US-China Trade War: Beijing’s Rare Earth Dominance Undermines Trump’s Trade Leverage

Rare Earth Mineral Exports Crucial to US-China Trade War Truce

Rare earths may decide the fate of the US-China trade pact. Last week, two-day intense talks resulted in the US and China agreeing to uphold the framework agreement signed in Geneva, keeping the 90-day trade war truce in effect.

As part of the agreement, China will maintain 10% tariffs on US goods while the US will keep the 55% levy on Chinese goods. However, China’s agreement to end delays to magnet and rare earth mineral exports to the US was potentially a more significant outcome for the US administration.

President Trump wants to return manufacturing to the US and end reliance on overseas supply. However, Trump has few alternatives to China for sourcing magnet and rare earth minerals.

According to The Kobeissi Letter, China mined around 270,000 metric tonnes of rare earths in 2024, accounting for 69% of global production. China’s production has reportedly tripled since 2014. The US and Myanmar, by contrast, produced 45,000 and 31,000 tonnes, respectively, in 2024, accounting for just 11% and 8% of global production.

The Kobeissi Letter concluded:

“Importantly, China also accounts for ~90% of the world’s total refining capacity, according to IEA data. This means China is the primary location for transforming mined rare earths into usable materials. The US needs China’s rare earths.”

After last week’s agreement to uphold the terms of the 90-day truce, Trump announced:

“President Xi and I are going to work closely together to open China to American trade. This would be a great WIN for both countries!!!”

Rare earth minerals remain China’s Trump card, with key US sectors, including defense, tech, and auto, at the mercy of China’s stance on exports. Beijing could ‘weaponize’ supply if it does not agree with the Trump administration’s moves in trade talks.

China Data Delivers Market Relief and Beijing an Upper Hand

This week, economic data from China eased concerns about US tariffs challenging Beijing’s 5% 2025 growth target. Retail sales soared 6.4% year-on-year in May, up from 5.1% in April. The unemployment rate dropped from 5.1% to 5.0%. The May numbers indicated Beijing’s stimulus measures gained further traction in mid Q2.

Despite US tariffs, industrial production was resilient, rising 5.8% YoY in May, down slightly from 6.1% in April.

While the US faces a Beijing stranglehold on rare earth minerals, China’s dependence on US chips could fall fast, potentially giving President Xi the upper hand in trade talks.

According to CN Wire,

“Chinese automakers, including SAIC Motor, Changan, Great Wall Motor, BYD, Li Auto, and Geely, are preparing to launch models using 100% domestically produced chips, with at least two brands targeting mass production as early as 2026. The initial rollout will involve updated versions of existing vehicle lines, with additional manufacturers expected to follow, according to people familiar with the situation.”

Car manufacturers align with Beijing’s call for self-reliance in key sectors, including semiconductor technology. China’s self-relianceand US dependence on China’s rare earth minerals could be key to the outcome of future trade discussions.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero remarked on China’s grip on rare earths, stating:

“China’s weaponization of rare earths does not stop at export controls, but rather at extracting information on key manufacturing processes, including those of dual/military technologies for which rare earths are being used. The diversification of the supply chain is not a nice-to-have but a must-have!”

Despite the Middle East Conflict Hong Kong and Mainland China Hold Monthly Gains

Hong Kong and Mainland China-listed stocks have advanced in June on easing US-China trade tensions. In June, Mainland China’s CSI 300 and Shanghai Composite Index were up 0.66% and 0.99%, respectively, while the Hang Seng Index gained 3.07%. Notably, the trio are in positive territory despite the Israel-Iran conflict.

June’s gains have reduced the year-to-date (YTD) deficit for the CSI 300 to 1.77%. The Shanghai Composite has risen 0.87% YTD. Meanwhile, the Hang Seng Index has soared 19.66% YTD, boosted by demand for tech and EV stocks, outperforming the Nasdaq Composite Index (YTD: +2.02%).

Further progress in trade talks may boost demand for Mainland and HK-listed stocks. However, growing Chinese tech and auto sector reliance on homemade semiconductor tech may be more crucial to investor sentiment.

Outlook

US-China trade developments remain crucial for the US, Mainland China, and Hong Kong markets. Progress toward a balanced trade agreement would likely boost demand for risk assets. However, an escalation in the trade war, either through breaches of the agreement or stalled talks, could impact the markets.

In the meantime, the Israel-Iran conflict may continue to take center stage until Iran inks a nuclear agreement.

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