Tariffs and the Escalatory Cycle; China and the Fentanyl Crisis; TSMC Plans and Nvidia Scrutiny; Hard Times for Moutai
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Hello and welcome back to another episode of Sharp China. I'm Andrew Sharp and on the other line, Bill Bishop. Bill, how you doing? Hey, Andrew. How are you? Hi, everybody. I'm okay. So I'm a little sick. So if I sound a little off, that's why. Oh, boy. Well, I hope you feel better soon. Hopefully we get some fresh spring air to help you recover in the weeks to come. I don't want to jinx anything, but it is getting warmer around D.C.,

And it is a crazy time around D.C. And so that's where we're going to start. On Monday, we got another executive order from President Trump, which I'll read in part. In recognition of the fact that the PRC has not taken adequate steps to alleviate the illicit drug crisis, Section 2A of Executive Order 14195 is hereby amended by striking the words 10 percent and inserting in lieu thereof the words 20 percent.

So Executive Order 14195, for anyone who's not keeping track, was the executive order from a month ago announcing tariffs on China related to the fentanyl crisis. Those tariffs are now 20 percent, not 10 percent. And the new 20 percent tariffs took effect at 12.01 Tuesday morning. And then as far as the Chinese response, I'll read this note from Bloomberg.

China on Tuesday announced tariffs as high as 15% on U.S. agricultural goods and banned trade with some defense companies after the Trump administration doubled a blanket tariff on all Chinese exports. Beijing's measures hit goods the Asian nation can source from other countries, shielding the domestic economy from blowback.

The Chinese response throws the ball back into the U.S. court. Would Trump's review of Beijing's compliance with the first trade agreement due in April, adding to the urgency for negotiation? And of course, when they refer to the first trade agreement, that's the trade agreement agreed upon during Trump's first presidency, which is currently being reviewed as they evaluate Beijing's compliance. But generally, Bill,

What do you think of where things stand as we record here on Tuesday afternoon and where this might go in the weeks to come? So I think that the PRC side believes that their reaction to the incremental 10% tariffs was restrained and is meant to signal that on the one hand, of course, they are trying

They're not going to be pushed around and they will react, but at the same time, they're trying to leave the door open to have some sort of a negotiation with the Trump administration. A couple of things just stood out. I think there's not a huge surprise they responded with some tariffs. I think on the fentanyl side, the Chinese also...

They issued a white paper at the same time. So they clearly... They had prepared a sort of a cross-government response, multiple ministries. And the white paper, again, talks about how they... All the good things they're doing, they say they're doing on fentanyl. And of course, it's really America's fault that there's a fentanyl problem. Not necessarily stuff that I think will endear themselves to the Trump administration. But at the same time, they did not...

you know, as they've done in the past when they get mad about something, just cut off all fentanyl cooperation or announce they are. We'll see if they're

Maybe we'll hear or we won't hear what's in terms of working groups, if there still is cooperation on fentanyl between the US and Chinese officials. But certainly publicly, they haven't said we're suspending this kind of cooperation. So again, I think the idea or the message Beijing appears to be trying to send is we'll fight if you want to fight, but we also want to leave the door open to talk. How that gets received...

here in D.C. is not at all clear. And I think that, at least with other countries, when they respond to Trump tariffs with their own tariffs, then Trump responds by adding more tariffs. And so there's certainly that risk. We have to wait. This is

These tariffs are about fentanyl. The other tariffs that are under sort of trade actions or tariffs that are under consideration, you know, that were on January 20th, Inauguration Day, when President Trump issued one of his, I forget how many executive orders he issued that day, but it was a lot. One of them was about trade.

I think America First Trade or whatever it was called. And that directed the bureaucracy to undertake several different investigations that may end up with, and I think the reports are due in early April, and that may end up, we may see the next wave of potential tariff action

Related to balancing trade and balancing our economy. Within a month or so. But the wild card, of course, is does the president decide to respond to the Chinese response by adding more tariffs? And then you end up in this very, I think, damaging tit-for-tat cycle. 20% additional tariffs on all Chinese goods are not

Again, I think the Chinese aren't happy about it. It's not going to bring them to their knees, but it gets increasingly problematic as the number goes up. And then the real risk, though, for the Chinese, I think, is if coming out of, say, the April investigations, if the U.S. decides to do more of like a rule of origin tariff,

under Section 32 in trade law, where they would basically, if whatever country this stuff is made in, if it has a Chinese origin, then they would have a tariff reply. That would cause the Chinese a lot more problems than just tariffs on the bilateral trade. Interesting. Yeah. So both sides are...

restrained for now. It's funny, you mentioned the executive orders. I was reading it this morning, Executive Order 14195, and I was like, you know, have there been 1,400 executive orders from the Trump administration in the last five weeks? Maybe. But yeah, no, I think...

You wrote, we are on the verge of a significant escalatory cycle on cynicism on Monday, because if the PRC responds, then Trump will add even more tariffs.

And it seems like she and the PRC are trying to avoid that escalatory cycle with at least this round of responses. I mean, they're still keeping these responses targeted, whereas the U.S. tariffs encompass all PRC exports. So it seems like

On the PRC side, they still at least have hope of negotiating some sort of resolution that can avert a full-scale trade war here. Well, that's what it seems like. I mean, certainly the response to the first 10% included some export controls around critical minerals. They could have caused a lot more pain if they added minerals.

some additional minerals to the list. They didn't use that tool this time. You know, one of the challenges, one of the biggest challenges, and your Times had a story yesterday about the challenges of the Chinese are trying to figure out who to talk to.

