The Summit with Xi is finally here.

The U.S. has arrived with an impressive group, including many titans of industry. Equity futures had a nice pop overnight as Jensen Huang hopped on AF1 at a stop in Alaska.

Another higher than expected report on inflation has tempered those gains.

Now we await what is likely to be a barrage of headlines from China.

Market consensus is that the President “needs” a win and will likely come away with some sort of a deal and a softening of tone with China.

The Cards

This administration often talks about “holding the cards” so let’s look where we are on a few key issues.

• Semiconductors, data centers, and AI. The U.S. continues to dominate this area (especially if you use stock market valuations as a judgement tool). Does bringing the CEO of NVDA along mean we are about to soften our restrictions on high-end chip sales to China? Many in national security would argue against that, but it is a possibility. What has been “curious” is that China has shown little inclination to buy the higher-end (“nerfed”) chips the U.S. has permitted them to buy. Is that China being stubborn? Or is China quietly building out their own designs and AI platforms without them? Edge to the U.S. though a slightly smaller edge compared to the last set of meetings.
• Processed and Refined Rare Earths and Critical Minerals. The U.S. has been making some progress on this front. There is a lot going on behind the scenes in D.C. (and in the DOW) that is smoothing the path to more domestic processing, refining, and smelting (as well as extraction). It takes time. Regulatory hurdles remain, though we are seeing some states embrace the jobs and taxes that come with these industries. ProSec™ at work! These talks may once again light an even bigger fire in D.C. to make progress on this front. I expect we will see news about projects in Venezuela (and possibly Greenland) in the coming weeks and months. The only slight negative is that we are using a lot of these critical minerals with the chip industry going gangbusters and the war in Iran. Edge to China, though a slightly smaller edge than last round.
• War in Iran. It is difficult to argue that the U.S. wouldn’t be in a stronger position if the conflict was over, Iran had become far less of a threat to the region, and the Strait was operating at full capacity. But none of that is true. The current state of the war in Iran leaves the U.S. in a position to be possibly asking for help from China. China does get a lot of oil (on the cheap) from Iran, so it too is feeling some pain, but it had a billion barrel stockpile coming into the conflict, so might be prepared to deal with the Strait being closed for longer. China does sell a lot of goods to Iran (including military or military related goods). That business has certainly slowed, and China is a likely beneficiary on the export front to Iran if the conflict is ended. One “wildcard” is that at some point “humanitarian” issues will crop up in the region and China has positioned itself as a possible helping hand, while the U.S. could be blamed as the cause. Edge to China, but likely only a minor edge in the grand scheme of things.
• Tariff Policy. A lot has changed from the early rounds of the trade war with China. China never once initiated changes in tariff policy. They chose to ignore some of the early hikes and then matched increases as they were foisted on them. They backed down when the administration capitulated and backed off. Threats of higher tariffs have been walked back, time and again (often coinciding with stock market declines or rising affordability concerns). IEEPA tariffs were allowed at the time, but they can no longer be applied as broadly. Do “maximalist” threats scare China any longer? Doubtful. Edge to China.
• Domestic Support. China, by its very nature, tends to have an edge on this front. They can have long-term plans. They have little fear of dissent or protest. Leaders don’t need to get re-elected. With affordability front and center as a concern in the U.S. (linked to various measures of confidence and support for the admin), there is less wiggle room for the President to be aggressive (and less time with midterms looming). Always an edge to China, but a larger edge now than compared to this time last year.
• Energy and Agriculture Independence. The entire world is being affected by the fighting in Iran, but the U.S. has been in a far better position to weather the storm. Yes, China has built up a large energy infrastructure that is not dependent on oil or LNG (coal, solar, nuclear), but that doesn’t help them with the various distillates or downstream products. People need to eat. The U.S. grows a lot of food. While selling more soybeans to China doesn’t sound that exciting, it is not a bad outcome. Edge to the U.S. that has increased with the regime change in Venezuela and the war in Iran.

There are more cards, but these 6 cards seems enough for this game.

Bottom Line

China’s hand looks stronger (relative to the U.S. hand) than it did at this time last year.

Against that is the perception (and market consensus) that the President needs a win to set the tone for the summer and a strong economy heading into the midterms.

Look for a deal. The positives we can see would include:

• Best case is we get some progress on Iran, with China’s help. The corollary is that any deal that leaves the Iran conflict in its current status quo is unlikely to help markets much.
• China agrees to buy a bunch of stuff, presumably with agricultural products being the bulk of those purchase commitments.
• More time to build out our own rare earths and critical mineral efforts.

The potential negatives:

• Allowing more Chinese brands (particularly any EVs) into the U.S. Not a major risk, but BYD seems downright scary at this moment in time.
• Downplaying our support of Taiwan to the point that it adds to the growing lack of faith in where the U.S. stands in terms of prior global commitments. It could send a ripple through the semiconductor industry (while helping those with domestic foundries). I do think every country should be pursuing ProSec™, in most cases more aggressively than they are, so this would push that agenda.

The wildcard

• Selling higher quality chips to China. While there are obvious benefits for the markets, this seems very dangerous to our longer-term competition with China. With the Middle East’s goal of becoming a data center hub being questioned until we understand what threat Iran will pose down the road, we should continue to focus on maintaining our advantage in this crucial industry. I call it a “wildcard” as it seems to have short-term benefits, but potentially longer-terms issues.

Expecting a deal, but one that doesn’t do a lot for markets or the economy.

My “concern” would be that I’m accurate in my assessment of who is holding what cards, but the admin doesn’t see it that way, and pushes for something and gets forced to walk away empty handed (or worse, with a series of Truth Social posts threatening to do things on the tariff and trade front – though markets would probably yawn their way through those posts).

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