Positioning:
The importance of rare earth minerals in our lives has grown so significantly—and their global control become so imbalanced—that they now stand as ideal candidates for weaponization in international trade.
Rare earth minerals hold a crucial place in today’s economy. A shortage of these often-overlooked and little-understood elements can bring essential sectors to a standstill. Despite their quiet presence, they are indispensable—and China’s dominance over them is nearly absolute, controlling close to 70% of global supply. These minerals are critical components in smartphones, electric vehicles, wind turbines, medical devices, and, most importantly, defense technologies. Their strategic value is rising, and their relevance is only deepening with time.
Sit-rep:
China’s grip on rare earth minerals is so firm that it is now using them effectively as a bargaining chip in ongoing trade talks with the United States.
In these negotiations, the U.S.'s dominance in semiconductor technology is a counter-leverage. But this isn’t the trump card it once appeared to be. Over the past five years, China has developed surprisingly advanced semiconductor capabilities. While it still lags behind the West—particularly in high-performance AI chips like those made by Nvidia—it’s closing the gap at a rapid pace.
The U.S., by contrast, has no immediate alternative to China for rare earth supplies. While efforts are underway to build domestic production capacity, any meaningful progress remains at least a decade away—if not longer.
Short term impact:
U.S. companies are already feeling the impact, with automakers like Ford forced to temporarily scale back production due to shortages of rare earth minerals—shortages driven by China’s tightening export restrictions.
The U.S. isn’t alone. Over the past two years, the European Union has increasingly limited China’s access to its markets, particularly in the green tech sector. In response, China is leveraging its dominance over rare earth supplies to pressure the EU into opening its doors to Chinese businesses.
Long term impact:
The mining capabilities of Western companies will become increasingly valuable in the coming years. Both governments and private sectors will be willing to pay a premium to secure supplies of critical minerals—materials that make up only a tiny fraction of a product’s total manufacturing cost, yet are essential to its production. Electric vehicles, for example, may rely on rare earths that account for less than 1% of the manufacturing cost, but without them, the vehicles cannot be built.
Why such restrictions are only temporary trade war weapons?
In the past, U.S. restrictions on China in semiconductors have only fueled domestic efforts in China to develop its own capabilities—something it has managed to do to a large extent, and quite rapidly. China’s restrictions on rare earths to the U.S. and EU are having a similar effect. They are pushing the U.S. and other Western countries to build supply chains free from Chinese control. So, China’s use of its dominance in rare earth minerals as a weapon will only be effective in the short term—until the U.S. and EU develop their own capabilities. Once that happens, China loses its leverage to use this control as a trade war weapon.
When it comes to using economic weapons in a trade war, there’s something to be said about their diminishing effectiveness over time—a decline that often occurs when there’s either a threat of use or actual use.
If a weapon is never used, and the wielder makes it clear—through trust—that it never will be used, the weapon gains strength, and the holder gains influence. This, of course, assumes that the weapon strengthens over time. If so, only through harsh use does the adversary feel compelled to stop, reassess, and invest in countering the threat—thus reducing the weapon’s long-term effectiveness. But if the weapon is never used, if trust is maintained, it can gain strength quietly, becoming more potent, more devastating, and functioning as a subtle deterrent.
The U.S. built its global hegemony partly by following this logic. Most of its allies have long been more dependent on the U.S. than the U.S. is on them, and until recently, the U.S. maintained that asymmetry. The allies, for their part, were content with the arrangement, as the alternative—a costly realignment—was less attractive. There was mutual trust. That trust has now been eroded by the U.S.’s recent protectionist stance, a stance that has rapidly spread to its allies. Historically, the U.S. had the privilege of using its economic dominance to align global thinking with its own.
We see the same pattern in the realm of dollar-based transactions. Most international trades were once denominated in dollars, but the increasing use of this financial control to impose sanctions on bad actors has pushed more countries to seek alternatives.
If a weapon is used—or even if trust erodes and the possibility of future use becomes real—then the weapon loses its strength, even if it is never actually deployed. It becomes a “use it or lose it” scenario.
If the U.S. had not restricted semiconductor supply to China, some argue companies like Nvidia might be more deeply embedded in Chinese technologies today. China might be more dependent on Nvidia and U.S. tech firms, rather than on its own domestic players—who may never have felt the pressure or received the support to develop local capabilities. One could argue that Nvidia would be a larger company today, with an even stronger network effect working in its favor. The U.S. would have more control over critical technologies used in China. From this line of reasoning, it follows that by restricting Nvidia’s chip supply, the U.S. showcased its dominance—but in doing so, it harmed Nvidia and itself more than it harmed China in the long run. It compelled China to develop its own semiconductor industry, which it has largely succeeded in doing.
The counterpoint is that trust had already been lost—or perhaps never existed. China always intended to build its own technology ecosystem and achieve self-sufficiency. In the past, when it allowed access to Western firms—auto manufacturers, tech companies—it was primarily to absorb their technology, only to eventually replicate it through domestic firms. China has already done this with considerable success.
In the case of rare earth minerals, the U.S. was slow to realize its dependence on China. It always saw China as a competitor, if not a rival superpower, and some had long voiced concerns about China’s dominance in rare earths, but serious efforts to diversify away from China have only recently begun—though arguably, the trend was already underway. China may have sensed that the effectiveness of this particular trade weapon was already declining, and that if it wasn’t used now during negotiations, it might lose its power altogether.
In today’s trade war, China seems to hold a more effective weapon with its control over rare earths than the U.S. does with semiconductors. Any deal between the two is unlikely to be heavily one-sided in favor of the U.S., as may have been expected on “liberation day.” Instead, it will likely be more balanced than the U.S. would prefer.