Rare Earths and Chips Shape US-China Trade Dynamics

• A fragile balance between China’s mineral dominance and US chip leadership is keeping trade tensions in check, but long-term competition remains intense.

Strategic Dependencies and Temporary Truce

The United States and China remain locked in a cautious economic standoff, with both sides relying on each other for critical resources. Earlier this month, the two governments extended a tariff truce by three months, delaying steep import duties and preserving a fragile equilibrium. Western economies continue to depend on China’s rare earth supply chain, while Beijing relies on advanced semiconductors largely controlled by the US and its allies. Export and licensing restrictions have become tools of leverage, as both rare earths and chips are essential to sectors like electronics, automotive, AI, and defense.

In May, the US reversed a short-lived export ban on Nvidia’s H20 chip in exchange for continued Chinese rare earth shipments. That move led to a 660% surge in July exports to the US, and Nvidia now anticipates up to $5 billion in H20 revenue over the next quarter. Commerce Secretary Howard Lutnick defended the reversal by downplaying the chip’s importance, while China made no changes to its own export rules. These mutual concessions suggest that economic interdependence may help prevent further escalation, at least in the short term.

US Push to Diversify Rare Earth Supply

To reduce reliance on Chinese minerals, Washington is accelerating efforts to build a domestic rare earth supply chain. Although the 17 elements classified as rare earths are geologically common, their extraction and refinement are costly and environmentally challenging. The global market remains small, with 2024 purchases totaling just $3.5 billion—far below the $600 billion spent on semiconductors. Last month, MP Materials, which operates the only US rare earth mine, announced a $400 million investment from the Department of Defense, making the agency its largest shareholder.

The agreement includes a guaranteed price floor for two rare earth types, and similar deals may follow. According to Reuters, the Trump administration is considering reallocating $2 billion from the CHIPS Act to support critical mineral projects. The goal is to reduce mineral dependency before Chinese firms like Huawei and Cambricon achieve breakthroughs in domestic chip production. While the US appears to have an edge in semiconductor technology, building a competitive rare earth infrastructure will require sustained investment and policy support.

Long-Term Outlook and Global Implications

Huawei’s chip development has stalled due to bottlenecks in design, equipment, and software, much of which is controlled by suppliers in the US, Japan, the Netherlands, and South Korea. Without access to advanced lithography machines from Dutch firm ASML, Chinese manufacturers are unlikely to produce chips beyond the 7nm generation. Even if progress resumes, keeping pace with Nvidia’s latest processors—offering 2.5 times the performance of previous models—will be difficult. Meanwhile, China’s dominance in rare earth processing, accounting for 90% of global refining and magnet production, faces growing international competition.

Countries like Australia, Malaysia, Japan, and members of the EU are expanding their capabilities, though not yet at China’s scale. In response, Beijing has tightened controls on domestic firms to prevent talent and technology from migrating abroad. Financial and environmental challenges remain significant, as Chinese producers can keep prices low to discourage foreign investment. For example, Australia’s Lynas Rare Earths reported a 90% drop in net profit due to expansion costs and underperformance, despite raising A$750 million in new equity.