Donald Trump and Xi Jinping agreed this Thursday at their
first meeting in over six years to delay export controls on rare
earth and on computer chips. The deal they struck lasts for
one year and follows months of escalating tariffs, retaliatory
restrictions, and stalled negotiations.
The US and China additionally reached agreements on American
tariffs related to fentanyl and on tit for tat levies on each
other's shipping industries. On the scale of up from zero to
10, with 10 being the best, I would say the meeting was at 12.
While Donald Trump sounded triumphant after the meeting,
the deal was mostly seen as a win for China, where the US
accepted a negotiating link between its restrictions on high
tech exports like AI chips and China's restrictions on rare
earth exports. With the 20% fentanyl tariff
halved, the average tariff rate on Chinese goods falls to 31%,
which is well below the 50% US tariffs on Brazil and India and
below the 35% tariffs on many Canadian goods, making
production in China more attractive, at least for now.
While markets seem to have breathed a sigh of relief, the
underlying tensions are still in place and the Economist
described the agreement as sketchy, temporary and built on
sand. Rare earth elements have been a
key negotiating point in the most recent standoff.
These are crucial components in electric motors, smartphones,
airplanes, fiber optic networks, medical imaging equipment and
much more. They also play a role in missile
systems and jet engines. China has spent decades building
dominance in their production, and that dominance is now being
used as leverage. Rare earths are a group of 17
metallic elements highlighted here on the periodic table, and
if you learn how to spell all of their names, you'll have a real
edge in playing Scrabble. They're not particularly rare,
as their name would imply, but they're often found together in
low concentrations, which makes mining them and separating them
a very complex and expensive process.
The refining stage is messy, energy intensive, and often
involves strong assets. This is partially why China
dominates the industry. It built the infrastructure over
the years, accepted the environmental costs, and scaled
up production when other countries were reluctant to get
involved. While rare earth production has
grown massively over the last 25 years, demand has grown just as
fast. These elements have become
almost indispensable in modern manufacturing.
Neodymium magnets, for example, are used in electric motors,
wind turbines, and hard drives. They're small, powerful, and
efficient, ideal for miniaturizing components and
reducing energy consumption. It would be difficult to build
something like a drone without them.
Rare earths are also used in things like polishing powders,
battery alloys, and medical imaging equipment.
They play a critical role in the production of fiber optic
cables, which form the backbone of the Internet and modern
telecommunications networks. Different rare earths are used
to dope the glass fibers, enabling the amplification of
light signals over long distances without degradation.
This is essential for maintaining high speed data
transmission across across continents, powering everything
from video streaming and cloud computing to financial
transactions and global communications.
Without rare earth, the efficiency and reach of fiber
optic networks would be severely limited, undermining the
infrastructure that supports the digital economy.
Military applications exist too, and these are usually hyped in
articles whenever the supply of rare earths is cut off.
But these applications are not the primary driver of demand.
Harvard points out that electric cars require six times the
mineral inputs of conventional cars, and wind plants require 9
times more minerals than gas fired plants.
So while rare earths do have military uses like in missile
guidance systems, jet engines and radar equipment, the
quantities needed for military applications are relatively
small. The main demand comes from
civilian industries like electronics, cars, energy, and
telecommunications. From the 1960s through to the
1980's, the United States was the dominant global producer of
rare earth elements, largely due to the Mountain Pass mine in
California, which was shut down in 2002 after a toxic waste
spill where radioactive wastewater leaked into the
surrounding desert. The mine was no longer viable
due to cheaper Chinese imports, environmental compliance costs,
and pollution issues. The site was revived in 2012,
went bankrupt in 2015 and was taken over by financiers who
founded MP Materials in 2017. Earlier this year, the US
government acquired a 15% stake in the company for $400 million
as part of a broader public private partnership aimed at
building a domestic supply chain for rare earth magnets.
Apple has committed $500 million in a long term partnership to
source American Made rare earth magnets and to build a rare
earth recycling facility at Mountain Pass.
Starting in the 1990s, a combination of environmental
regulations, corporate short termism and outsourcing led to a
decline in US rare earths production.
China, meanwhile, strategically invested in the industry,
offering lower costs and fewer environmental constraints.
By the early 2000s, China had overtaken the US, and today
supply buys around 80% of the world's rare earths and handles
over 90% of the refining. China also manufacturers nearly
all of the magnets that use rare earth materials.
In China, the entire supply chain from ore to finish
components is vertically integrated and geographically
concentrated. China's dominance is possibly
more strategic than economic in nature, as selling rare earths
isn't hugely profitable. The US spends more than 20 times
as much on avocado imports each year as it does on rare earths.