And they've been going around DC with various groups and not just from the embassy, but delegations, you know, since the election to try and figure out one, what does the president want? And two, who, who can they talk to? Yeah. And, and most importantly, who, who can they talk to actually knows what the president wants. And so, so far, I don't think they've been particularly successful. And one of the challenges is going to be, you know, there's this talk of, you know, for a while, there's been this talk to Trump and see, you're going to have a call. Maybe they're going to have a meeting. I think on the Chinese side, you know,

you know, there's no way that she's going to get on the phone unless he knows what a deal could be. And he knows that he's not going to hang up the phone and five minutes later, Trump's going to, President Trump's going to smack him with some new set of tariffs or sanctions or whatever. That's really interesting. I mean, I was going to ask about the call between Trump and Xi. I find it so odd that we had those reports a month ago that Xi and Trump were going to be talking imminently, like within a day, and then the call never happened again.

Well, one of them is one of this. One of his I think was Navarro. One of the advisors said there'll be a call later today. Exactly. Yeah. And I mean, is it essentially that she is uncomfortable with the uncertainty at this point and won't get on the phone with Trump? It sounds like that's what you're saying. No, I don't know that that's the reason I have a call. I'm just saying from the Chinese side, you know, you don't want to be the Chinese official who teased up a call for your general secretary Xi and then have it blow up in his face. Yep.

That makes sense. And right now, I think the Chinese have not been able to get any real certainty about where or how this ends or what the end goal is or what a possible deal could be. Because quite honestly, I'm not sure that there are people in the administration who know that answer.

Yeah, I think a lot of it could be, you know, we saw this in Trump one. I think we're seeing it even more in Trump two. It just isn't clear. You know, you could go find some, you know, some senior official who tell you this is a deal. But then the president is unburdened by what has been what was...

burdened by what he is unleashed. I blacked out nine months of the Kamala campaign. No, but but but honestly, it's it's it's a really hard problem for some of his own officials, but then also for the Chinese. I mean, it's been a problem for the Chinese since before Trump was elected. We were

talking about it back in September and October. They didn't know who to talk to. It's interesting that it's still a problem for them to find the right people to get their message across. It's a problem for people in D.C. trying to understand what the administration wants to find the right people to talk to, let alone some foreign power. And so I think that that kind of uncertainty makes it less likely that there would be a call in the near term, you know,

Maybe by the time the podcast comes out, they'll have a call. I doubt it just because tonight we're recording on Tuesday afternoon at 3.15 Eastern Time. There's the State of the Union in a few hours. We'll see if the president, what he says about China, if anything, and whether or not

Again, whether or not there is movement, whether or not he threatens to respond even more. I do think it's interesting today the news broke that BlackRock was buying up the two ports on either side of the Panama Canal. Yep.

So that is interesting. It's a Hong Kong company that owns that, but I think it's unlikely they would do that without at least giving a heads up to the powers that be in Beijing. Yeah, no. And it also ties a bow on our conversation a month ago in terms of the Trump administration's concerns with Panama Canal and the Hutchison presence there. And it's

at least appears to be an early win for Trump and the State Department being able to wrestle control from Hutchison. So you're saying that Chinese government would sign off on a deal like that and is part of the mechanics there? I can't say. No, I'm not saying that for sure. I'm saying I think it's a reasonable likelihood that at a minimum, they...

were given a heads up by the owner of the Hutchinson. And BlackRock's not a dumb buyer, but also maybe Hutchinson decided this is a good price and they might as well get out because it's a lot of cash. Indeed. Yeah. And only hassles ahead. So why not take the money and do something else? Well, yeah. And you mentioned that...

Talks. That's what I wonder is like whether there's stuff happening beneath the surface that we're unaware of that would allow a move like that to go forward. I think everybody is just speculating at this point. It's possible.

And in terms of what the PRC side can control, as you said, we're recording this Tuesday afternoon. Two sessions got underway today. More news will come down this week from the two sessions. So we're not going to do too much two sessions discussion. We'll cover it all next week.

in lieu of speculation on how big the stimulus might be or what the GDP forecast could be? Are there any variables that we should keep our eye on as the NPC announces policies this week? So I think the expectations for...

stimulus-related talk are fairly low. I think that the expectation is they'll increase the budget deficit to something like 4%. They'll lower the inflation target rate to 2%. They'll probably set the GDP growth target again to around 5%.

You know, I think, though, the things to watch for will be... She goes and talks to delegations. And so the first delegation he chooses to meet with and what he says, you know, those are key messaging. Signals, priorities, exactly. And so whether or not out of that we get some messaging about the US-China relationship, the suppression from Western countries, like you said, I think it was two years ago or last year, I think it was two years ago, whether or not we get...

So that is really, you know, tomorrow, Wednesday, Beijing time, we'll get the premieres. We'll deliver the government work report. That'll have a lot of this information around targets. And then the next thing will be really where does Xi Jinping, which delegations you meet with, what did he say? It's this thing about like the two sessions are hard because they're very choreographed. You know, you end up with...

If you look at Chinese media today, it's full of all these so-and-so delegates suggesting they do this and that. And people have to say, oh my God, so-and-so delegate said, oh, lower the legal age for marriage, etc.,

A lot of the stuff is just noise. It doesn't really matter. There are really only a handful of things that come out of the NPC that are going to really matter. So we'll see. It's actually kind of a hard week to pay attention because you sort of have to pretend a lot of it's important. Yeah.

Yeah, I mean, that was my thinking is like, let's let the dust settle and circle back next week and seize on a couple themes. The other thing to watch, to listen for really is what do they say about, you know, we should expect to see a lot about, you know, the new quality productive forces. A lot of emphasis on private business lately too. And a lot of it,

A lot of themselves on technology and AI. And then I think, again, more love for private businesses. I mean, yesterday I had the newsletter. Yesterday, the People's Daily had a front page story, which was basically, it was the...

