by Vaibhav Tandon, Senior Economist, Northern Trust
Negotiations are off to a combative start.
In high-stakes negotiations, there are usually a series of threats and retreats before the final handshake. Each side uses bargaining chips to shape the outcome of the discussions. But bargaining chips don’t always lead to bargains.
The recent escalation of U.S.-China threats appears to be a tactical positioning, but the risk of a serious rupture is real. Having gone from a boil to a simmer, trade tensions between the U.S. and China are once again teetering on the edge of renewed trade war.
Earlier this month, China tightened its grip on rare earth exports, introducing new licensing rules that require case-by-case approvals for any shipment containing even trace amounts of these critical elements. Beijing has also tightened export controls on lithium-ion batteries and launched an antitrust investigation into the acquisition of an Israeli firm by a major U.S. chipmaker, citing violations of China’s anti-monopoly law. Though short of a formal export prohibition, restricting rare earth exports effectively broadens the scope of actions announced back in April. Those measures had already disrupted auto supply chains and triggered panic stockpiling by Western companies.
After cooling during the summer, tensions between Washington and Beijing are on the rise.
For America, reliance on Chinese rare earths is a strategic vulnerability. For China, it is a source of leverage in trade negotiations. With control over nearly 90% of global processing capacity, China dominates the supply of the minerals that form the foundation of the digital era. These elements enable the magnets in electric motors, the sensors in smartphones, and the guidance systems in defense hardware. Without them, the semiconductor supply chain will falter.
The new rare-earth controls are widely seen as Beijing’s response to Washington's expansion of its own export control regime in September. Those measures included Entity List additions, tighter rules on dual-use technologies, and Section 301 actions targeting the maritime industry.
Washington is willing to take this further. The U.S. has floated additional tariffs of up to 100% on Chinese goods, potentially pushing total duties back to April levels of around 130%. Sweeping export restrictions on critical software and chip design tools are also part of America’s retaliatory arsenal.
Recent volleys have spilled into the shipping arena, with both sides imposing steep port fees of roughly $50 per ton on each other’s vessels. This represents a 17.5% increase in annual shipping costs for a 35,000-ton vehicle carrier. This could trigger rerouting, delays, and higher freight costs for imported goods, particularly for key commodities like crude oil, iron ore and agricultural goods.
According to Oxford Economics, even a partial disruption in rare earth supplies could deliver a shock comparable to the supply interruptions seen during the early phase of the pandemic. Over a two-year horizon, U.S. gross domestic product could be lowered by around 1 percentage point, while China’s could fall by 0.4 points.
The ripple effects of the new escalations will extend beyond Washington and Beijing. Key Asian economies like Japan, South Korea and Taiwan will face renewed disruptions. European shipping companies are also exposed, as many of Europe’s fleets are backed by U.S. investors; China’s increased port fees target vessels with 25% or more American ownership or control. Some companies have already begun reshaping their boards to sidestep the crossfire.
With none of these measures set to take effect before the planned Trump-Xi meeting at the end of this month, there’s hope that both sides are simply using leverage to shape outcomes without confrontation. But without a handshake, the chips may soon begin to fall.