The difference, of course, is that no one ever threatened to
cut off the guacamole supply. Because railroads are so deeply
embedded in the supply chains of nearly every advanced industry,
control over their flow means influence over production
timelines, pricing, and provides huge geopolitical leverage when
needed. China's geopolitical edge in
controlling this small industry comes from its ability to cause
huge disruptions. When export licenses are delayed
or denied, supply chains around the world come to a halt.
Rare earth elements, despite their name, are not particularly
rare, but the ability to refine and produce them at scale is.
China has built that capacity through decades of industrial
investment, environmental tolerance, and technical process
development. The process is messy, expensive
and difficult to scale U quickly, making it extremely
difficult to rebuild this industry under Western
environmental and regulatory constraints.
Environmental approvals can take years in Western countries,
labor costs are significantly higher than in China, and
expertise in production is extremely limited, as most of
the engineers would experience in this space retired many years
ago. Even with government backing and
corporate investment, progress has been slow as rebuilding
capacity requires more than just access to raw materials.
It requires technical expertise, regulatory change and long term
investment. China's export licensing system
has become a central tool in its trade strategy.
Since 2023, the Chinese government has expanded the
scope of these licenses to cover more than 700 different
products, including rare earth manufacturing equipment and
other critical inputs. Licenses are typically issued
for six months and require detailed disclosures about the
buyer, the intended use, and the final product that will be
built. In some cases, exporters are
asked to collect technical documentation or proprietary
information from their customers as part of the license
application process. The licensing process gives
Beijing a window into foreign supply chains.
By collecting data on how and where rare earths are used,
Chinese authorities can track demand patterns, identify
potential stockpiling, and monitor for buyers who might be
reselling the materials. The licensing system also allows
for selective enforcement on a customer by customer basis.
Licenses can be delayed or quietly withheld, creating
uncertainty for buyers without the need for formal bonds.
In recent months, German firms have received more approvals
than their American counterparts, and Indian buyers
have faced even longer delays. The structure of the licensing
regime reflects a broader shift in China's approach to trade.
It mimics the example set by the United States with the Foreign
Direct Product Rule, AUS export control regulation that extends
the reach of US restrictions to items made abroad if they are
the direct product of US technology, software or
equipment. Beijing has adopted this logic,
applying restrictions to goods produced outside of China if
they rely on Chinese inputs or know how.
If the United States was cut off by China, other nations might
hesitate to re export to American buyers, not just to
avoid jeopardizing their own access, but also because recent
U.S. trade aggression has strained diplomatic and
commercial relationships with the rest of the world.
In a moment of scarcity, Washington may find that fewer
of its historical allies are willing to take a big economic
risk. Risks on its behalf heavy rare
earth have received particular attention from the Chinese
government in the recent trade disputes.
These elements are particularly valuable and extremely difficult
to substitute due to their unique properties.
One of the uses of these elements is as an additive in
powerful magnets, where they enhance thermal stability,
allowing magnets to maintain their strength at high
temperatures and essential property in certain defence
applications, space applications and in energy technologies.
The Chinese government has gone to great lengths to restrict the
spread of technical expertise, too.
In 2023, they banned the export of railroad processing
technology, and according to reports from the Wall Street
Journal and Reuters, China's Ministry of Commerce began
requiring railroad firms to register technical staff and
collect their passports, effectively limiting their
ability to to travel abroad even for personal reasons like
holidays. The policy targets workers
involved in rare earth processing and in magnet
manufacturing. The goal is to prevent leaks of
sensitive technical knowledge and maintain China's strategic
advantage in railroad technologies.
The licensing regime is opaque by design, giving China the
ability to exert pressure without the diplomatic cost of a
formal embargo. China's use of rare earths as a
trade weapon is nothing new. In 2010, during a maritime
dispute with Japan, Beijing quietly cut off rare earth
exports to Japanese manufacturers.
The move caused immediate disruption.
Japanese firms, caught off guard, were forced to halt
production lines. The Japanese government caved in
and released the Chinese fishermen that had been arrested
as part of the dispute, and China resumed shipment shortly
after. The episode left a lasting
impression on Japanese firms, who had up until that point
relied on, just in time, manufacturing techniques.
Japan began stockpiling rare earths, investing in alternative
sources, and redesigning products to reduce reliance on
Chinese materials. According to The Economist,
Japan's dependence on Chinese rare earths has fallen from 90%
in 2010 to around 60% today. Japanese auto manufacturers
developed electric motors for their hybrid cars that didn't
require rare earth magnets. The 2010 Japanese embargo
triggered a formal complaint at the World Trade Organization.
the United States, the European Union, and Japan jointly
challenged China's export restrictions.
In 2014, the WTO ruled against China, stating that it's
policies violated international trade rules.
Beijing agreed to to remove all quotas, but by then the message
had been delivered. China was willing to use its
control of rare earth as a geopolitical tool.
In 1987, China's former leader Deng Xiaoping famously said that
while the Middle East has oil, China has rare earths,
foreshadowing China's willingness to use its leverage
over the supply chain of vital components.