The headline was, I have always supported private enterprises, a record of Comrade Xi Jinping's concern and promotion of the development of the private economy. And it was just a long record of since his early days as a cadre in the grassroots, how he supported private enterprises. Yes. I cracked a smile when I was reading through your newsletter. So I mean, it's a little bit... I don't want to overdo it. It's not quite sort of the... What's dynamics here at COVID? What's that? We...

What are you talking about? I've never heard of that. Well, some private businessmen may have different perspectives as far as Xi's commitment to private business over the last 10 years, but sure. But joking aside, there is a real shift in the propaganda talk and the policy urgency around giving private businesses, private enterprises more confidence. And I think that speaks to a couple of things. One, it speaks to the state of the economy. They actually now need them.

And so I think they realized that they need to be nicer because the economy is in worse shape when they don't have, when these private businesses are under pressure, don't have confidence, are being extorted by local governments, local police forces. Two, they also need them for, uh,

technology development, breaking through the US choke points. And so those two are, I think there is a real shift underway where you will see, and this is one of the things I think will come out or will be messaged through the two sessions will be again, how much, we've always supported private enterprises and we love you and you're our own people and go make China great again and be patriotic and help the country.

And here are a bunch of policies. Here's a new law about private enterprises. Here are all these new protections you're going to get.

And then we'll see how it gets implemented. But there is really a shift underway. Yeah. Well, and it's strategically coherent. If you believe that technological development and progress in AI is going to be elemental to national security long term, then you want to lean on private industry and some of your top companies to help support those efforts. The best entrepreneurs, the most innovative entrepreneurs. You know, the thing is, right, is...

is this time different? And then the entrepreneur, the private business will be like, oh yeah, this is great. Now everything's fine and we're going to go full speed ahead. And Balfon is free. Everything's changed. Or have they... No, he's not free. Or have they... Is it just been... They've been so beaten down that a lot of them were just, again...

It's like it's going to take a lot more to get them to actually regain confidence. Yeah. I mean, some of them are living in Singapore these days. If all of a sudden it becomes a lot easier to make money, then people get a lot more confident. Absolutely. Because ultimately, if you feel like you're going to miss out, the greed kicks in and the fear of missing out kicks in. Then all of a sudden, the kind of confidence, it can actually rebound, I think, faster than some people recognize if people see that some of these private enterprises are actually doing really well and making lots of money. Yeah.

I'm not sure we're there yet, but I don't think it should be ruled out. It's all about those animal spirits. Yes. Well, we'll see. And I look forward to circling back on the two sessions next week. Before we move on from tariffs and the fentanyl discussion, I also wanted to mention this response from the PRC Ministry of Foreign Affairs on Twitter on Tuesday. This is a long tweet, but they write...

fentanyl issue is a flimsy excuse to raise uf u.s tariffs on chinese imports our countermeasures to defend our rights and interests are fully legitimate and necessary the u.s not anyone else is responsible for the fentanyl crisis inside the u.s in the spirit of humanity and goodwill towards the american people we have taken robust steps to assist the u.s in dealing with the issue

Instead of recognizing our efforts, the U.S. has sought to smear and shift blame to China and is seeking to pressure and blackmail China with tariff hikes. They've been punishing us for helping them. This is not going to solve the U.S.'s problem and will undermine our our counter narcotics dialogue and cooperation. Intimidation does not scare us. Bullying does not work on us.

Pressuring, coercion, or threats are not the right way of dealing with China. Anyone using maximum pressure on China is picking the wrong guy and miscalculating. If the U.S. truly wants to solve the fentanyl issue, then the right thing to do is to consult with China by treating each other as equals. If war is what the U.S. wants, be it a tariff war, a trade war, or any other type of war, we're ready to fight till the end.

Bill, I thought that response struck a much more confrontational tone than typical statements. Did you have any reaction to what was put forth there? Didn't like the last line. Definitely didn't like the last line. That was pretty sobering. But I think it's trying to...

warn the U.S. that they're not going to bend over. They're not going to fall back in the face of the pressure from the Trump administration. But it's also trying to, you know, it's very similar to the stuff we've been hearing for a while around, you know, if you have the right, the correct perception, the right attitude, then we could talk about anything. Mm-hmm.

almost anything, not everything. Not Taiwan, not territory. I mean, there's... But in all seriousness... And not seriously rebalancing trade. I think this goes back to the point of sort of where... How does this end? Because I think the Chinese, you know, look, they've...

One of the things they've been running around, going around D.C. and having conversations about is some sort of a deal that involves investing in the U.S., buying more stuff. That so far hasn't gotten a lot of traction. If you go back to Trump 1, that trade war in Trump 1, originally the Trump, the Lighthizer and President Trump and the rest of the team, they were looking for not just purchases, but also money.

all sorts of structural changes in the Chinese economy. And they went back and forth and back and forth and back and forth. And Trump, President Trump wanted a deal. He wanted to win. And the Chinese weren't budging. And so they ended up with, they broke it into phases. So phase one was the easy bit. The Chinese will buy a bunch of stuff. Phase two, which we'll get, you know, oh, we'll figure that out later, which they never figured out. Phase two was the much more difficult structural stuff.

And the Chinese didn't even – part of it was COVID, part of it not just COVID. The Chinese didn't even fulfill phase one. So the thing is, is it a win for the president this time if all he gets is the Chinese buying a bunch more stuff without making some of the – because again, what does he really want here? Does he want a reindustrialization of America? Does he want –

changes in the Chinese economy to deal with what the US and plenty of other countries say is massive industrial overcapacity, manufacturing overcapacity? Or is he happy with them buying a bunch more energy and soybeans? And I think the Chinese, of course, would prefer the latter because it's easier for them to say, well, buy a bunch more energy and soybeans and other commodities. But I think if really what the Trump administration is pushing for is

the former, which is what they tried and failed in the first term. One, there's no reason to think that they're going to succeed in the second term. Two, though, I think is also there's no reason to think then that things will get a lot worse as President Trump gets frustrated. Yeah. Well, and that's sort of the challenge. At least in the first Trump administration, they could dangle the carrot of purchase guarantees. Granted, they didn't ultimately deliver on those purchase guarantees, but Trump was also running for reelection at that point.

