both China and the U.S.

RARE EARTHS STRANGLEHOLD

The talks are again focused on China’s stranglehold over global supplies of rare earth minerals and magnets essential for high-tech manufacturing, which Beijing has used as an effective leverage point against Washington.

In April, Trump hit Chinese imports with new tariffs that quickly escalated to triple-digit rates on both sides, and Beijing cut off rare earths supplies to U.S. buyers, a move that threatened to halt U.S. production of electric vehicles, semiconductors and weapons systems.

Bessent and Greer’s first meeting with He in Geneva in May led to a 90-day truce, which brought down tariffs sharply to about 55% on the U.S. side and 10% on the Chinese side and restarted the flow of magnets. The terms were refined in London and Stockholm and September talks in Madrid produced a deal to transfer Chinese short video app TikTok to U.S. ownership control.

But the delicate truce frayed two weeks later, when the U.S. Commerce Department vastly expanded a U.S. export blacklist to automatically include firms more than 50% owned by companies already on the list, banning U.S. exports to thousands more Chinese firms.

China struck back with the new global rare earth export controls on October 10, aiming to prevent their use in military systems by requiring export licenses for products using Chinese rare earths or rare earth refining, extraction or processing technology developed by Chinese firms.

Bessent and Greer blasted China’s move as a “global supply chain power grab” and vowed the U.S. and its allies would not accept the restrictions. Reuters reported that the Trump administration is considering a plan to up the ante with curbs on a dizzying array of software-powered exports to China, from laptops to jet engines, according to sources familiar with the deliberations.

STEPPING BACK FROM BRINK

But their challenge in Kuala Lumpur, analysts say, is to negotiate a return to the prior status quo to keep magnets flowing and avoid a massive U.S. tariff hike. If they fail, next Thursday’s Trump-Xi meeting in South Korea during the Asia Pacific Economic Cooperation Summit may be canceled.

“Ultimately, I’m optimistic that at this particular meeting there will be tactical decisions to sort of extend the pause,” said Dennis Wilder, a senior fellow at Georgetown University’s Initiative for U.S.-China Dialogue on Global Issues.

“Trump won’t go to the 100% tariffs. The Chinese will back away a little bit from this idea that rare earths exports to defense sectors around the world will not happen,” Wilder told an online forum hosted by the Center for Strategic and International Studies.

The U.S. side is also likely to press Beijing to resume buying American soybeans after China bought none in September, heaping economic pain on farmers, a key Trump political constituency.

But the talks are less likely to dig into the core U.S. complaints about China’s export-driven economic model that prompted Trump’s tariffs in the first place, which include a long-sought rebalancing of Chinese economy towards more consumption and reducing its excess production capacity.

“We’re not able to get to that because we’ve got to ask them to buy soybeans, right?” said Philip Luck, director of the Center for Strategic and International Studies’ Economics Program. “It’s not the core issue.”

Reporting by David Lawder and Rozanna Latiff

Our Standards: The Thomson Reuters Trust Principles.opens new tab

Purchase Licensing Rights

What specific U.S.export controls are causing friction with China regarding technology transfer in Malaysia?

Rising Trade Tensions in Southeast Asia

recent high-level meetings in Kuala Lumpur between U.S. and Chinese officials have revealed escalating tensions surrounding export controls, tariff disputes, and concerns over economic coercion within the strategically crucial region of Southeast Asia. The discussions, framed as part of ongoing efforts to manage the complex U.S.-China relationship, quickly devolved into pointed exchanges regarding trade practices and national security concerns. This clash specifically centers on Malaysia’s growing role as a potential hub for technology manufacturing and its implications for both superpowers.

The Core of the Dispute: Semiconductor Supply Chains

The immediate trigger for the heightened friction appears to be the U.S.’s continued tightening of export restrictions on advanced semiconductors and related technology. Washington argues these controls are necessary to prevent China from acquiring capabilities that could be used to enhance its military and surveillance apparatus. Beijing vehemently opposes these measures, labeling them as protectionist and a intentional attempt to stifle its technological advancement.

* U.S.Concerns: Preventing the flow of cutting-edge chip technology to Chinese entities involved in military research and advancement. Maintaining a technological advantage in critical sectors.

* Chinese Counterarguments: Accusations of the U.S. using national security as a pretext for economic containment. Assertions that the restrictions violate free trade principles.

Malaysia, a key player in the global semiconductor supply chain, finds itself caught in the crossfire. U.S. officials have reportedly expressed concerns that Chinese companies are increasingly utilizing Malaysian facilities to circumvent export controls, potentially through re-routing or repackaging of sensitive components.

Tariff Threats and Retaliation Risks

Beyond export controls, the specter of new tariffs loomed large during the meetings. The U.S. has been considering additional tariffs on a range of Chinese goods,citing unfair trade practices and intellectual property theft. China has consistently warned of retaliatory measures, potentially targeting U.S. agricultural products and other key exports.

The potential for a trade war escalation is especially concerning given the already fragile global economic recovery. Analysts predict that increased tariffs could disrupt supply chains, raise prices for consumers, and dampen economic growth. The situation is further complicated by Malaysia’s existing trade relationships with both countries.

Malaysia’s Position: Navigating a Delicate Balance

Malaysia is attempting to navigate a delicate balance,seeking to maintain strong economic ties with both the U.S. and China. Prime minister Anwar Ibrahim has emphasized the importance of a rules-based international order and has called for dialog to resolve the trade disputes. However, Malaysia also recognizes its economic dependence on China, which is its largest trading partner.

* Economic Considerations: China accounts for a critically important portion of Malaysia’s exports and foreign investment.

* Strategic Partnerships: Malaysia also values its long-standing security and economic relationship with the U.S.

* ASEAN’s Role: The Association of Southeast Asian Nations (ASEAN) is attempting to play a mediating role, advocating for a peaceful resolution to the disputes.

The Impact on Foreign Investment in malaysia

The escalating tensions are creating uncertainty for foreign investors in malaysia.Companies are reassessing their investment plans, concerned about the potential for disruptions to supply chains and the imposition of new trade barriers. This hesitancy could hinder Malaysia’s efforts to attract foreign capital and diversify its economy.

Case Study: Intel’s Malaysian Expansion (2023) – Intel’s recent multi-billion dollar investment in a chip packaging facility in Malaysia was touted as a sign of the country’s growing importance in the semiconductor industry. However, the current trade disputes raise questions about the long-term viability of such investments.

Potential Scenarios and Future Outlook

several scenarios could unfold in the coming months:

1. Escalation: The U.S. and China could impose further tariffs and tighten export controls, leading to a full-blown trade war.
2. Negotiated Settlement: Both sides could reach a compromise, potentially involving concessions on export controls and tariff reductions.
3. Continued Stalemate: The current tensions could persist, creating ongoing uncertainty for businesses and investors.

The outcome will likely depend on a number of factors, including domestic political considerations in both countries, the broader geopolitical landscape, and the ability of diplomatic channels to remain open. Monitoring trade policy, geopolitical risk, and supply chain resilience will be crucial for businesses operating in the region.

Benefits of Diversifying Supply Chains

The current situation underscores the importance of supply chain diversification. Companies reliant on single sources for critical components are particularly vulnerable to disruptions caused by trade disputes or geopolitical events.

* Reduced Risk: Diversifying supply chains reduces the risk of disruptions and ensures business continuity.

* Increased Resilience: A diversified supply chain is more resilient to shocks and can adapt more quickly to changing circumstances.

* Cost Savings: Competition among suppliers can lead to lower costs and improved quality.

Practical Tips for Businesses

Businesses operating in Malaysia or with exposure to the