It’s been one week since China put the entire world on notice and made clear that long-term reliance on Chinese rare earths is untenable. Short-term reliance is no sure thing, either, at least for the United States. Here’s the New York Times on that news, if you missed it last Thursday:
The Chinese government announced on Thursday that it was escalating its curbs on exports of rare earth metals, as Beijing claims broader jurisdiction over the global manufacture of semiconductors and other technology. The new rules, which are set to take effect Dec. 1, are the latest step by Beijing as it tightens the reins on rare earths to exploit China’s dominance in the sector.
The rare earth rules could scramble the supply chains of some of the world’s biggest companies, including Nvidia and Apple. Rare earths are essential for the production of many computer chips, which are used in everything from smartphones to artificial intelligence systems. Rare earths are also used to make the magnets that power the electric motors in drones, factory robots and offshore wind turbines, as well as the brakes, seats and other systems in cars.
The rules issued on Thursday give broad authority to China’s Ministry of Commerce to restrict not just rare earth metals and magnets, but also the many devices like electric motors and computer chips that contain these materials.
“China is playing hardball,” said Jimmy Goodrich, a senior fellow at the University of California Institute of Global Conflict and Cooperation. The move “could position Beijing to have complete control of the global A.I. and modern electronics supply chain,” he added.
The measures from Beijing elicited multiple responses from President Trump on Friday, including threats of “a Tariff of 100% on China, over and above any Tariff that they are currently paying,” as well as “Export Controls on any and all critical software,” and potentially cancelling a meeting with Xi Jinping on the sidelines of the APEC summit later this month.
I’m more interested in what the President said Sunday afternoon. 18 hours earlier, in Beijing, the Ministry of Commerce had taken pains to emphasize “China’s export controls are not export bans” and promised to consider non-military license applications in a “prudential and moderate manner.” By Sunday in DC, then, Trump struck a different tone. “Don’t worry about China,” Trump wrote, “it will all be fine! Highly respected President Xi just had a bad moment. He doesn’t want Depression for his country, and neither do I. The U.S.A. wants to help China, not hurt it!!!”
It should be noted that this isn’t the first time China has weaponized rare earths, having done so first in 2010 during a dispute with Japan, and then again in May and June by restricting exports to Western firms in the wake of Trump’s tariffs on China. The spring dispute was ultimately resolved after the U.S. responded with a series of countermeasures, including a ban on the export of chip design software to China, proposed export controls on airplane components, and threats to revoke the visas of Chinese students studying at U.S. universities—all measures that were withdrawn once China restarted the flow of critical minerals and permanent magnets to Western firms.
What’s different this time is the establishment of a broadened export control regime that covers an expanded list of rare earths and related exports, including manufacturing and refining equipment for countries looking to develop their own mining and processing capacities, and requires foreign manufacturers shipping anywhere in the world to first seek Chinese government approval if they are shipping products that contain rare earths mined or refined in China, or refined elsewhere using Chinese tools, and those rare earths make up 0.1 percent or more of the product’s value. The rules will add regulatory burdens to companies everywhere, not just in America. Companies seeking approval may also have to submit product designs to Chinese authorities, which would make this regime a sort of institutionalized tech transfer for any company that uses critical minerals in its products. Contrary to the insistence of Beijing partisans, if implemented as written, these policies would be broader in scope and more extreme than anything the United States has ever done in global trade.
So let’s go back to Trump and the line about Xi’s “bad moment.” To the extent Trump is implying that Xi Jinping lost his nerve and made a tactical error, is he right?
Expected Benefits and Measurable Reality
The Wall Street Journal reported last week that in the course of trade negotiations, China’s negotiating team is pushing the American side for the “full removal of tariffs and export controls.” These rare earth rules were reportedly introduced in furtherance of that goal, with explicit approval by Xi Jinping. There are a few reasons I think this strategy is misguided.
First, it misreads the U.S. position in the trade war and its willingness to negotiate a settlement. “Beijing officials see Trump as eager to make a deal,” the Journal reported. I wouldn’t be so sure. The U.S. has been expressing urgent concerns about China’s trade practices since the beginning of Trump’s first administration, and the problem has been getting worse every year. China is in the grips of a deflationary cycle and exporting its excess capacity all over the world (except to the United States, in light of Trump’s tariffs). It’s now commonly understood that China’s trade practices have led to the deindustrialization of trade partners whose domestic industries are undercut on price, creating both job loss and long term strategic vulnerabilities. How China wound up going full speed ahead in this direction is its own story—state investment has been diverted to manufacturing sectors after a years-long property buildout that at one point used more cement across three years than America did in the entire 20th Century, which led to a real estate bust and an estimated 60 million empty apartments—but what’s germane for our purposes is that for Western economies, the status quo is intolerable.