And so that mattered to him more than it might matter in a second term here, where the focus might be on long-term structural changes that the PRC may or may not be willing to cooperate with. They're going to... The Chinese are going to... You know, they are...

have undergone significant changes in their economy, the structure of their economy, not though in the way that the U.S. and other developed countries wanted to see it. So I think at this point, though, that there should be no expectations that the Chinese are going to make any sort of meaningful changes

structural changes to their economy because of U.S. pressure. The structural changes the last couple of years have led to more overcapacity and more trade imbalances around the world with the U.S. and others. Yeah, I mean, it will be interesting because I just don't know what the PRC can offer that will solve the structural issues that are driving these trade tensions. Again, I don't know. I don't know that there's a

I'm honestly not sure that the U.S. knows, that the Trump administration knows. The other thing I wanted to mention, though, is in response to the idea that the U.S. alone bears responsibility for the fentanyl crisis,

I think that's a pretty facile line of argument in response to the reality of what it means to address the problem and cooperate in a diplomatic context, because it's not as if fentanyl is all being produced within the United States. I would understand that argument more if the entire supply chain was here. But

I will say, because I was thinking about it when we talked about this like a month ago, you mentioned that PRC diplomats have relayed that message to you in conversations around DC. Well, and they had a press conference last week, two weeks ago, where they made the same points. Yeah, yeah. Well, and...

At their core, the Chinese are right that the U.S. does bear the ultimate responsibility for the fentanyl crisis. And that's exactly why the U.S. is cracking down on China here. Because if you really care about addressing the fentanyl crisis,

which again kills about 75,000 Americans every year. Some people put the number at 100,000 Americans a year. You don't just go drug dealer by drug dealer around the U.S. You have to go to the source of the problem, the root of the problem.

You have to unravel, you have to go up to the supply chain and the financial chain. Yeah. And the source is precursor chemicals made in China that are then distributed by transnational drug gangs that work through Mexico and in recent years have been working through Canada. And so I just, this isn't the U.S. abdicating responsibility for the fentanyl crisis. This is the U.S. taking ownership of the responsibility to solve the fentanyl crisis and

and ultimately using its market as leverage to try to solve that problem. It's consumer market. And, you know, China has historically wielded the fentanyl cooperation as leverage to

And to the extent that they are now bearing the consequences of that strategy, that's the PRC's fault. It's not America's fault. So I just needed to say that for my own sanity, because I see them use that argument over and over and over again. And it always sort of rubs me the wrong way. I don't know whether you have any thoughts, but I just wanted to put that on the record. I think that the Chinese could do a lot more to

stop the export of, say, precursor chemicals to Mexico if they really wanted to. Yeah, exactly. And they haven't. I mean, they're able to, for example, my understanding is there's a certain type of a component involving that does video for drones that...

They have gone to the two, I think it's two factors in China that make it and they told them to stop selling them because they were being used in Ukraine. So, you know, they have the ability to go very, very deep down into supply chains and tell people to stop doing things if they want to. And it's the most elaborate surveillance state on earth. The system can do that if it's a political priority. Yeah.

And so I think that they have done, Chinese have definitely done some things, but I don't think there's any question they could do a lot more. And so maybe the idea here, again, the idea here is if the US squeezes them on the access to the market, then they'll be able to do more. I don't think the pain threshold is high enough to get them to really change. So then again, you look at what the US is doing. The US is also 25% tariffs on Mexico and on China.

Canada, right? We have a free trade agreement with those two countries. And the administration is saying it's all about fentanyl. It's all about getting them to actually focus on dealing with this issue. Yeah. Well, I mean, and along those lines, I included in our rundown a New York Times report from November on a massive fentanyl lab in Canada that was broken up and...

Thank you.

thinking the logic of these tariffs may actually be coherent if the goals are to stop the flow of fentanyl and to rebalance trade and bring more manufacturing onshore. Because in addition to cracking down on fentanyl, tariffs on Mexico and Canada serve as a signal that

rerouting exports through third-party countries are, it's not going to be a viable option this time around. And so part of me wonders whether the Canada and Mexico tariffs are

are going to be more temporary, where those countries will enhance the cooperation on drugs and then maybe impose tariffs of their own on PRC exports, thereby strengthening the tariff regime. I have no idea. I don't know whether any of this will lead to long-term solutions on either fentanyl or rebalancing trade. But I do...

I think it's probably a mistake to assume this is all being done on an arbitrary and capricious basis. But more will be revealed in terms of what the results and consequences look like. And fentanyl, I mean, from a from a sort of a you look at it from domestic politics perspective.

fentanyl is an issue, an American issue needs to be solved. Too many people are dying. Too many people have been affected by it, either lost family members, lost friends, family members of friends. And so as president, it's something he campaigned on, but it also is something that really is extremely important. I will say one other thing that the Trump administration hasn't, I don't think, talked about yet is

but certainly might get the Chinese attention too, is, you know, a lot of the ways that the money is, you know, actually being laundered through like WeChat. And, you know, there's, I think there was, I'll have to pick up the articles a few weeks ago, how the, their networks of Chinese who are actually doing the money laundering for the cartels to get them their money. Yeah. And again, in classic Chinese fashion, they charge like 1% versus 6%, right? It's just like the, the,

this is like, yeah, we'll do it better and cheaper. It's all about scale. Right? But all joking aside, it's not funny at all is that how much of that money then is effectively flowing through PRC banks. And the US, if the US should say, look, we have evidence that this kind of, the money laundering is happening through one of your major banks and we're going to take steps to sanction those financial institutions unless you do something, that will probably get more attention in China because the banks are

still a pretty significant point of vulnerability. If they were to be sanctioned, somehow disconnected from the U.S. financial system, that would cause a whole bunch of problems. Okay. Well, I hope for the world's sake that this escalatory cycle can end and at least end without any sort of kinetic conflict. But as you mentioned earlier, there are a lot of structural forces in play that

make some of these tensions inevitable. So time will tell on how any of this plays out over the next couple of weeks and months. To keep it moving, though...

