Hello, and welcome back to another episode of Sharp China. I’m Andrew Sharp, and on the other line is Bill Bishop. Bill, how are you doing?
I’m good, Andrew. Happy Year of the Snake to you and everyone listening to us. The Year of the Snake continues indeed. I still have not seen any snakes around my house, which I personally consider a good omen, but there’s still plenty of time in the Year of the Snake for me to run into some snakes. How’s your year going?
Good. It’s D.C. There are lots of things slithering around here. Lots of slithering, indeed, as we all slither together.
Well, we have a lot to work through on this show. We’ll begin with tariffs. As of 12:01 a.m. on Tuesday morning, the U.S. will impose a 10% tariff on all goods originating from the PRC. I’m going to read a portion of the executive order that’s at issue here.
The Chinese Communist Party, which exerts ultimate control over the government and enterprises of the PRC, has subsidized and otherwise incentivized PRC chemical companies to export fentanyl and related precursor chemicals that are used to produce synthetic opioids sold illicitly in the United States. The influx of these drugs to our nation threatens the fabric of our society. The PRC plays a central role in this challenge, not merely by failing to stem the ultimate source of many illicit drugs distributed in the United States, but by actively sustaining and expanding the business of poisoning our citizens.
The PRC implements the most sophisticated domestic surveillance network coupled with the most comprehensive domestic law enforcement apparatus in the world. The PRC also routinely exerts extraterritorial reach across the globe to threaten, harass, and suppress what it views as political dissent. As such, the CCP does not lack the capacity to severely blunt the global illicit opioid epidemic. It is simply unwilling to do so.
So as far as I know, and from what I’ve read, all of that is true and has been supported by findings from Congress, among others. I wanted to start there because there’s a lot of talk about a trade war and all kinds of palace intrigue about what may or may not come next, which obviously we’re about to talk about. But it shouldn’t be overlooked that this first round of tariffs is specifically a response to the PRC’s role in the global fentanyl trade and the flow of fentanyl into the United States, which kills about 75,000 Americans every single year at this point. Did you have any thoughts on that point in particular?
No, I mean, I don’t disagree that the PRC could do more. I think that the PRC’s view is that the problem is on the US side. The problem is demand. The problem is the drug abusers. In the last year, I saw a senior PRC diplomat, and we talked about fentanyl, and I got why China is really working hard, the whole official line about all the things China’s doing, and really the problems on the American side.
I think, though, that when you look back at the history of how the PRC has withdrawn or increased cooperation on the fentanyl issue just in the Biden administration, it was clear they linked it to other issues. If they were mad at the US or when they were mad at the US over one thing, they would reduce fentanyl cooperation.
Right. And look the other way on some of this enforcement. I think there’s no question that the PRC could do more. And so I think the issue—what the Trump administration is doing, what the Biden administration tried to do, the Trump administration is taking a bit of a different approach—is trying to create the incentives for the PRC enforcement bureaucracies to pay more attention to things like pill presses and chemical precursors that are being exported.
It’s one of those things where if the bureaucracy is told from the top that these things really need to be stopped or there needs to be much more scrutiny on where they’re headed in terms of end user, because now, of course, the PRC has set up this whole export control regime that includes getting verification of end users or companies declaring the end users. They could do the same thing for all these fentanyl precursors and pill presses. So, we’ll see. One would think.
Right. Right. Right. So, we will see if this pressure from the Trump administration creates those incentives inside the PRC system to take more actions to limit the export of these things.
Yeah, we will see. Just like NPR in 2020 found at least 32 vendors who had been selling precursor chemicals on Alibaba in 2019. When those vendors were banned, there were 31 other vendors discovered selling to other precursor chemicals. Some of this has been happening kind of in plain view, and the China Select Committee has done a good job in the House documenting some of the abuses.
The US has tried working group after working group after working group, and nothing has really changed. So, to the extent this is specifically designed to combat the tacit or explicit support of the fentanyl trade on the PRC side, it’s a good idea on that basis. But it’s also only a small portion of the tariffs that were discussed in the lead-up to the 2024 election. The number 60% has been thrown out.
These are 10% tariffs. It is a 10% tariff on all goods from the PRC, so it’s pretty meaningful. But then on Tuesday, there was an immediate round of responses from the PRC side: additional tariffs on 15% imported coal and liquefied natural gas originating from the United States, additional tariffs of 15% on crude oil, agricultural machinery, automobiles with large displacement, and pickup trucks. There are export controls on items related to tungsten, tellurium, bismuth, molybdenum, and indium. There’s the addition of PVH and alumina to the unreliable entity list. And the publicizing of an already underway investigation into Google for suspected violations of antitrust laws.
We’ll come back to Google and that element later in the show. But as far as the other retaliatory tariffs announced, how do you interpret this response from the PRC?
It’s interesting, right? Because when President Trump issued the executive order, he also issued the executive orders for the 25% tariffs on Mexico and Canada. Both those countries were able to offer enough, even though I think what they were offering was basically they’d already announced—but it didn’t matter—they were able to say, okay, we’ll offer these things. Then they got a 30-day reprieve while there were going to be discussions. The Chinese response was not at all, okay, let’s talk.
It was, I think what they’re doing here, and it was restrained. It doesn’t actually have a particularly significant economic impact. The new measures they announced in terms of tariffs—the entity listing or the unreliable entity listing of those two US firms—is potentially quite problematic for them. Not a complete surprise, given investigations are underway, but clearly held in reserve as part of a response package.
What I think really is most interesting here is while they are being restrained, they’re trying to—this response was restrained. I think also, though, they basically have sort of pulled out the blade to show all the things they can do. Because things like the critical minerals list, the export controls, tungsten, if they really wanted to restrict tungsten and tungsten-related exports, they could actually cause the US a lot of problems.