China, meanwhile, is intractable. The government has not curbed exports of excess capacity and runs a trade surplus of around $1 trillion. If they were to meaningfully alter those dynamics tomorrow, even more factories would sit idle, more jobs would be lost, and social stability would be in jeopardy. In other words, China can commit to purchase goods from the U.S. to put a dent in the trade deficit, but I’m skeptical that its leaders are either willing or able to restructure the aspects of the economy that are actually driving tensions with the U.S. No amount of soybean or Boeing purchase commitments will allay fears of state-supported industries that are are eroding America’s ability to compete across a variety of sectors and creating strategic dependencies on an adversarial government that talks explicitly about “tighten(ing) the international industrial chain’s dependence on China.” It’s certainly possible that Trump is either naive or vain enough to seek a big number commitment and some kind of compromise that would allow the U.S. to continue doing business with China indefinitely, but this week’s rare earth sabre rattling is a vivid reminder of why that would be dangerous.
And speaking of dangerous naivete, there is a fairly common perception that the Trump Administration has gone “soft on China,” and it appears to be a perception shared in Beijing. Rush Doshi, a former NSC member under President Biden, told the Wall Street Journal Wednesday, “It is precisely China’s belief that Trump will fold—as he appeared to do on [rare earth] magnets earlier this year—that has led them to massively escalate.”
Did the Trump administration actually fold earlier this year? When China restricted rare exports in the spring, Trump issued and then rescinded new countermeasures on China—the airplane components, chip software, etc—but never rescinded any of the initial tariffs and did not roll back any export controls on advanced semiconductors or high bandwith memory as part of the eventual compromise. If China understood this as weakness, they are misreading an Administration that has spent the year negotiating lower tariff rates with every trade partner on earth, while leaving tariffs firmly in place with the biggest trade partner of all. The average U.S. tariff on Chinese goods is 57.6% as of Thursday, port fees targeting Chinese shipbuilding dominance were introduced this week despite months of Chinese objections, and the Commerce Department recently revised entity list rules to include thousands of Chinese subsidiaries and close longstanding export control loopholes.
None of this is to guarantee that Trump won’t fold exactly as the Chinese expect, but if Xi and his negotiating team pursued this strategy because they believe Trump has already folded over and over again, their read on this Administration is at odds with measurable reality.
What’s more, if Trump were to fully capitulate to Chinese demands and remove tariffs and export controls in exchange for guarantees of continued rare earth access, that’s a bell that probably can’t be unrung. Until America develops durable alternatives to the Chinese critical mineral supply chain, any China policy the Americans ever attempt to implement for the sake of economic or national security, if it’s a little bit too inconvenient for the Chinese, could trigger the same response from Chinese authorities who suddenly start vetoing rare earth export applications. So here, when you consider the implications of an American capitulation in light of China’s threats, the rare earth measures may have made it even harder for Trump to entertain a deal to de-escalate.
America has cards of its own to play, as the world saw in the spring. The U.S. can ban the export of critical software to the PRC and, depending on the breadth of such a ban, handicap the progress of either the Chinese chip industry or larger swaths of the PRC economy. Restricting the export of airplane components (again) could impair China’s aviation industry, while sanctioning banks or taking steps to de-list PRC companies traded on American exchanges are additional countermeasures that have been explored previously and could easily be entertained again. The point here isn’t that these measures or others would lead to a detente and continued access to rare earths for American firms. I don’t know how China would respond to U.S. aggression. What’s clear based on the past nine months, though, is that an escalatory cycle is far more likely to materialize than any fantastical scenario in which Trump decides, for the sake of stock market stability, to roll back all tariffs on PRC goods, several years worth of export controls, and any ability to credibly deter Chinese behavior for the foreseeable future.
At a practical level, the analysis of this decision could end there. Trump is probably correct; Xi Jinping had a bad moment when he greenlit a policy that is unlikely to yield meaningful progress in the trade war and could instead lead to U.S. escalations that compound existing challenges facing China’s domestic economy. But that conclusion understates the risks for a country that is nowhere near as self-sufficient as the United States and still reliant on trade with the developed world to power its growth.
