China won the first round of the Sino-US trade war
Beijing leverages rare-earth dominance as Washington blinks on export controls
Yuqing Xing is a professor of economics at the National Graduate Institute for Policy Studies in Tokyo.
China just reminded the U.S. who really holds the levers of the global tech economy. By forcing the U.S. to suspend its new export controls, China's rare-earths gambit turned a defensive resource advantage into strategic dominance -- winning it the first round of the 21st century's great power competition.
Chinese President Xi Jinping met U.S. President Donald Trump in Busan, South Korea, on Oct. 30. After the meeting, the Chinese Ministry of Commerce disclosed the main contents of the agreement reached by the two countries' trade negotiation teams a few days earlier in Kuala Lumpur.
The agreement covers three main points. First, the U.S. will cut its tariff on Chinese fentanyl-related products from 20% to 10%, and China will withdraw its corresponding countermeasures. Second, Washington will postpone for one year the expansion of export controls on Chinese firms announced on Sept. 29, while Beijing will suspend for the same period its long-arm jurisdiction on rare-earth exports announced on Oct. 9. Third, the U.S. will suspend port entry fees on Chinese vessels for one year, and China will reciprocate by halting its own related measures.
The U.S. decision to roll back its latest export controls on Chinese companies clearly reflects Beijing's use of rare earths as leverage against Washington.
Washington holds a monopoly in many high-tech sectors and can arbitrarily weaponize this power and impose embargoes on Chinese high-tech companies. However, these embargoes only affect a very small number of Chinese firms. Most of the Chinese companies need neither AI chips nor semiconductors smaller than 16 nanometers. Chinese people can still run their mobile phones and computers on old versions of American operating systems. Their daily lives will continue as usual without DeepSeek or ChatGPT. In short, the various high-tech sanctions imposed by the U.S. have no impact on the normal operations of the Chinese economy. They might affect China's future technological development, but the extent of this impact remains a question.
However, if China were to impose a rare-earth embargo on the U.S., the impact on the American economy would be immediate. U.S. automakers, aircraft and missile manufacturers, and chip manufacturers would all face shutdowns due to rare-earth shortages. Recently, the U.S., Japan and Australia signed agreements for the development and production of rare earths. However, this is a long-term solution that cannot address immediate needs. Within three years, the U.S. and its allies will not be able to establish rare-earth supply chains independent of China.
People are inherently shortsighted and prioritize current interests. Trump is no exception. His presidency is only four years long. The current and next two to three years of U.S. economic performance are much more important to his presidency than after he leaves. Therefore, facing China's rare-earths weapon, Trump's decision to reverse course again is a pragmatic choice.
In fact, before the meeting between the U.S. and Chinese trade negotiation teams in Kuala Lumpur, U.S. Treasury Secretary Scott Bessent's comments about China's chief negotiator, Li Chenggang, not only lacked diplomatic courtesy -- he called him "very disrespectful" and "unhinged" -- but also revealed the U.S.'s frustration at being unable to effectively counter China's extraterritorial jurisdiction over rare earths.
Since Trump started his second term in the White House, he has continuously used America's buyer's power to impose so-called reciprocal tariffs on trading partners, adding more and more Chinese companies to its entity list. Trump and his team had zero understanding of the mutually beneficial trade relationship between China and the U.S. based on global value chains. They arrogantly underestimated China's strength in this trade war and its determination to pursue an equal and reciprocal trade agreement.
The agreement reached between China and the U.S. in Malaysia is not a long-term solution to the Sino-U.S. trade conflict. The U.S. Department of Commerce recently launched a Section 301 investigation into the Phase One trade agreement signed by the two countries in 2020.
The temporary truce may be broken again. But one thing is for sure, China will respond tit-for-tat to any American challenges.