We did have chip news this week. There are a lot of balls in the air here, as always. I'm going to read a series of headlines. The Wall Street Journal had a big story this week, headlined, Chinese buyers are ordering NVIDIA's newest AI chips, defying US curbs. Blast.

Bloomberg had a story reporting that Singapore is probing whether Dell and Supermicro Computer Inc. servers were shipped to Malaysia housing NVIDIA chips barred from China, an investigation that highlights the role of middlemen in funneling high-end semiconductors.

Saishin reported that ByteDance is expanding aggressively. Several industry sources told Saishin that the parent company of TikTok recently acquired 100,000 modified NVIDIA chips from Chinese suppliers. And by modified, I think they mean those are modified to comply with U.S. export controls. Okay, so nerfed. We're thinking like H800s. ByteDance has denied those claims for the record. And then the Wall Street Journal

announced or TSMC announced per the wall street journal plans to invest at least a hundred billion dollars more in chip manufacturing plants in the United States over the next several years under a plan that was announced on Monday by the company and president Trump. It will, it will construct three new chip plants, two chip packaging plants and a research and development center. Chief executive CC Wade said during a white house appearance with the president that

So of all those stories, we can kind of go one by one, but what's most interesting to you and why? So I think, I mean, they're all interesting. You know, Ben Thompson had a good piece today about the TSMC project.

It's certainly positive for moving some chip manufacturing to the U.S., but it does not sound at all like the TSMC will be putting their most advanced processes here, at least anytime in the near future. I think on the NVIDIA side, it goes back to that executive order we talked about earlier from January 20th. There was a section in there about taking a look at existing export controls and saying,

Again, we should hear something within the next month or so on that, I think. And then the question will be,

and we talked about it, I think, in the last podcast, so the changes over in the Department of Commerce and the Bureau of Industry and Security, BIS, is will the Trump administration decide to actually tighten export controls in a meaningful way? And this kind of news certainly will give more ammunition. I mean, not that they didn't know this, but it helps potentially give ammunition to the people in the administration who might be arguing for that. At this point, I honestly don't know

In the Biden administration, you kind of knew sort of where people fell out in terms of in the administration and where they fell out on the export control argument. Not sure where it is on the Trump administration. Yeah. And whether or not there really is actually any significant opposition to tightening export controls or whether they're just waiting for these studies to be done and then they're going to roll more stuff out. Right. I mean, it is...

A couple of things come to mind on the NVIDIA side of the spectrum. One, it's just another glaring reminder that the chip ban has been full of holes. So if you're pointing to China's success in AI as proof that a chip ban will never work, I find that argument unconvincing because all of the leading models in China today are reliant on some version of NVIDIA chips. But then more importantly, I mean, I would also add that

All these stories remind me that it is very difficult to control the flow of chips around the world and a big problem facing BIS, certainly under Biden. And I assume it continues under Trump today. I mean, it's been six weeks.

They were understaffed and under-resourced, and they were sort of fighting with one arm tied behind their back, certainly dealing with the chip industry and trying to enforce some of these controls. And any serious policy on chips going forward is going to require hiring more people to help enforce these policies.

And I don't know whether that sort of thing is viable in the Doge era, but I hope... I heard today that there have been more cuts at BIS, so we'll see. Right. And so that's where it's like the unstated portion of all these, oh, the Trump administration is going to be more hawkish on chips. Right. That...

has been a problem historically. So if you're going to solve that with a smaller staff, good luck. And it would be something to keep in mind for the next couple of years here. And the Singapore move is interesting. You know, I think Singapore is, you know, clearly there, again, I don't know whether or not they got pressure from the US government or how much they got. Clearly, the news, you know, the reports of, you know, whatever, you know, high, you

high teen percentage of Nvidia sales going through in Singapore look pretty strange. Singapore does not like it if people lie about...

sort of, you know, it's a trading country. And so if people are going to lie about where they're sending stuff or the end use when there are rules, you know, when they're effectively committing fraud, I think they take that pretty seriously. And so clearly they seem to believe they caught some people red-handed diverting NVIDIA chips. Yeah. And, you know, to your point about DeepSeek, again, DeepSeek's amazing and good, you know, they've had their open source week and they clearly have some of the best engineers in the world working in this area. But at the same time,

They all want more NVIDIA chips. Right. The appetite is there. And the numbers on Singapore are astounding. I can't believe that that's publicly reported information. It's just like this open secret that's sitting there. Yeah, well, and on the TSMC side of it...

Uh, it's hard to know what's real there. And there've been a lot of announcements of American investments, uh, over the last several weeks, we had the Stargate announcement with open AI, Apple, Apple, the numbers are always gigantic round numbers, but it kind of reminds me of like NFL contracts where they report one number, but it's not a guaranteed contract. And the real numbers are always in the fine print. I don't really know, but I think in general terms, uh,

It's smart for TSMC and Taiwan, more generally, to try to stay in Trump's good graces by participating in announcements like this and reminding him that there's a real partnership between TSMC and the American economy and the long term interests are intertwined.

