US-China talks continue. Export restrictions are the problem.

Any progress is likely to be cosmetic, failing to go to the heart of structural issues, and thus prone to further setbacks.

Commerce Secretary Howard Lutnick, Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer were in London meeting with their Chinese counterparts following a call between President Donald Trump and Chinese leader Xi Jinping last week. The aim is to ensure the survival of the Geneva agreement, which ratcheted tariffs back from three-digit levels but ran into trouble within weeks. Both sides said the other had violated its terms.

The focus of the talks is China’s restriction of exports of rare earths and magnets following the Trump administration’s April 2 tariff blitz, as well as U.S. export controls limiting China’s access to critical technology, including around chip design software and AI chips. Some of those date to October 2022, while others were put into place after the Geneva meeting.

Trump’s economic advisor, Kevin Hassett, said on Monday in a CNBC interview that the purpose of the meeting was to make sure Beijing was serious and to “literally get handshakes" on their lifting of restrictions on the flow of critical magnets needed for the autos, industrials and defense sectors. While some sort of “handshake" could emerge, analysts were skeptical of what the talks would ultimately produce.

“Beijing at a minimum will require the removal of restrictions post-Geneva on semiconductor design tools, aircraft related components and technologies, chemicals, and other critical inputs such as high purity quartz that the Commerce Department and Trump administration used as part of a failed ‘escalate to de-escalate’ strategy," says Paul Triolo, a partner at the geopolitical consultancy DGA-Albright Stonebridge Group who focuses on China and technology.

For its part, Beijing has been implementing monitoring and tracking systems for critical minerals and rare earths as a response to U.S. export control in recent years. Beijing is unlikely to roll back its controls to pre-April levels, Triolo says. It won’t agree to approve licenses for U.S. military and defense industry without a major concession on the part of the U.S. in the semiconductor arena, both for advanced graphics processing units and semiconductor-manufacturing equipment, he predicts.

The sort of negotiation that would be required to make that happen could be too complex for the London meeting because it would involve the intelligence community, Congress, and the other agencies involved in U.S. export controls, he says.

And Beijing is unlikely to back down on shipments of rare earths and magnet shipments, at least to certain end users. The reason: Those materials now are a national security priority for Beijing, which could say, for example, that it can’t allow its samarium cobalt magnets to be used in the nose of F-35 jets that could take part in a U.S.-China conflict over Taiwan.

“Beijing has clearly ‘tasted blood’ on the rare earths issue, and won’t make concessions without clear and major symmetric measures on the U.S. side which may be very difficult to sell to U.S. domestic constituencies," he says. “Any further progress on these issues coming out of London will require extended negotiations over a period and some clarity about the overall goals of U.S. trade, economic, and technology policy vis-à-vis China."

Investors are expecting some conciliatory efforts in the near term, at least. In a note to clients, Ulrike Hoffman-Burchandi, chief investment officer for global equities at UBS Global Wealth Management, says the U.S. could relax some restrictions on lower-end AI chips and semiconductors even if it keeps stricter control over more advanced manufacturing gear. In return, China could dial back its recent rare-earth curbs even if its new centralized system to control and track supplies is likely to expand, and could be periodically tightened to reassert leverage as needed. Markets may be placated in the near term, but the outlook for the global economy, especially sectors reliant on inputs from China, likely will remain unclear.

Write to Reshma Kapadia at reshma.kapadia@barrons.com