Tariff Tracker, June 2: Renewed US-China spat brings fears of rare earth shortage to the fore

We are now entering the third month since his “Liberation Day” tariff announcements, which allowed the US to charge a 10% baseline tariff on all trading partners, and country-specific rates on those countries with which the US has maintained trade deficits. He subsequently announced a pause on the latter for 90 days.

Trump’s goal all along has been to bring the countries of the world to the bargaining table to seek trade deals with the US. His claims of 90 trade deals within 90 days, however, may have been far more ambitious than originally imagined. Thus far, the US has finalised a trade agreement with the UK, has engaged in talks with India with a view towards a staggered trade agreement, and will meet the EU over the coming weeks to finalise a trade agreement.

Since his return to the White House, Trump has repeatedly singled out China for refusing to play ball. He slapped a 10% fentanyl tariff on China (currently at 20%) and increased US tariffs on Chinese goods to an eye-watering 145% by early April. China has responded at every turn, restricting rare earths exports through an elaborate licensing system, citing a national security risk, and taxing US exports of coal and Liquefied Natural Gas (LNG).

So, when the two countries announced on May 12 that they had found a common ground, investors and markets worldwide heaved a sigh of relief. The truce had reduced mutual tariffs by 115% and was set to last 90 days.

However, the waters are choppy again, and this weekend, both countries have accused each other of not honouring the truce. China’s Commerce Ministry on Monday (June 2) accused the US of “seriously violating” the truce the two nations had concluded in Geneva last month. This follows Trump’s claim on Friday (May 30) that China had “totally violated” the agreement, over American concerns over the sluggishness in clearing rare earth exports from China.

How rare earths became a flashpoint

Rare earth metals, or rare earth elements (REEs), are a group of 17 chemical elements on the periodic table, with similar chemical properties and silver-coloured in appearance. Despite their name, REEs are not as rare. However, it is unusual to find concentrated and economically mineable deposits of REEs, despite their relative abundance compared to silver, gold or platinum. And crucially, China holds unparalleled expertise in refining REEs compared to other nations.

The rare earths sought by the US are vital in the manufacture of high-value goods, ranging from everyday items like smartphones and electronic displays, to those in the fields of defence and clean energy. China has held indisputable dominance over rare earths since the 1990s, supplying 85-95% of global demand.

China has weaponised rare earths exports in the past, restricting these exports to Japan in 2010 over a fishing trawler dispute, and more recently to the US between 2023 and 2025. And on April 4 this year, China announced another set of rare earth restrictions following Trump’s “Liberation Day” tariff announcements.

While the presence of smuggling and alternate suppliers helped to arrest the threat in the past, such a move may not be viable now. On May 22, economist Alan Beattie wrote in The Financial Times that the April 4 restrictions by China involve finished items, specifically magnets, which are currently made only by a few Chinese companies. Alternatives to China do not currently exist, which has increased the prices of rare earths in the interim. This round of export controls relies on end-user licensing requirements for materials that can be used for both civilian and military purposes, potentially affecting electric vehicles and F-35 fighter jets.

He noted that the US was especially vulnerable, given its limited attempts to increase rare earth manufacturing and processing, and retaining minimal stockpiles of critical minerals. “Trump has risked a geoeconomic war with China without any discernible attempt to prepare or even assess the dangers,” Beattie warned.

Supply chain shortages are already being reported worldwide. Since April, rare earth exports from China have halved, according to a Reuters report, even as companies contend with the vague and tedious application process for permits.

American automakers have been the hardest hit, The New York Times reported on Monday. Rare earths are an important component of the magnets for the electric motors that run brakes, steering and fuel injectors. Magnets are also used in the motors in luxury car seats, as well as factory robots. The report cited executives warning of rollbacks in automobile production in the midwestern and southern states over the coming weeks.

In India too, automakers have expressed fears of having to shut production within days if the Indian government does not intervene, The Indian Express reported last month.

China protests US countermeasures

China has now alleged that the US imposed several restrictions against it, including AI chip export control guidance, limiting sales of chip design software – electronic design automation (EDA) – to China, and announcing the revocation of visas for Chinese students, the ministry said.

“The US has continuously provoked new trade frictions, exacerbating uncertainty and instability in bilateral economic and trade relations,” the Commerce Ministry said. “Instead of reflecting on its own actions, it unjustly shifts blame, baselessly accusing China of violating the consensus, which gravely deviates from the facts. China firmly rejects these unwarranted accusations.”

On Sunday, China also accused the US of trying to “sow division”, following comments by US Defence Secretary Pete Hegseth at a defence conference in Singapore. Hegseth described China as an “imminent” threat, and said China was “credibly preparing to potentially use military force to alter the balance of power in the Indo-Pacific”, even preparing for “the real deal” of invading Taiwan.

“Hegseth deliberately ignored the call for peace and development by countries in the region, and instead touted the cold war mentality for bloc confrontation, vilified China with defamatory allegations, and falsely called China a ‘threat’,” the Chinese Ministry of Foreign Affairs said.

Trump has repeatedly expressed interest in connecting with Chinese President Xi Jinping over a call to iron out the differences, something which has thus far not materialised.