What I think they’re doing here is they’re just reminding, they’re trying to make sure that the Trump administration understands this is not 2017. They have a lot more tools now that they can use, they can bring to bear to respond to US trade pressure, and they are going to be very smart about targeting actions that will cause pain to specific US companies and specific industries.
One question— and we talk about the tools they have now—did they not have these tools in 2017? Why are they more prone to use them now?
So, things like the export controls, the entity list, the unreliable entity list, those are new. All these have been developed. They’ve been building up their toolkit, and in many ways, they’ve mirrored what the US does. They’ve seen how the US has built out their whole infrastructure around sanctions and entity listing, export controls, and they see, obviously, a lot of those things have been applied to PRC firms and PRC individuals.
I think they’re like, well, we’re going to do it too. And here’s our roadmap. What they’re trying to signal, and you hear this from various think tankers on the PRC side, they’ve been consistently pushing the message that the Trump administration needs to understand that things have changed, that we have a much… We have economic challenges, but we’ve also done a lot of work to harden our economy and harden our supply chains and, frankly, are buying more countries and companies to our supply chains or to supply chains in China.
But we’ve also built out this much broader sanction coercion related toolbox so that we—being China—can retaliate in a much more targeted and painful manner than we could during the first trade war.
What’s interesting is in the executive orders for Canada, Mexico, and the PRC that Trump issued earlier this week, there was language that said should the PRC retaliate in response to this action through import duties on the US exports to the PRC or other measures, the president may increase or expand in scope the duties imposed under this EO to ensure the efficacy of this action. It’s basically saying, look, if you guys respond, we’re going to double down.
Right. There’s like an escalation clause built into all this.
Exactly. So far, at least, Trump isn’t escalating.
Well, and the tariffs—how much coal was China actually importing from the US, or natural gas? It’s like, I think it was… let me pull it up here. I think it was maybe the… someone had the good number. Oh, it’s a Bloomberg report. Sorry. I said the tariffs; it only affects about $14 billion of US exports to China.
So it’s not nothing. But again, this is not a, “we’re going to cause you pain.” This is, “Really? You want to go down this road?” We’re ready to go. The Chinese message has been, we will keep fighting with you. If you want to fight, we will fight you. We will keep talking while we’re fighting. Of course, we think it’s pointless, and so we’d rather find a way to have a deal to avoid this.
But if you really want to go there, we’ll go with you.
Yeah. No, it’s just in terms of the escalation, that’s where I’m like, okay, maybe Trump sees this as the most limited response that China could offer in this moment. It’s unclear what’s going on. You know, yesterday morning you had Peter Navarro saying there would be a call later in the day between President Trump and Xi. There’s certainly been talk over the last few days of a call coming because, you know, the President, I think, wants to go to China relatively soon.
He’s been talking—or people have been talking on both sides about working towards some sort of a peace plan for Ukraine. But then yesterday, of course, there was the call didn’t happen. Then in the Oval Office, later in the day when Trump had his freewheeling press conference—
Which is now a daily session out there.
It is. He also said… what was the thing he said? He basically said that we’re in no rush to have a call.
Right. It didn’t sound imminent based on his quote.
So anyway, so now we’re at the point where we don’t know when the call is. We’ve got sort of mutual actions from each other—the US tariffs, the Chinese multi-dimensional response. We’ll see. I mean, we’re recording now at 11 a.m. Eastern time on Wednesday. By 11:45, it could be something new. And then by 12:15, it could be something else.
Oh, God. Am I going to have to start checking Twitter while we record?
No. Checking Truth Social, perhaps? I don’t know. The challenge is going to be… we’re specifically talking about US-China. The challenge on anything with the Trump administration is, you know, everyone ends up running around chasing their tails, trying to have a hot take on what’s going on when it just keeps moving by the minute.
At this point, I would just say on the US-China issue, the thing to watch really is, okay, Trump said if you retaliate. The EO said if you retaliate, we may retaliate.
24 hours later, the US hasn’t done anything, so probably, you know, they’re going to just figure out a way to have a call. But again, because it’s President Trump, there just is a lot more uncertainty and volatility. If the right or the wrong person gets someone who says, you know, she just called your bluff, and you look like a sucker, you look weak, then we may get a tweet or a Truth Social post saying he’s doubling down on more stuff because, you know, the Chinese retaliated.
Yeah. This is the way things are in a Trump administration.
It’s just… and I would also say that she didn’t necessarily call his bluff based on what we have here. I mean, if you want to be really literal about it, yeah, sure, there are retaliatory tariffs. But China has much more aggressive actions that they can take in response to a tariff regime.
So, yeah, I agree. So does the US.
I would say, on the one hand, this response from the PRC was restrained, but I think it also carries a lot of warnings—or at least I think they’re trying to communicate those warnings. The question is, does the Trump administration—and again, we don’t even know who’s really advising him at this point on some of this stuff—do they believe that China can’t withstand significant escalation of trade war, and so the US holds all the cards?
Or do they have folks who are saying, you know, actually, things have changed, and the Chinese can implement a lot more targeted pain than they could have during the first trade war?
Well, and as the negotiations continue, as you said a couple of weeks ago, the initial wave of executive orders included an order for agency heads to study the bilateral relationship with China and evaluate what sort of tariffs might be imposed. Those studies, I believe, are expected to conclude in April.
Yeah. A lot of this has been held in abeyance for the time being. The Wall Street Journal also had a report that as negotiations and discussions between the US and China continue on trade, Beijing is planning on offering more purchases of US farm, energy, and industrial products.