Underappreciated Risks and Protracted War
On April 28th this year, with American tariffs on China at 145%, Beijing Daily published a piece exhorting citizens to revisit On Protracted War, a collection of speeches given by Mao Zedong in 1938. Tariffs have since been reduced from late-April levels, but the war continues, clearly, and to the extent these are the early innings of an inevitable decoupling between the US and China, that process is likely to take years. Under any protracted war scenario, then, controlling the narrative is crucial. And here is where it’s notable that Beijing’s rare earth rules could restrict the flow of critical minerals to companies all over the world.
To illustrate this point, we can go back to April. If Beijing wanted to scuttle America’s trade war, the time to deploy these extreme measures was in the immediate aftermath of Liberation Day, with rules more narrowly crafted and explicitly limited to America. In the frenzy of those first few weeks, with U.S. stocks volatile and the bond market overheating, China may well have been able to scare Trump away from ushering in a full scale depression and forced the US to abandon its most aggressive tariffs on China. The rest of the world, back then, may have seen China’s measures and blamed Trump for inflaming tensions to the point that China had no choice but to establish reciprocal policies on rare earths. (And yes, leadership did attempt a version of this gambit with their May and June rare earth restrictions, but even then, China inexplicably expanded those restrictions to Europe.)
Unfortunately for Xi, it’s not April anymore. The U.S. has brokered trade deals with every major country but China, while U.S. trade partners in Europe are being inundated with Chinese exports and are now proposing tariffs on China-dominated industries that are effectively identical toTrump’s tariffs. It was in the middle of that environment, and with leaders from all over the world descending on Washington D.C. for IMF meetings this week, that China announced policies that threaten to make a huge portion of the global economy subject to an application process overseen by the Chinese Communist Party.
Trump seized on this messaging gift immediately. “There is no way that China should be allowed to hold the World ‘captive,’” the President wrote Friday morning, “but that seems to have been their plan for quite some time, starting with the “Magnets” and, other Elements that they have quietly amassed into somewhat of a Monopoly position, a rather sinister and hostile move, to say the least.” Later, he emphasized, “This affects ALL Countries, without exception, and was obviously a plan devised by them years ago. It is absolutely unheard of in International Trade, and a moral disgrace in dealing with other Nations.”
Countries around the world may not trust President Trump, but between warming relations with the largest consumer market on earth and the simple reality that all these countries woke up last Thursday and learned that their most successful companies may have to submit semi-regular applications to the Chinese government to participate in international trade, this is an argument that’s hard for Xi to win.
In Washington, too, the difference between economic calamity because of tariffs and calamity because of China’s response is important to consider. Volatility in April was blamed entirely on Trump and considered by many to have been avoidable, but the economy has been more stable since. If that success is then interrupted by a foreign country’s deliberate attempt to sabotage American industry and the stock market, the pain would galvanize government, private industry, and American public opinion not against Trump, but against China. At a minimum, it would lead to decoupling efforts that are more urgent and comprehensive than ever before.
The Next Month and Beyond
Xi, in fairness, doesn’t have many good options. The U.S. status quo is hurting China and inflaming trade tensions elsewhere in the world, and all this is happening as the domestic real estate market (and primary source of household savings) continues its decade-long decline, consumer spending flatlines, and youth unemployment looms as a problem of unknown magnitude, because China stopped reporting the figures. The status quo is bearable, but decidedly suboptimal. I don’t know what will happen next, and you probably shouldn’t trust anyone who says they do. The word “Taiwan” has not been mentioned once in this article, and there are a dozen other variables and sources of volatility that could complicate the next several years of China’s relationship to the U.S. and the rest of the world.
For now, I’ll simply stress that as someone who’s been following the trade war all year, I’ve noticed that the Trump administration has been consistently underrated for its resolve and strategic thinking in this area, and Chinese leadership might be getting too much credit for their foresight and calculus. It’s popular to observe that the CCP is an authoritarian government whose leaders are not subject to semi-regular elections to maintain their grip on power, and therefore China has a higher pain tolerance than the U.S. in any trade war scenario. But higher pain tolerance does not mean the system is outright immune to pain, and just because the trade war is not immediately an existential problem does not mean it won’t eventually become one.
Be clear about what’s happening in 2025. China is fighting to maintain its standing in the global trading system despite allegations of human rights violations, expansionist military tactics, widespread political and industrial espionage, and trade practices that have eroded industrial capacity all over the world. That’s the context for last week’s escalation. Rather than weathering the storm from the U.S. and presenting itself as the reasonable party upholding the global trading system, Xi and the CCP may have just sharpened the world’s focus as to which country, specifically, has rendered that system unsustainable.