In 2019, a week after the Trump administration had blacklisted
Huawei, Xi Jinping toured a rare earth processor in China and
highlighted the importance of rare earths in global supply
chains. This was widely interpreted as a
threat to restrict Chinese exports to the United States.
Chinese state media followed with editorials warning that
China could cut off supplies if pushed too far.
One headline read. Don't say we didn't warn you.
In Chinese political discourse, rare earths are often described
as being both a strategic resource and a national
treasure. The Financial Times has reported
that Beijing views rare earths as both a sword and a shield, a
means of defense and a tool of coercion.
The term Assassin's Mace has also appeared in official
rhetoric referring to asymmetric trade capabilities designed to
counter more technologically advanced adversaries.
These signals are not just for foreign audiences.
They serve a domestic purpose, too.
The trade war has allowed XI to frame China's economic
challenges as the result of foreign hostility.
This narrative has helped consolidate political support at
home, even as the country grapples with deflation, a
property crisis and slowing growth.
Rare words in this context are more than a bargaining chip.
They're a symbol of national strength and a reminder that
China is prepared to fight on its own terms.
The railroad stand off may have started as a dispute between the
United States and China, but its effects have rippled far beyond
Washington and Beijing. Europe, India, Japan and other
manufacturing economies have found themselves caught in the
crossfire. In early October, the Dutch
government took temporary control of a Chinese owned chip
maker based in the Netherlands called Nexperia, citing
governance concerns and national security risks.
The CEO was accused of misappropriating over $200
million of company funds to benefit another company he owned
in China, and Dutch officials were concerned that the
companies operations and intellectual property were being
shifted to China. And Experia's chips are widely
used across Europe's industrial base in cars, medical devices,
and defense systems. According to local reports, 49%
of European auto companies, 86% of medical device firms, and the
entire European mechanical, engineering and defense sectors
rely on Nexperia's components. Since the dispute began, the
company is reported to have struggled to secure railroad
supplies from China, and the resulting shortages have started
to affect production. China's control over rare earths
is just one part of its broader trade strategy.
Over the past year, Beijing has been quietly stockpiling
industrial inputs, including oil, natural gas, iron ore,
bauxite, and copper, according to The Economist, these
purchases accelerated in early 2024 in anticipation of a
possible Trump victory. Even as China's industrial
output slowed, metal imports surged.
The goal appears to be strategic insulation to ensure that in the
event of renewed trade hostilities, China can continue
to operate without relying too much on foreign suppliers.
This stockpiling strategy has cost large purchases, drive up
prices and tie up capital, but Beijing seems willing to absorb
these costs in exchange for greater resilience.
At the same time, China has been diversifying its sources of
supply, buying oil and gas from Russia, investing in African
mining projects and building out domestic refining capacity.
China's economy has been under strain for quite some time.
The property market is in a deep, prolonged slump, now
entering its fifth year. Deflation has taken hold, with
falling prices reflecting weak consumer demand and overcapacity
in key sectors. Youth unemployment remains high,
and business confidence has been dented by regulatory crackdowns
and sluggish domestic spending. Despite these pressures, the
confrontation with the United States has strengthened XI
Jinping's position at home. The trade wars provided a
convenient external enemy. The narrative of foreign
encirclement has allowed the Communist Party to rally public
support and to justify tighter political control.
It's also reinforced Beijing's push for self-sufficiency,
expanded industrial policy, and accelerated efforts to reduce
reliance on foreign technology and materials.
China's confidence is not entirely unfounded either.
Its exports have remained strong despite US tariffs, its stock
market has outperformed US indices in dollar adjusted terms
and its domestic tech sector has made visible progress, including
the recent DeepSeek AI breakthrough.
Trump stocks in Malaysia, Japan and South Korea over the first
four days of his Asia trip were an exercise in flattering the
American president. South Korea gifted him a golden
crown and a medal. Japanese Prime Minister gave him
a golden golf ball and told him that she had recommended him for
a Nobel Prize. Trump's meeting with She was
described by the BBC as a meeting of equals on a global
stage where the stakes for both nations were enormous.
She felt no need to flatter Trump with gifts, military bands
and honor guards. Beijing appears to believe it
can weather the trade war with the United States, and whether
that confidence is justified or not remains to be seen.
China's control over rare earth does give it leverage, but not
without limits. The global response to its
export restrictions has already begun to erode the foundations
of that dominance. Japan's experience after to the
2010 embargo is instructive. Caught off guard by the sudden
cut off, Japanese manufacturers rushed to redesign products to
reduce their reliance on rare earths.
The government invested in alternative sources and build up
strategic reserves. Overtime, Japan's dependence on
Chinese railroads declined. The lesson was that supply
shocks create incentives to adapt.