China, in this second Trump administration, will also make a case that it should be allowed to buy goods it really needs, such as American chips and other tech products, which, hey, it’s worth asking. I don’t blame them in the course of those negotiations.
There may be folks in the administration who think, yeah, okay, you know, those export controls have failed. They’re hurting American companies, and you know, just open the floodgates.
Yeah. China has also pledged to not devalue the yuan for now, which would undermine the effectiveness of any tariffs that Trump imposes. Beijing also plans to treat TikTok largely as a commercial matter, according to sources talking to the Wall Street Journal. We’ll see about that.
I don’t know, exactly. I mean, the line of, oh, they have to abide by the laws is fine. But among those laws, it is impossible for them to cut some sort of deal in the US without ensuring that they have sign-off from the authorities in Beijing.
Right. And even the Journal notes that it’s unclear what that means for control and ownership of the algorithm, which is the core issue with the TikTok question.
But while we’re talking TikTok and corrosive tech products, another aspect of the tariff story for avoidance of doubt: The executive order reads, duty-free de minimis treatment shall not be available for the articles described in subsection A of this section.
So, Bill, we’re approaching an anniversary—the one-year anniversary of Timu becoming the breakout star of last year’s Super Bowl.
Oh, that’s right. How many commercials did they have?
I mean, it felt like twenty-five commercials for us.
I don’t know. But is it now time to say farewell to Timu?
The de minimis exception was what basically built their business, and I feel like it’s now all thrown into uncertainty. I mean, closing that exception is long overdue. It has really been abused by Timu, Xi’an. But also, frankly, you know, you look at a lot of the Amazon sellers.
Amazon was getting in on it, too.
Yeah, right. And so, but this was not designed for commercial products. And yes, I think there’s also a… some of these packages, you know, as a way to ship fentanyl directly into the U.S. So it’s all wrapped up together.
There’s a little bit of confusion overnight. The U.S. Postal Service said they would no longer accept packages from the PRC in Hong Kong. Then a few hours later, they said, oh, actually, we will accept packages. They have to go through customs and pay the duties. But it’s a blow. It’s a really difficult administrative task for U.S. customs agents because tracking and analyzing all these packages—that’s why the de minimis loophole was created in the first place.
So buy on Timu, and you’ll get it in, I don’t know, March. Who knows? You’ll pay more for the stuff that, anyway, at some point, if you have to pay enough, you realize, like, why am I paying so much for a lot of stuff that’s frankly kind of crappy?
Right. Closing that loophole has implications for e-commerce companies in America. It also has implications for Meta, for one, who Timu and Xi’an were advertising on. And Google and, you know, all these companies—there’s a lot of… I think Xi’an and Timu are among the biggest advertisers on Facebook, aren’t they?
Yeah. I mean, look, they were the stars of the Super Bowl last year. Every Monday morning after that game, everyone was like, so what is Timu and what is Xi’an? So it’s been a hell of a year. Can’t believe that was only last year.
But to the extent this does spell the end of Timu and Xi’an—and I’m not sure that it does—but it’s certainly getting more complicated for those guys.
I’ll just note that it’s probably a good thing, and I’ll read three quick items that I came across on Tuesday as I was prepping for the show.
First, CSIS has written, Timu, in effect, is an information-gathering spyware program masquerading as an e-commerce site. I can link people to that piece in the show notes if they want to read more. Then Annie, someone on Twitter, wrote, it’s like it was built by a dopamine addiction and gambling scientist, having users run through eight to ten, quote-unquote, games that take about 30 minutes of time to win, quote-unquote, free stuff that one finds is only free with a handful of specific 40-plus dollar purchases. I honestly think the way the user process is made to unfold, it was designed to keep people on the app for hours, like just to spend hours buying and, quote-unquote, winning.
Anyway, I got no sleep last night, and now I have binder clips and LED lights and all sorts of things on the way to my house.
So it works.
Exactly. That was just a good, entertaining piece of writing that I wanted to share with the audience. On the data collection, remember, in the oral arguments to the Supreme Court, the lawyers for TikTok invoked Timu and I think Xi’an under the bus, saying they collect as much or more data than TikTok does.
And it was a good point, yeah. It doesn’t necessarily mean we shouldn’t do anything about TikTok, but maybe we should do something about both. Semaphore also reported that the Trump administration is discussing whether to add low-priced Chinese retail companies Xi’an and Timu to the Department of Homeland Security’s forced labor list. Two sources familiar with the discussion told Semaphore on Tuesday night.
Well, so that would definitely be bad for Pinduoduo’s stock, right? And that’s listed on NASDAQ. Xi’an had tried to list in the US and realized it was just not going to happen, so now they’re trying to list in London.
That’s right. They were looking at the UK. We’ll see if talk of this Xinjiang-related listing will have any impact on their prospects for listing in London.
Yeah. Because I mean, it could also, if they really get listed, it could potentially cause some reputational risk for some of the underwriters. But then again, it takes a lot for an underwriter to back out of a deal.
Yep. Well, we’ll continue to monitor that situation. But I would say it was as important as anything else that was announced on the 10% tariffs. We’ll wait to see whether there are more tariffs forthcoming in the next couple of months here.
But to keep it moving, and speaking of trade, Bill, there has been a lot of discussion of Panama and the Panama Canal over the past month.
I’ll read a headline from Bloomberg this week. Panama offers concessions to the US after Rubio meets the president. They write, Panama promised free passage for US warships through the Panama Canal and said it will withdraw from China’s signature lending program after Secretary of State Marco Rubio blasted the government during his visit on Sunday.