And at the same time, I mean, I don't blame Taiwan and TSMC for keeping some of that leading edge capacity centered in Taiwan. And as Ben pointed out on Stratechery, the trailing edge processes will also remain in Taiwan. So preserving peace in Taiwan and independence in Taiwan is still very much a priority for the United States in this scenario. And I don't think the announcements from TSMC this week

really do much to change that reality. No, I agree with that. You know, and I think if the Trump administration decides to push harder on export controls, I mean, you know, it's certainly possible they'll push Taiwan harder on preventing some of their, you know, many of their, some of their chip engineers from, say, working for SMIC in China or other Chinese chip firms because, you

there's brain drain that way too. Yeah. That's an element of the story that I wasn't as familiar with until I think you brought it up in a group chat a couple, like a week or two back. Um, but that is a really important sort of sign of cooperation that they could take and, they haven't to date. And so you look at some of the people powering the gains made at SMIC and they're of Taiwanese origin. Um, that's a problem, but, uh,

But yeah, in general, I mean, we've talked about Taiwan trying to make inroads into the Trump administration and in D.C. and searching for the right people to talk to. Ultimately, Trump does love these press conferences and does love big announcements like this. And so maybe this is the best strategy. I don't know. Yeah. And today we had the confirmation hearing or I think the start of the confirmation process, hearing process for Trump.

Bridge Colby to be what is undersecretary of defense for policy. And in his prepared marks, I think he or maybe it was an answer to your question. He said Taiwan should be spending 10% of its GDP on defense. Not going to happen. But I think that if he is confirmed, you know, we'll be hearing a lot more about that again, how the Taiwan or Taiwanese are not spending nearly enough money on defense.

And so they can say they're going to put $100 billion of TSMC investments into the US, but they're going to have to do a lot more, I think. Interesting. Okay. Well, any final thoughts on chips, a topic I'm sure we'll return to in the weeks to come, or should we move on to the leniency trap here? Let's move on. Okay. Well, I'm going to read from the New York Times article.

When Sun Junho, a key midfielder for South Korea's World Cup soccer team, signed with a Chinese club, he was an indication of China's ambition to dominate the world's most popular sport.

But after Chinese police officers detained him two years later, accusing him of bribery and match fixing, he became a symbol of a different sort, the ruthless efficiency of China's legal system. Mr. Sun had insisted to his interrogators that he was innocent. He asked for a lawyer, but the police told him through a Korean translator that one was unnecessary. The police threatened to bring his wife in and asked how his children would fare if both parents were detained.

After months in detention, he was offered a deal in which he was promised a lighter punishment in return for signing an admission of guilt. He took it. It was a move he would later regret, saying that he had only signed it under duress. The arrangement Mr. Sun was offered, known as plea leniency in China, is a legal tactic that scholars say has further eroded the rights of the accused in a judicial system that has long been stacked against them."

So, Bill, you sent me this article on Tuesday. We can get to more details and we'll link the full piece in the show notes. But what do you think of what's going on here? So, I mean, that is a it's an interesting practice. I mean, it's from the Chinese perspective, the legal system, it.

In theory, it was supposed to actually make things better. But the problem is you end up with the police able to use all sorts of... Abusive tactics. Abusive tactics to get people... Basically, if you cooperate, we'll be lenient. If you resist, we'll treat you harshly. Or just detain you indefinitely without explanation. But this case, I think, was more interesting just because it ties back to the latest round of...

of massive corruption in the PRC soccer football industry and bureaucracy, right? Where you've seen multiple officials, players, coaches all go down. And what was interesting though, I think in this article was, so this player for South Korea, he's back home in Korea and he's,

I think the Chinese had gone to FIFA and said he should have a lifetime ban on the sport globally because he had been convicted of match-fishing. But FIFA basically called BS on the Chinese verdict and refused to enforce a ban globally. Right. Which is pretty interesting. So FIFA is basically saying, we don't believe in your legal system.

Right. And Sun said that I didn't know what I was signing when I signed a Chinese document. I didn't know that I was confirming that I had participated in match fixing, which I assume was true. And yeah, I mean, it is the tension between the PRC and various

governing bodies of world sport continues to be a theme here. Well, FIFA, I mean, this is interesting. FIFA had more of a backbone than, say, the IOC or the WADA, the doping agency, right? And maybe that's because the Chinese are just non-factors in global soccer at this point.

Yeah. They've never qualified for the World Cup. The only way the Chinese will qualify for the World Cup is if they get to host the World Cup. I mean, that's how the U.S. qualified in, I think it was the early 90s. That was my first World Cup. Absolutely. Right, right. And so, and you know, maybe that will happen, but I think that FIFA is, perhaps feels like they have less to...

They don't have to be so obsequious to the PRC at this point, unlike, say, the IOC or WADA. Or WADA. I believe WADA was getting a lot of support from the PRC, a lot of monetary support, donations. But yeah, I mean, the Times, they quote Pu Jichang, a former human rights lawyer in Beijing, who was disbarred in 2016 for, quote unquote, provoking trouble when he criticized Chinese officials and

And he says plea leniency is being practiced in a disturbing way. Threats used during interrogations, sleep deprivation. Nobody regulates the process. And then I also thought it was interesting from a systemic standpoint. I'm going to read for the Times again. Defense lawyers say that plea deals are being used to railroad entrepreneurs and go after their assets.

especially as China's economy continues to struggle. In the southwestern Chinese city of Mianyang, which has been hit by a housing downturn, the authorities in 2021 detained a property developer along with his employees. Local police called them gang members and asked the public to submit evidence of crimes to prove their assertion. The local government went after Mr. Zha

Mr. Zhang and his company's assets, seizing acres of land, hundreds of apartments, and dozens of cars. His company had paid an $83 million deposit for a plot of land auctioned by the city. Officials took the land back and auctioned it off again.

