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.