Rubio, echoing President Donald Trump’s complaints about Chinese influence over the waterway, warned that the US would “take measures necessary to protect its rights” unless Panama makes immediate changes, the State Department said after Rubio met President Jose Raul Molino. Molino also said his country would not renew its participation in China’s Belt and Road Initiative, making Panama the first Latin American country to do so. He added that his government will evaluate whether to pull out before its current agreement ends in 2026.
US National Security Advisor Mike Waltz called that move “a step in the right direction” in a post on X. A US official said that while positive, the move doesn’t fully resolve concerns about the canal.
So I was reading about all this on Tuesday night, and particularly some of the history was interesting. What should people know about the PRC’s activity in Panama and why it’s concerning to the US?
Well, I think that the biggest concern may be that a Hong Kong company, Li Ka-shing’s, one of his companies, controls ports on both ends of the canal. That’s Hutchison Ports PPC. Even though Li Ka-shing actually seems to have had a bit of a falling out with the Xi Jinping government and has really sold down a lot of its exposure in China and Hong Kong since Xi Jinping came to power, regardless, it’s seen as a national security risk to the US.
Since the Panama switch recognition from Taiwan to the PRC, you’ve got a lot of PRC investment in Panama. You’ve got the BRI participation. The US is seeing lots of potentially malign PRC influence in the country. In what is a— I mean, the US has a long history in Panama; a long checkered history in Panama.
What was interesting is how quickly, again, the Panamanian president said, okay, we’re not going to renew participation in BRI. It’s not exactly clear what that really means and what that means in terms of—among the projects that may have been signed under the auspices of BRI, will those continue? Will they pull out of them? It’s going to be pretty messy because if there are contracts for investment, they can’t just tear those up without some sort of a legal process.
Also, I think what we haven’t— we’re just going to start to see the PRC reaction to all this because this Rubio trip happened while the PRC was on holiday for Lunar New Year. So you’re starting to see—there was basically an op-ed in a Panamanian newspaper by the PRC ambassador to Panama that was titled, “America, Please Learn to Respect,” which sort of went through the history and criticized the US actions.
I think there was comment at the foreign ministry press conference today, but we’ll hear a lot more because Rubio has also—he’s making a tour. He went to Panama, he was in El Salvador where you had the El Salvador president. The readout; they also talked about Chinese influence. Then I guess he’s also going to Costa Rica, Guatemala, and the Dominican Republic.
It sounds like Chinese influence in this hemisphere is very much a theme of the Trump administration. We’re going to hear a lot about it from all these stops.
Yeah. This is the area where there’s really a note-for-note echo of what the Cold War turned into 50 years ago.
Yeah. No, it harkens back to the Monroe Doctrine and trying to remove PRC influence from this hemisphere. The flip side, of course, is if you’re in Beijing, you’re like, well, okay, you’re saying you’re worried about Greenland because of us; you’re worried about Panama; you’re worried about Mexico.
Well, gee, we’re worried about Taiwan because of the Philippines, because of Japan, because of Korea. To your point, if that’s the road we’re going to go down to, then we have to—related to the trade discussion earlier in this episode, the PRC is not just going to say, yeah, okay, we’re going to take it. We’re going to have to see how they really respond.
They have a lot more ties, specifically back to Latin America, Central America. They have a lot of ties and investment in these countries, and many of them don’t have a particularly happy history with the US.
Again, if the Trump administration comes in and says you can’t do this because of Chinese influence, well, okay, what is the US offering versus all this trade, the new port that the Chinese built, that she inaugurated at the end of the year to have a direct… it’s like all this infrastructure the Chinese are trying to build in Latin America, all the ag they’re buying.
They shifted a lot of those soybean purchases from the US because of the last trade war to Brazil, for example. They want to buy iron ore, all sorts of other minerals. There’s a lot of PRC Latin America trade. It’s going to take more than angry tweeting and berating from the new Secretary of State to get these countries to think that they really need to flip.
Well, and to that end, I’ll relay some of what I read last night, just some notes in case anyone’s interested or unaware of the dynamics here or found themselves over the last month or so wondering why exactly the Panama Canal is now in dispute.
First, to your point on investment in Latin America: According to the World Economic Forum, in just two decades, the PRC’s bilateral relations with Latin America—generally, not just Panama—have increased 26-fold from $12 billion in 2000 to $315 billion in 2020.
As for the Panama Canal, more than 40% of US container traffic valued at roughly $270 billion annually transits the Panama Canal. The US remains the canal’s biggest user, accounting for roughly 74% of cargo tonnage. China is now the second largest customer at around 21%.
In June 2017, as you alluded to, Panama severed its ties with Taiwan and established diplomatic ties with the PRC. They were the first Latin American country to join the Belt and Road Initiative, which is important context for them now leaving the Belt and Road Initiative.
In the years since, the PRC has poured a lot of public and private money into Panama infrastructure projects. They sent one of their most talented ambassadors to be the ambassador to Panama, and he’s fluent in Spanish. They established Confucius Institutes around the country to teach Chinese language and culture.
In March 2021, a 25-year extension of the lease contract to Hutchison Wampoa, the company we were alluding to earlier, was signed to continue operating and managing the ports of Balboa and Cologne, one on each side of the canal. That contract is now at risk of being canceled, according to Bloomberg.
President Molino is weighing the possibility of canceling that contract, and we’ll see what happens. It’s unclear how any of this will play out. But I’ll read one quote from Evan Ellis, who’s a research professor of Latin American studies at the US Army War College, the Strategic Studies Institute.
He says, “The level of cooperation that the Panamanian government can get from Hutchison, for example, is not the same as it can get from other port terminals. When you have limited transparency in the port that is being operated by China, when you have limited transparency in the warehouses that are being operated by China, when you have politicians who are reluctant to stand up to the Chinese for their own interests, we’re talking about a loss of sovereignty.”
