A curious parallel has emerged in the ongoing trade war between China and the United States. There are, of course, the broad sources of relative strength and weakness. Trump, by making Chinese imports more expensive, would take from China its once largest and most lucrative market. Beijing no doubt hopes that the cost to Americans will pressure Trump to relent. Beijing also has hopes of finding an alternative to American sales in the emerging global south.
Two Critical Strategic Advantages
In addition to such broad matters are two trump (no pun intended) cards each country holds against the other. China has a near monopoly on rare earth elements that America and the rest of the developed world need to advance technology. Against this, the United States controls a big portion of the advanced semiconductors that China needs for its technological future. Each nation is working feverishly to neutralize the other’s advantage. In the fullness of time, both will likely succeed, but in the meantime, each could do a lot of harm to the other.
China’s Rare Earth Dominance
China’s hold on rare earth supplies is significant. These elements are a crucial input to all technologies from traditional gas-powered autos to household appliances, but especially to advanced technologies such as artificial intelligence (AI), electric vehicles (AVs), and biomedical applications. Presently, China controls an estimated 60% of all global rare earth mining and 90% of the world’s refining capacity. Beijing has not hesitated to threaten supply cutoffs, to particular nations and to the world generally.
America’s Leverage Over Advanced Chips
On the American side, the chips under Washington’s control are also crucial to AI, AVs, and biomedical applications, as well as more quotidian technologies. And although domestic U.S. production is not especially dominant, Washington—through allies like Japan and contracts between American designers, such as Nvidia, and Taiwan’s impressive production capacities—has the power to deny China these essential inputs. More, Washington, through agreements in Europe, also controls the supply of advanced chip-making equipment, notably extreme ultraviolet machinery.
Recent negotiations between U.S. President Donald Trump and Chinese President Xi Jinping seem to have come out in America’s favor. When the two men met in Busan, South Korea last October at the Asia-Pacific Economic Cooperation (APEC) Summit, Xi, in return for minor reductions in U.S. tariffs on Chinese goods, agreed not to cut off rare earth exports for at least a year. Washington, however, will continue its embargo on advanced chips and chip-making equipment. Trump has even limited sales to China of Nvidia’s less powerful H20AI chip. But matters will not stand this way for long. Given that two agreements between Washington and Beijing have already failed in the past ten months, there is little reason to expect this latest arrangement to prevail much into 2026. More fundamental are the steps that each nation is taking to nullify the other’s trump card.
China Accelerates Domestic Chip Control
For its part, Beijing has taken full control of domestic Chinese chip production and distribution. To wean China’s technology off Western products, Beijing has forbidden the use of existing Nvidia chips in China. It has also dictated to China’s premier chip maker, Semiconductor Manufacturing International (SMI), where it can deploy its advanced chips, favoring especially China’s technology champion, Huawei Technologies. The rest of China’s technology effort has turned to workarounds, including schemes to bond together older, less powerful chips in order to gain the computing power needed for AI and other advanced applications. These efforts have created a shortage of even these less advanced chips, but more telling is how these workarounds have slowed technology advances generally and made what exists more prone to error. Even AI star Deepseek has had to delay the release of its latest model.
Washington Builds a Rare Earth Supply Chain
At the same time, Washington has launched a rare earth program. Though China’s near monopoly might make Washington’s aim seem quixotic, it nonetheless has promise. Despite the name, rare earth elements are not especially rare. They are, in fact, found all over the world. China has acquired its monopoly less from geological reasons than because the country has been more tolerant than others of the pollution involved in rare earth mining and refining. Washington’s willingness to sign contracts and otherwise encourage rare earth development has moderated former pollution concerns and created considerable enthusiasm, including an increased flow of private capital into the area. Recent meetings of energy ministers from G7 nations—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—endorsed Washington’s efforts.
New Investments Signal Growing Momentum
Momentum is building. Already, a combined government and private consortium has raised some $1.8 billion to develop domestic U.S. sources of rare earth minerals. J.P. Morgan recently announced a $75 million investment in Perpetua Resources, an Idaho-based mining operation, while the Pentagon has awarded the Canadian rare-earth processor, Ucore Rare Metals, an $18 million contract to build a plant in Louisiana. Trump recently signed an accord with Australian Prime Minister Anthony Albanese to promote rare earth projects in Australia. The Australia-based Lynas Rare Earths has raised $500 million for expansion. Trump has also signed memoranda of understanding with Malaysia and Thailand to mine and process rare earth metals. The agreement with Malaysia is especially important because that country already has an established mining operation that could scale up quickly.
There is every reason to expect efforts on both sides to bear fruit. SMI will upgrade and expand to supply Chinese technology with the advanced chips it needs. The United States and the rest of the G7 will develop rare earth supplies outside China. In the fullness of time, if not in 2026, each country will have nullified the advantages it presently holds over the other. In the interim, however, rare earth and advanced chips remain significant trump cards in the Sino-American trade war.