That all just brings me back to some of the conversations we've had about provinces that are weighed down by debt and then turn to shaking down local businessmen. It sounds like the plea leniency process might be one of the ways the shakedowns are executed. I don't know. No, I think you're right. And it also goes back to the earlier conversation we had on this podcast about this surge, the newfound...

even though they say, I've always supported private enterprises, but there's a very obvious attempt to restore confidence among private businesses. And one of the key problems they're facing is these kinds of shakedowns. Yeah. Well, and it's interesting in the context of the anti-graft campaign, not only in soccer, but countrywide. I mean, the Financial Times reported this week that China's technology minister has been removed from office after being out of the public eye for two months. And

And China's anti-graft watchdogs have disciplined 889,000 officials in the last year, which is up 46% from the year before and is the biggest number in at least a decade. First of all, that is just an insane number, 889,000 officials. It's a big bureaucracy. Yeah, I guess so. It is a big bureaucracy. Yeah, well, and I have no doubt that there is a lot of corruption, but...

But reading the New York Times story made me wonder how some of those investigations were carried out. And I would imagine that there were some plea leniency issues in some of the investigations along the way there as well. And then back to the soccer, but the thing was there were absolutely match fixing. And so...

But again, I was struck more in that article, just the fact that FIFA had said, you know, we're not going to... We don't consider this legitimate. Yeah. Yeah. We don't consider the Chinese legal system's opinion legitimate. I thought that was interesting. Yes. Well, perhaps the Olympics will follow suit on some of the testing issues that have been a problem over the last couple of years. I don't know. But...

For now, while we're talking about local economies, this story that you shared in the cynicism chat earlier this week was interesting to me. The headline from Reuters, ebbing demand for China's favorite firewater adds to debt concerns. In the Chinese village of Maotai, the local firewater named after the town is not only a key source of income, it's a barometer of the country's battered consumer market and the economic misfortunes of its home province.

In the weeks before Lunar New Year, tourists traditionally flocked to the town to buy the Baiju or white spirit as gifts. This year, those crowds were notably smaller. And it goes on from there. But I thought the whole article was pretty interesting. First of all, though, I know nothing about Maotai and I don't drink, so I'm completely useless for this conversation. But can you tell people about the history of this alcohol?

Well, it is multi... Where do I begin? Basically, it became the baijiu of choice for the top leadership in

in the early days of the revolution. Okay. And it then became sort of, it was served at all the banquets. You have multiple levels, multiple grades of multi. It's, you know, even the cheapest version is not that cheap. I will say my,

What I was drinking, my experience with Maotai was... It was actually eye-opening because I was never a huge fan of Baijiu and even Maotai, it just was hard to drink. And then I went to a friend's 40th birthday in Beijing.

And he was a business guy and a lot of interesting friends. And, you know, of course, he drank a lot. And someone poured a big shot of this multi and I drank it. It was actually really good. And I was like, what is this? And oh, yeah, that's the 10,000 MB bottle, you know, which at the time was like 1,500 bucks, right? Yeah.

And then you can go a lot higher depending on, you know, there's, there's anyways, it's, but the, the point is, is it's, it's, it's cultural. It's also had become multi has become a, frankly, an investment where people would buy it and hold it.

because it would always go up in value. At one point, Maotai was the most valuable stock, listed stock in China. It's incredibly important to Guizhou, the province where it is, because it's, I think, majority owned by the local government, the provincial government, and gives them massive dividend payments every year, helps with some of their debt problems.

But I think you're seeing with this is the corruption crackdown. When it first started, when CGV came to power, it had an impact on multi-sales because this is part of the... You go out, you're an official, you go out and you go out and you have...

big banquet and you drink too much and you do stupid things, right? It's not a great thing to have your officials going out drinking Ma Tai four or five nights a week. So there was some hit to demand at the beginning when Xi Jinping came to power. It kind of recovered over time. In part, I think as people got wealthier, you could have people just enjoying it. Now, since COVID especially, we're seeing this consumption downgrade. And there are plenty of other types of Baijiu in China that are

decent. And so I think you're seeing the company is being hit with that kind of a consumption downgrade, other options out there that are reasonably good that are a lot cheaper. And it has not really been able to find an international market. It's a very particular taste. Yeah. Is it essentially moonshine or is it whiskey? No, no, no. It's... No, I mean, it's a... What is it? Sorghum-based, right? I mean, it's a...

Again, it's an acquired taste, but there are some really good maltai. And when I said when I was drinking, I actually had a meal of drinks that I got COVID two years ago, and I can't process alcohol. Different discussion. Although I was talking with a Beijing friend the other night who's in the liquor business, and we were talking about going to meet up in Europe this summer.

and I said, but you know, I can't drink, right? You remember that. I said, what do you mean? I said, well, after I got COVID, I said, what, did you get the vaccines? He said, what do you mean? I got all these friends who took the vaccines and they all have all these problems now. And you know, I never took vaccines. You know, we're all fine. I can still drink. Still down. I was just like, okay. But the point being though, that...

You know, Malta gets a sort of a, you know, a bad name in like in the far, like, oh, it's really, you can't drink it, whatever. But actually some of it's pretty good. It's also quite, I mean, it was really like the liquid corruption in a lot of ways. Yeah.

As far as like a gift that would be exchanged to various party epistles. Yeah, a gift. And then you'd have all sorts of different ministries and departments would have, they'd get their specially produced, specially produced multi where it would come like with special labels or in a special bottle shape. I remember I was at a dinner once and we were going to dinner and we were with a friend who saw another friend who had a relative who'd been a BLA general and

And on their table, they had two really nice balls of Maltese shaped like artillery shells. I really wanted one. I tried to get one. They were just like... But so the point being though is it's a... And it became a massive business. It's still a massive business, but it has...