He added that the location of the ports on both sides of the canal, quote, “allows China to observe the operational routes, personnel requirements, and movements of other armed forces.”
So, again, more will be revealed, but it’s just another inflection point in the tensions between the US and China.
Well, and it also, you know, it’s also, I think, the broader context here, right, is of course, you know, there are a handful or more of op-ed think pieces every day about what Trump’s going to do on China, right? You know, Politico has one today about, I think, you know, how he’s soft on China.
Again, I think we have to see because we’re 16 days into the second Trump administration.
Oh my God.
Yeah. It is still not at all clear what his ultimate set of policies will be towards China. But when you look at, you know, there are these 10% tariffs, which he talked about last year after he was elected that he would implement. You’ve got the executive order sort of instructing various agencies to embark on investigations around tariffs and around export controls.
You’ve got this Rubio, you know, Greenland, Panama—there’s a nexus around concerns about China that’s driving this. And so you’ve got a view that China’s influence, at least in this hemisphere, is a real problem, right?
Which doesn’t then argue for, hey, they’re going to be super soft; you know, Trump’s going to be super soft on China. But you’ve got some uneven appointments in terms of his cabinet, in terms of how they view China and Taiwan.
Then you’ve got things like—I think it was yesterday—the Philippine Air Force and the US Air Force had a joint flyover of Scarborough Shoal. The US had like two B-1B bombers, I think, which is pretty significant hardware to fly over those rocks.
Again, I think that was the national security side of the Trump administration. That was a demonstration. I think they’re putting more assets into that Indo-PACOM region.
I think that their idea is to signal, you know, we’re not going anywhere and try to show more deterrence to the PRC, but we’ll see how that’s received. There are a lot of conflicting streams here.
I still think it’s, you know, I do think, and I keep hearing from, you know, that Trump wants to go to China; he wants to talk to Xi. You know, they want to have—he really wants to figure out a way to solve Ukraine, and China is a part of that.
But it’s too early to say, oh, yeah, Trump’s gone soft on China. It’s also too early to say he’s like the China hawks’ wet dream. If anything you learn from— if you take away from Trump, one is there’s got to be a lot of cognitive dissonance because there are going to be all sorts of conflicting streams continuously.
This is just the way you roll. Look, to be fair, that was also true during the Biden administration, but there was a little more consistency and a little more of a— there was just a lot less volatility.
Yeah. I mean, we’ll be trying to wrap our arms around it every week on Sharp China. I wasn’t familiar with the Panama situation.
The other thing that I would add on the Panama story is that the PRC is behaving rationally. They’ve been very aggressive and pretty shrewd in making inroads into Panama and Latin America. I don’t begrudge them that strategic decision, but that’s the context for the US suddenly waking up and getting aggressive and attempting to use its own leverage to sever some of those relationships.
One of the questions is, okay, so the US pressures Panama. The Panamanian president said, I will review the deals with— Hutchison, you know, the port operator. Okay, so they revoked them—whatever the legal process is, you know, it’s probably not a simple thing to do. Well, then who runs the ports?
The Chinese company, these Hong Kong, Hutchison—they run these ports because they’re actually really good at running ports. So does the US have that capacity at this point? I don’t know.
We can run ports here, but do we have the capacity to then also run a port? I mean, this is a—again, if you want to really push back on—a company, in this case, US government, and you want to push back on activities that concern you from the PRC, you have to provide alternatives.
Again, I have not seen anyone discuss, okay, well, if they kick Hutchison out, then who’s going to run the ports? Who’s moving in?
Yeah, no, that is a good question and an important question as we move forward.
So we’ll see. We’ll shift now back to the mainland. We had the Google news. I’ll read what you wrote in Cynicism.
The State Administration for Market Regulation gave no details about Google’s alleged issues in its one-sentence announcement of the investigation into Google. Even though Google long ago pulled its web search business out of the PRC, its Android OS has significant market share, and the company generates billions of dollars in revenue each year selling ads to PRC firms marketing outside China.
The Financial Times reported Tuesday that this investigation started in 2019, was paused, but then reopened in December. Do you have any thoughts on Google and its fate here?
A number of folks describe this as a more symbolic gesture in the course of the trade fight because obviously, Google, I believe, stopped operating in the mainland in 2014—like Google, the search engine. But again, they make a lot of money out of the PRC.
Yeah, through Android.
Right. Well, no, through selling Google ads to companies that are trying to market their products, including Xi and Antimo, right? I mean, they have a very… in the billions a year in revenue from Chinese companies buying ads to target buyers in the rest of the world, the internet ex-China.
What this investigation is really about, it’s not at all clear. It sounds maybe about Android, and it’s interesting, right? Because up until a few years ago, it was Android and iOS were the two mobile operating systems available to basically everyone around the world, but also in the PRC.
Huawei has now— they started out with their own indigenous mobile operating system, which originally was just an Android fork. Now they claim it’s not at all—it’s completely independent, and it’s this Harmony OS.
They’ve been really pushing it. They got a lot of users. Now there’s a credible alternative to Android. So maybe this is the stars aligning so that they can potentially harm that Android business without really causing a lot of problems for PRC consumers.
Maybe. I don’t know. I’m speculating on that. I think also the timing is interesting if the Financial Times reporting is correct that they started this in 2019, then again, I guess for whatever reason, they shelved it. It may have been political.
Then they reopened it right after Trump was elected, and it may certainly have been a—again, it’s an arrow in the quiver. They’re just building up their ammunition chest of things that they can target.