That pattern is now repeating across Europe, North America,
America and parts of Asia. Companies are exploring ways to
reduce their exposure. Some are turning to recycling.
Others are redesigning electric motors to use fewer rare earths
or none at all. BMW and Renault, for example,
have developed electric vehicles that rely on externally excited
motors rather than permanent magnet designs.
These motors are larger and more complex, but they avoid the need
for rarer magnets. German auto parts manufacturer
ZF Group have developed a magnet free motor that matches the size
and performance of traditional EV designs, and several
automakers are now exploring its use.
Startups are also experimenting with new materials too.
Tetrateanide, a rare iron nickel alloy once found only in
meteorites, can now be synthesized in the lab.
AUS based firm is now developing magnets made from iron and
nitrogen, both of which are abundant and inexpensive.
These technologies are still experimental, but they point to
a future in which rare earths are no longer the only option.
Havior Blast, writing for Bloomberg, has argued that the
rare earths panic is totally overblown.
The total value of US imports of rare earths from China is
relatively small, around $170 million a year, and the
quantities used in military applications, he points out, are
minimal. Blass argues that most rare
earths go into consumer products like vacuum cleaners,
smartphones, and electric vehicles.
If prices rise, manufacturers will just have to adapt.
High price prices, as the saying goes, are the best cure for high
prices. Chinas dominance in this space
is real, but it's not unassailable.
The more aggressively China uses rare earths as a weapon, the
more it encourages others to find alternatives.
The global response to Chinas railroads dominance has already
moved beyond rhetoric. Governments and companies are
now investing in alternatives, not just to diversify supply,
but to reduce dependence altogether.
Recycling is possibly the most promising solution.
While rare earths are not widely recycled today, that's beginning
to change. In France, a facility is being
built to process around 2000 tons of magnets a year using
scrap from electric motors and manufacturing waste.
In Canada, a company is developing plants to recover
rare earths from E bikes, hard drives and other discarded
electronics. Apple, as I mentioned earlier,
has announced A partnership with MP Materials to support rare
earth recycling at Mountain Pass.
These efforts are still small in scale, but they represent a
shift in mindset from linear supply chains to circular ones.
Governments are also rethinking their approach to supply chain
security. Japan, as I mentioned earlier,
has built up strategic reserves and diversified it's suppliers.
In Frankfurt, a World War 2 era bunker now houses 300 tons of
rare earths stored by a private metals merchant.
Some of the material stored there is owned by manufacturers,
but much of it is held by intermediaries who anticipate
future shortages. The Pentagons investment in MP
materials is part of a broader US effort to rebuild domestic
manufacturing, but so far progress has been slow.
The Just in Time model that defined global manufacturing for
decades is now being reassessed. Companies are beginning to
prioritize resilience over efficiency.
That means holding more inventory, building redundant
supply chains, and investing in technologies that reduce
exposure to geopolitical risk. Rare earths are now a strategic
variable, and the world is adjusting accordingly.
The announced agreement between Trump and she appears to have
paused the immediate crisis, but it hasn't resolved the
underlying conflict. Rare earths remain a pressure
point, and they are a tool that China can deploy again with
little warning. The agreed deal is explicitly
temporary, with key provisions set to expire in a year.
None of the five prior meetings between Trump and she have
produced a lasting deal, and there's little reason to believe
that this one will be any different.
Trump has already suggested that it could be renegotiated
annually, raising the prospect of a permanent state of trade
uncertainty. The strategic logic behind
China's railroads policy is quite obvious.
For a relatively small loss in export revenue, Beijing can
inflict significant disruption on foreign industries.
The materials themselves are embedded in everything from
smartphones to satellites. Restricting their flow doesn't
just raise prices, it halts production, exposes
vulnerabilities, and forces uncomfortable political choices.
The problem is that this strategy carries big risks.
The more China uses rare earths as leverage, the more it
encourages others to adapt. Substitution, recycling and
stockpiling are no longer theoretical responses.
They're active areas of investment.
Japan has already reduced its dependence.
Europe and in the United States are following suit.
If China is to think of railroads as it's Assassin's
maze, it has to be careful how it uses them.
This is quite a balancing act for China, as if they play this
hand too often it stops working, and a small reduction in
dominance in this sector could reduce its negotiating power
disproportionately. The deeper structural issues
remain unresolved. China's industrial policy, it's
push for technological self-reliance, and its use of
trade as a geopolitical instrument are still in place.
the United States, for its part, continues to wield tariffs and
export controls with little predictability.
The current truth might hold for a few months, but the overall
relationship remains fragile and the next disruption is only ever
one political decision away. Thanks for tuning into this
week's podcast, with special thanks to my supporters on
Patreon whose donations make this podcast work.
If you'd like to support the podcast, I've left a link in the
show notes. Have a great week and talk to
you again soon. Bye.