Again, I think back to the consumption downgrade, that has hit the business. I don't think it's like the GLP-1 effect where you're seeing in the US and other Western countries where so many people are on Ozempic or Zepbound that they're not drinking as much. I don't think that has happened. We haven't seen that impact yet. But Malta is... Again, I think it... You don't want to say it's seen its best days, but it is a...

the Chinese economy has to improve a lot or the corruption crackdown has to

pull back a lot to see, I think, a big jump in demand. Yeah, that's interesting. I hadn't factored in the corruption crackdown into the story. But yeah. And one of the other problems for them is the way that people had collected and hoarded multi-items because it was all we'd go up in value is that market had started, I think, last year or the year before, you started to see those sort of secondary market prices going down. And so there's always the risk of

a run on those sort of a panic where people start dumping all their multi, the second that they collected. And that could then, that could depress not only the price, but then also why would you, you know, you're not buying from the company because you've already, you're just buying on the secondary market. It's cheaper. And so there's, there's that risk too. So there are a lot of, I think, challenges for the company.

Yeah.

And they also highlighted how central Kwecho Maotai is to the economy in Kwecho. In addition to employing more than 30,000 people, the company accounts for a fifth of the province's tax receipts and 5% of its GDP.

And Guizhou has used the company to not only raise revenues and paid out debts, but also bail out local highway builders and contribute to public works such as roads, railways, airports, and hospitals. I think multiple heads of multi have gone down in corruption crackdowns. Wow. Yeah. I mean, it's an interesting window into a variety of the challenges facing China today. So we're running a little long, but I have a quick story. And I wrote a, I wrote a early, God, this was like, this was well over a decade ago. Um,

So Malta, Guizhou Malta acquired a distillery brand called Xijil. And Xi is X-I. It's the same character as Xi Jinping. And in 2012, before the corruption crackdown, when everything was a big party...

I had a friend who was friends with the Shizhou distributor for Beijing, and they were pushing out. They were about to launch, I think, a several hundred million RMB marketing campaign on CCTV to promote this brand because the logic was, well, it's the same name as the incoming general secretary, the heir. And so everyone's going to want it. It's going to go up in value. So I bought a couple of cases for several thousand RMB thinking like, hey, this is a great investment. Straight to the moon. Here we go. Yeah.

And the logic isn't bad there. How did it work out? It didn't work out. I have a, it turned out to be an okay gift. I still have a, I still have a bottle. It's a very nice package. I have still a bottle in our house. Um, I haven't opened it. I'm going to wait for a special day to open it. But, um,

You could see it was funny to talk to the people and some other friends did it. It was just like the whole idea like, yeah, this is great. We should all buy this because it's basically a branch of Malta. It's got the she name attached to it. Hey, it's only going to go up and to the right in terms of investment value. Well, we talk about the convergence often on this show. A lot of people are doing that with Solana and some of the other things that are being pumped by the Trump administration these days. So...

Well, there, there is, there is actually, I, I, I, I owned some, it was a, not a good investment. It was just fun. That didn't matter. There, there is a, a, a multi coin meme coin. Oh God. Unrelated, unrelated to the company. You know, I remember you tweeting about it. It is collapsed. I think 99%. So, well, for,

For anyone curious, Maltai's fermentation process often spans months, followed by years of aging, giving it a distinct flavor profile with notes of soy sauce, nuts, and spices. And it's traditionally an older man's drink, and most consumers under the age of

35 don't really have a taste for it in China, which is another problem facing Kuaishou Maotai, which is the largest alcohol company in the world. I think with Luckin Coffee, where you could have multi-favorite coffee, and that was a big deal for a while, and then they tried multi-flavored ice cream. I think that did as well. But the coffee...

you know, had maybe sort of a short-term pop. But again, I don't think it's sort of changed the more structural problems that the business is facing. Indeed. Yeah. And the demographic challenges are obviously part of it too. I talked to Ben before we came on to record and he said, Maltai is pretty terrible, but also kind of refreshing. So I don't know how to make sense of that review, but this mystery will endure for me since I don't drink. But yeah,

I enjoy this story. And again, we'll link it in the show notes. It is a microcosm into like four or five different problems facing China domestically. And I hope next time I'm at your house, I'm going to make you show me that bottle of Maotai that you kept from your failed investment opportunity.

But congrats to you for making it through the episode here, powering through the cold. And I hope you feel better. I hope it continues to get warmer in D.C. Any final thoughts as we sign off here?

No, except that it feels like it's been a lot longer than 40 days that Trump's been president. Oh my God. Like I said, 1,400 executive orders. I mean, it's been a couple years under Trump. No, and I mean, we talked about it a few podcasts ago. We're focusing on China, and obviously we have to care about what the Trump administration has done with China. I have little faith in...

that they're that what he's going to do on China. I really and I don't I don't think I don't know anybody who has confidence they know what he's going to do on China. Yeah. Well, I don't think there's a unified strategy right now. Well, I don't want to say there's no unified strategy. I don't think that Trump has an end game that he's

decided on in terms of how some of the back and forth with she may play out over the next couple of years here. I think he's open to a number of different options and avenues here.

I think that's right. So we shall see. I'm just tired of opening Twitter every day and seeing a new freak out that I have to sort of untangle. When I open Twitter, all I see are tweets from Elon Musk. Yeah. Well, I don't know what the hell they're doing with crypto and the strategic crypto reserve. Just a reminder of how algorithms can be manipulated.

I am really ready for less Elon Musk in my life, I'll tell you that much. But on that note, Bill, I will talk to you next week. Get healthy. Have a great couple of days. Give Tashi my best. And for people who are new and listening to this as a free episode, you can subscribe to Cynicism and get every episode we record. You could also access that through a subscription to Stratechery.com.

I suggest subscribing to both. And Bill, have a good couple of days and I will talk to you next week. We'll talk two sessions.