Well, and related, I mean, Apple is also being investigated. This is bigger news than the Google news. China’s antitrust watchdog, this is Bloomberg I’m reading from, is laying the groundwork for a potential probe into Apple’s policies and the fees it charges app developers, part of a broader push by Beijing that risks becoming another flashpoint in the country’s trade war with the US.
The State Administration for Market Regulation is examining Apple’s policies, which include taking a cut of as much as 30% on in-app spending and barring external payment services and stores. People familiar with the matter said agency officials have spoken with Apple executives and app developers since last year, said the people who asked for anonymity to discuss sensitive moves.
So this actually makes me wonder about the Google investigation. And again, we’re all left to speculate here because we got one sentence making us aware that there is a Google investigation. But I wonder if they’re apparently probing Apple for its App Store policies. Maybe that’s happening in the Google Play Store, and that’s part of what the Google investigation is focused on.
I don’t know, but I think the Apple point in particular is really interesting because they’re being harangued on multiple continents over the App Store and the fees.
Well, this is one of the things we have to be careful—not that you’re saying this—but okay, so Bloomberg reports an exclusive story that Apple may be probed for its App Store policies. They’ve had issues with big Chinese companies like Tencent, well-publicized.
But Apple’s App Store—the EU’s gone after them. Anyone who has a product that is sold through the App Store is sick of the 30% tax. I’m sick of even talking about it.
Including me. We’ve talked about it so many times on Sharp Tech that I won’t even bring it up anymore.
So Ben and you and Mr. Techery, you’ve done a great job. I mean, me personally, right? Because you can buy a subscription to Cynicism through the Substack app.
Oh, that’s right. And they take the 30%. They take the 30%, right? Every time you charge, right?
And so, and I actually, if you buy through the app, you pay more.
Because I was like, well, screw that. I’m going to make the money back. But it’s a higher price than the app.
But it’s like, okay, really? 30% of every transaction in perpetuity? It seems a bit much.
It is a bit much. There’s no question about it.
And I mean, so when you message to potential subscribers in the app, are you allowed to make it clear? Does Substack have a way to signal to them if you subscribe on a regular website, you pay less?
It’s there every… I probably shouldn’t be getting in trouble for talking about this. I don’t know.
You’ll get a call from Apple attorneys.
Well, that’s the portion of it. The anti-steering is awful. They’re very much adhering to the App Store rules. And as a content producer in the app, that’s great. It’s a new channel. That’s great. The app is very good. I like the app.
But it is a… personally, it was like, wow, okay, this 30% every transaction. If it’s a monthly subscription, every month, 30% goes to Apple. And it’s like, I get what you’ve created.
Anyway, this is not about me or the newsletter. But the Apple tax that you and Ben have talked about, and Ben has written about extensively, I can look at what Bloomberg reports of the Times is doing and say, yeah, you know what? They’re not wrong.
They’re not wrong. The EU is not wrong. To the extent it becomes a point of contention in the US.
I mean, I think there should be federal legislation to resolve it because I don’t think you can really solve it via antitrust law.
But then it’ll be really unfortunate if it becomes somehow this political, like, you know, China, you know, attack on the US because they’re going after the Apple App Store when in fact, you know, the timing is interesting, but the actual substance of the case may be quite legitimate.
Well, and what is interesting, having followed Apple over the last couple of years as I pay closer attention to tech, when the regulatory bodies in China tell Apple to do something, when they say jump, Apple says how high?
And so they’ve been fighting tooth and nail on several continents. But to the extent this becomes controversial in China, I wonder whether the response from Apple will change. Again, the details are pretty sparse right now.
No, no, no. And that actually—and that’s a really interesting point because if Apple agrees to some sort of some set of changes to their App Store for China, how are they going to not then be pressured to roll those out?
Exactly. It becomes much harder for them to make that argument in the EU and the US.
Wouldn’t it be ironic if the PRC regulators actually do everyone a favor? I mean, they sort of did that with text messaging. I believe I might be getting some of the details wrong, but I believe for years people were pushing Apple to abandon MMS messaging and adopt RCS messaging.
Then finally, China mandated it, and then the rest of the world got RCS messaging from Apple.
So who knows how this story will play out? But just interesting context for the next steps.
And then also while we’re talking Apple, Strategory this week wrote, Greater China’s year-over-year revenue was down for the sixth straight quarter, just as it has been for the last 12. This is in response to Apple’s latest round of earnings. The iPhone 6 took China by storm, and Apple built up a large user base. But it never really penetrated far beyond the tier one cities.
The one exception was the Huawei chip ban in 2020, which drove premium Android users to Apple. Apple has done pretty well to maintain its customer base from that episode, but it absolutely is not growing and is likely shrinking slowly over time.
So did you have any thoughts on Apple’s struggles with Chinese consumers? Because you were living in Beijing when Apple began to explode over there.
I think it’s still a massive pot of revenue for Apple, even though it isn’t growing. China is important for Apple. They really have a double exposure in terms of that material amount of their annual revenue comes out of China, but then also, obviously, a massive amount of their production.
Yeah. I mean, Apple is like the ultimate China success story for American companies in China. I think it was Ben—Ben made this point. I forget if it’s a sharp tech or dithering, but we’ve talked about before.
I totally agree with it, which is one of the challenges with Apple is the phones look the same, right? So if you really want to drive the update cycle, the upgrade cycle, you’ve got to have something new so people know that you have the new top Apple phone.
The problem is the top Apple phone has looked the same for several years, basically, and I think that they don’t even—not that Apple intelligence is going to drive a lot of new sales in China.
I mean, I can’t even figure out how to use the damn thing here in the US. It’s pretty big waste of time so far.
And Siri, I’ve discovered—sorry, Apple—but I actually get more useful information from Toshi than from Siri at this point.
Oh boy, a rough pod for any Apple executives listening.
Sorry. But my point, the point is that I think, you know, and you look at like they got the bump when Huawei, the Huawei band hit. Huawei has, you know, really innovative phones.
You know, they’ve got the folding phones, the three-panel phone. You know, they have a lot. And, you know, it’s also a very much a patriotic consumption.
And so, for example…
I think it’s also a story of China just moving up the value chain. Like Huawei’s phones are pretty close to as good as Apple’s. I mean, look at—I have an Apple; I have the 15. I didn’t buy the 16 because, you know, the 15 is good enough.
Like, what are you… And so if what you’re buying the new phone for is really to show off that you can buy the new phone, then the new phone has to look like it’s something new that people know you bought the new phone, right?
Yeah. And right now the Apple phones just aren’t doing that. I think also, though, you know, there was—I forget the name of the star—but, you know, every year the CCTV has the Spring Festival Gala around the Chinese New Year—the Lunar New Year’s Eve, the big show.
There was, I think one of the stars was shown taking pictures with an iPhone and got skewered online because, like, why, you know, why are you using an American phone?
So there, so I think there are a lot of headwinds against Apple ever growing phone sales in China. I shouldn’t say again, but certainly in the near future.
Yeah. Well, and as you said, there’s the whole dynamic of having great competition from both the local players and the fact is that Huawei was labeled as a national security threat, and Apple happened to be in the right place at the right time while Huawei was getting pushed back.
But Apple is likely losing ground with low-cost competition—those makers who have been providing smartphones really at certain price points that Apple just doesn’t touch.
I mean, it’s tougher to provide a low-cost model now. Their offerings are considerably more limited. The price sensitivity also is greater right now.
All these takeaways—exactly, it’s a combination of price point, competition from Huawei and other local players, and just the overall sense of patriotism for a Chinese-made product, simply means that it’s a rough reckoning for Apple in that market.
Indeed, yeah. Well, and we don’t have time to get into it, but there was a story from Rest of the World or Rest of World, which does great work on Foxconn refusing to send Chinese workers to India—iPhone factories, refusing to, or they’re holding up shipments of specialized manufacturing equipment that would allow Apple to assemble iPhones in India and continue sort of de-risking their supply chains.
It’s all interesting in part because Apple is just, again, it’s been such a massive success story that China itself has sold to the rest of the world.
Look at how great Apple has been; look at how great China has been for Apple. I think the story is going to get more complicated on the consumer side, more complicated on the manufacturing side, and Apple could well be, again, sort of a poster child for how difficult life can get for Western companies that are caught in the middle of a geopolitical struggle like this.
This first salvo, the 10% tariffs from President Trump—there are no exceptions. You know, Apple, Tim Cook was able to get the exemptions for Apple in the first Trump administration.
Maybe there will eventually be a mechanism to get exemptions, and Apple will work its magic. But so far, that 10% is not—Apple products are not exempted.
Indeed.
Yeah. Tim Cook, very good at working his magic, but he’s going to have his work cut out for him. But back to that Rest of the World story.
And I think Nikkei also had a related story, which seemed to be saying, look, that the Chinese authorities are, you know, they want to limit the flow of this key equipment and key knowledge from Chinese engineers from going to India so that Apple and Foxconn can recreate what they have in China outside of China.
Honestly, if you’re the PRC government and you are, you know, you’re trying to bind countries and companies even more tightly to the PRC supply chains, you’re looking at the potential for a trade war with Trump where, you know, a company like Apple is holding quite a lot of leverage.
Why would you allow this stuff to just freely flow outside of China? Of course, you’re going to want to make it much harder for them to hedge out of China.
I think it’s also, though, a sign that they’re—if this really is a kind of more of a top-down order and we don’t know for sure—then you could probably argue it’s a sign that Apple was getting relatively successful at hedging out, and then alarms were raised and they have to slow this down.
Yeah. We’re not going to just sit by idly as we lose this massive choke point and point of leverage.
Indeed.
Yeah. Well, speaking of tech, though, we can close with a few words about DeepSeek.
Oh, I thought we were going to make it through the podcast without mentioning DeepSeek!
Sorry. What a ride it was the last couple of weeks. Everyone’s got it.
Then there’s—I think there are two or three op-eds today about DeepSeek. I know the op-ed industry, it took a little while to get up and running, so it feels like there was a delay, and now there’s like an avalanche of op-eds in the Times and the Post and everything else.
The Journal has one today from George Gilder about why, again, the export controls have failed.
DeepSeek was great in that it was the sort of thing where you could project any narrative onto it that you wanted to confirm your prior arguments, and I think that’s a lot of what’s been happening here.
Eddie says, Andrew is way too biased against China in his podcast. For example, he was questioning if DeepSeek’s R1 release was timed with Trump’s inauguration. It is ruining the product and the strategery bundle as a whole. I value the balanced opinions and analysis more than a politically loaded product.
Alright, so I have two responses to this for Eddie. First of all, I was not myself arguing that the release of DeepSeek’s R1 was timed with Trump’s inauguration. I was merely relaying the questions I saw other folks asking, including some folks that I consider credible, given the fact that the DeepSeek CEO met with Li Qiang the day of Trump’s inauguration and we’re 18 months removed from Huawei releasing the Mate 60 Pro during Secretary Raimondo’s visit. So this sort of thing wouldn’t have been unprecedented.
But my second response, more importantly, ultimately my job on the show is to ask questions. Me asking that question prompted you, Bill, to say that you thought the timing was probably organic, but some of the messaging may not have been organic.
We had an interesting conversation about it on the show, and then your take was then confirmed by some follow-up from Reuters in the days to come.
So I consider it a success in podcasting. No offense, Eddie, but thank you for your comments.
Thank you!
First, thank you, Eddie, for listening. Second, Eddie, would you pay extra for a Substack live struggle session with Andrew?
I’ll happily go through it.
A criticism session, I think.
Let’s do some reading. We appreciate the comments and we appreciate the criticism.
I will say a couple of weeks on from the DeepSeek releases, I do think that you have to look at it from a Chinese timetable, which is if you’re a company and you’ve got happy news, you probably want to get it out before the Lunar New Year holiday. That’s potentially one scenario.
The meeting with Li Qiang happens every year around that time as part of the work towards the National People’s Congress meeting in the first week of March.
So that is on the Chinese schedule. That has nothing to do with the US inauguration. That has nothing to do with other things. So that is a China timetable that happened to align.
But again, like you said, Andrew, at the beginning of this segment, it’s like people are going to project what they believe. They’re going to take what they already believe and then project it out around DeepSeek.
So plenty of people are saying, oh, it was designed as a message to the US, designed as a message to Trump. Whether or not it was intentional, it probably was received that way by some people around Trump.
Right. And I think reading about DeepSeek, DeepSeek is not Huawei. They were not moving in lockstep with the Chinese government.
So Huawei releasing the Mate 60 Pro during Raimondo’s visit was definitely not a coincidence. But R1 probably was a coincidence.
Huawei PR is good. They also somehow—a CCTV journalist got the phone, the new Huawei phone, to take pictures with it at the press conference.
Exactly! I mean, the whole thing was planned. Whether or not it was planned with knowledge of, say, Premier Li, who visited Huawei the week before the Raimondo visit, we don’t know.
But certainly, from the Huawei PR perspective, it was 100% planned as a massive F you to then Commerce Secretary Raimondo.
And honestly, if you’re trying to sell phones partially rooted in patriotism, really great marketing for Huawei that week. It was great marketing. It was brilliant.
Yeah. But as I alluded to earlier, we did get a follow-up from Reuters about some of the conversations surrounding DeepSeek, which you said looked a little bit funny and not entirely organic.
They write that Chinese state-linked social media accounts amplified narratives celebrating the launch of Chinese startup DeepSeek’s AI models last week, days before the news tanked US tech stocks, according to online analysis from Grafica.
Quote, this activity shows how China is able to quickly mobilize a range of actors that seed and amplify online narratives, casting Beijing as surpassing the US in critical areas of geopolitical competition, including the race to develop and deploy the most advanced AI technologies, Grafica Chief Intelligence Officer Jack Stubbs told Reuters.
So just a nice little bow on the digression last episode. My only comment on that is I think there was absolutely some coordinated inorganic activity, but there was also a lot of organic activity, right?
It was a big— it was a mix. I mean, there was a lot of organic activity from people that I’m familiar with because of my work in the tech podcast. People were genuinely wowed by what they were seeing and what the potential implications were for American tech companies.
So that’s a good point to emphasize. What else has caught your eye as Washington continues to react to DeepSeek here?
Well, I just think the debate about export controls and whether or not they failed—or, and again, this is a theme we’ve talked about, I acknowledge on this podcast and in the newsletter—is have they failed, or were they always going to not work as designed because of all the loopholes or because they didn’t go far enough?
That debate is ongoing. We don’t know where the Trump administration is going to come down on export controls. We had yesterday—there was the announcement of the nominee to oversee BIS, who’s someone who has experience at Commerce. He’s been a lawyer at WilmerHale.
People I know who’ve dealt with him think if he were deciding, he would probably be less willing to have all the loopholes that the Raimondo team included. But he’s not the decider.
You’ve got, I think it was yesterday or Monday, the Washington Post got a copy of a letter from Elizabeth Warren and Josh Hawley—not the kind of bipartisan couple you usually expect to see on Capitol Hill—writing about DeepSeek and saying that DeepSeek success shows that sort of the holes in the export controls and the influence of industry to create those loopholes.
They’re calling on the Trump administration—or calling on, I guess, then it was directed to Howard Lutnick, who’s the nominee to be Commerce Secretary, I think it might even be confirmed today—to tighten those loopholes.
Yeah, I mean, they wrote, multiple administrations have failed at the behest of corporate interests to update and enforce our export controls in a timely manner. We cannot let that continue.
And Lutnick himself has signaled that he finds the status quo unacceptable, which may or may not matter going forward. He’s not the ultimate decider either.
He’s not. And so one of those— in that America trade executive order from day one of the Trump administration, one of the sections was about examining the export control policies and any potential loopholes.
Again, the bureaucracy may be working towards tightening them. What does Trump ultimately want? Does Musk have a say, or does Musk stay out of this? We just don’t know at this point.
Yeah. Well, speaking of sports, do you have a Super Bowl pick before we close out?
Commander.
No. I just—I can’t ever support the Eagles.
Okay. I think it’ll be an interesting game. The Eagles are tough. The Chiefs have an aura about them. I don’t know. It feels like a three-peat is somewhat inevitable.
Yeah, I mean, the Chiefs have really been like getting by with a little bit of fairy dust, I would say.
Whatever. A win’s a win.
A win’s a win.
They don’t look like a team that’s only lost once this season.
When you actually watch them, it’s like, alright, this is pretty —they’re barely holding it together. But Patrick Mahomes continues to be unbelievable.
So I hope everyone enjoys the game this Sunday. Maybe we’ll get more Timu advertising this Sunday. I don’t know.
I hope Bill continues slithering along, enjoying the Year of the Snake, and we can circle back next week.
Thanks, Andrew.
Thanks, everybody.