Just as we were bracing for some stock market volatility after a whopping 35% 6-month rally for the S&P 500, we got the perfect catalyst: tariffs. President Trump announced on Friday that he will be imposing additional 100% tariffs on Chinese goods. Some highlights:
- These embargo-level tariffs, which would put a complete halt to most imports from China, will start on November 1.
- There will be additional controls on “critical software” and potentially aircraft components.
- The president also indicated that “there seems to be no reason” to meet President Xi at the APEC (Asia-Pacific Economic Cooperation) summit on October 31 – November 1 in South Korea, though he clarified later that he still planned to meet.
You Escalate, We Escalate
Trump’s announcement was in response to China’s recent move to broaden the scope of its rare earth export controls. Last week, they imposed regulations requiring licenses for ANY product containing 0.1% in value of Chinese rare earths, or manufactured using equipment containing Chinese rare earths or related magnets. This would have a massive impact on the availability of rare earth for various use cases, and the regulations would imply:
- Denial for military-related end uses
- Extra close scrutiny for high-end uses, including chip production
- Expansion of the number of specific rare earth minerals covered
- Limiting export of rare-earth mining and manufacturing equipment from China
- Adding several US firms to China’s “unreliable entity list”
Controls on some minerals are effective immediately, with other measures becoming effective on December 1.
On Sunday, Trump did acknowledge that he could pull things back if the Chinese backed down as well. It’s far from certain that they will, at least unilaterally.
The good news is that it looks like both parties want to de-escalate, for different reasons. It’s clear that the White House doesn’t want the stock market to panic, a la April, let alone take away focus from other foreign policy initiatives. Treasury Secretary Scott Bessent also said that the Chinese are divided into multiple camps, with these recent measures coming from hawks within the Ministry of Commerce and Ministry of State Security, rather than President Xi himself, though it’s hard to believe that Xi is unaware of what China is doing on the trade front. Meanwhile the Chinese clearly want to avoid cancelling the Trump-Xi summit and want talks to continue at multiple levels.
Escalate To De-escalate?
There has been some confusion as to why the Chinese decided to go big on escalatory actions against the US, and seemingly out of the blue. But it’s worth backing up here.
Over the last few months, things seemed to have improved between the US and China, especially after multiple rounds of talks in Geneva, London, and Stockholm. There seemed to be some sort of equilibrium, even if fragile. China continued to supply rare earth elements at the existing level, and the US froze tariffs at the current level.
The Madrid round of talks that led to a Tik-Tok deal highlighted the need for stability in the relationship, and the next step was the bilateral meeting between Trump and Xi at the end of October (APEC). It looked like we were done with “unilateral moves.” In fact, China’s description of a Trump-Xi phone call in September explicitly warned against such unilateral moves that could undermine “the results of multiple rounds of talks.”
Then on September 29, the US Bureau of Industry and Security (BIS) issued a new rule that significantly expanded its export controls, particularly the scope of the US “Entity List,” to include any foreign entity owned 50% or more by one of more of the listed parties. That meant even unlisted affiliates would now be subject to the same US export controls as their listed majority owners. This is a big deal from the US side, though arguably the target was not just China. It does have big implications for Chinese firms’ sourcing of US technology but imposes little constraint on most of China’s current manufacturing production. Still, from the Chinese perspective, these steps were a major expansion of the list of blacklisted Chinese firms.
On top of that, the US Trade Representative’s office recently imposed additional port-entry charges on Chinese-built or Chinese-operated vessels. This is scheduled to take effect on October 14 (today).
From China’s point of view, the above are examples of US bad faith, and they’re going back to the April playbook — escalate in response to the US, and by a lot, to eventually force a negotiation reset rather than waiting passively for the next round of talks (which is what every other country has done). In other words, China will be looking for a big pullback in tariffs in exchange for stable flows of rare earths.
Note that China’s export controls on rare earths extend even to Europe, even as China looks for relief on EU tariffs on China’s electric cars.
Rare Earth Export Controls by China Is a Big Deal
It is interesting that China chose to show its full hand, but it is an area where China has a lot of leverage. The US, and the rest of the world, are very vulnerable to a rare earth supply shock, much more than China’s vulnerability to export controls by the US on chips and memory. In fact, China’s export controls on rare earths mirror what the US has imposed for high end chips and chip production equipment — controls that not only target direct exports of the targeted product, but also other countries’ exports that embed that product.
Even though China says this move isn’t to “weaponize supply” and is just “regulating for security” (language the US also uses), it is a big deal and likely makes every other country (not just the US) want to derisk. But in the case of rare earths, that’s easier said than done.
Here are some use cases for rare earths:
- Production of many computer chips, which are used in everything from smartphones to artificial intelligence systems
- Magnets that power the electric motors in drones, factory robotsand offshore wind turbines
- Magnets that power brakes, seats and other systems in cars (imagine going back to manual adjustments for car seats!)
Interestingly, China’s move to “weaponize” rare earths has been a while in the making. Over the past year, China has been gathering information on how companies around the world use rare earths. Since last October, exporters have been required to provide the authorities with detailed accounts of how shipments are used in Western supply chains. All this predates the Trump administration.
One thing with rare earths is that they’re not “rare.” But mining and production is complicated, and refining and processing even more so. And China has pretty much cornered those processes. A couple of examples:
- China refines all the worlds “samarium,” a rare earth metal used by the US to make F-35 fighter jets and a wide range of missiles.
- China refines 99 percent of the world’s dysprosium, a rare earth that is used in chips to preserve magnetic stability even when they become hot.
- NVIDIA uses something called ultrapure dysprosium, which is very difficult to refine. A single refinery near Shanghai (controlled by China’s Ministry of Land Resources) produces the entire world’s supply of ultrapure dysprosium.
Rare earths are key for manufacturing advanced chips, including different types of memory and logic chips. China’s new rules would require chip companies like TSMC, Samsung, and SK Hynix to obtain an export license to sell chips anywhere in the world. Note that most of these companies likely have a significant inventory of rare earths used in production, blunting any immediate impact.
China Has Responded to US Tariffs in Other (Painful) Ways
Rare earths are not the only way China has responded to Trump’s tariffs. China is the US’s biggest soybean customer, and it has halted purchases, sourcing them elsewhere.
Soybeans are the single largest American export to China in terms of value, $12.6 billion worth last year. September 1 was the beginning of the new marketing year for soybeans, the starting point for big sales. But China hasn’t bought any American soybeans since May. Instead, China has turned to countries like Brazil, and more recently Argentina (the country just dropped its export tax on crops like soybeans, despite receiving a massive sum of money to prop up its economy from the US).
Other countries continue to buy soybeans from America (like Egypt, Taiwan, and Bangladesh) but total soybean exports are down 23% year to date.
This is creating a massive problem for US farmers and it’s the reason why the administration wants to pass an aid package worth $50 billion for farmers (reminiscent of an $28 billion aid package Trump signed in his first term in 2018 – 2019, amid the fallout of the first trade war). $50 billion is the amount Republican lawmakers estimate will be needed by farmers to replace lost sales due to the trade war.
To put this in perspective, the US has so far collected about $118 billion more in import duties across 2025 than it did in 2024. This is sizable but well below the initially projected $600 billion. In other words, a $50 billion aid package for farmers would wipe out over 40% of the additional tariffs collected in 2025.
As I noted at the top, most signs point to a resolution of this latest flare-up. But it does go to show that tensions are high. Both the US and China feel they have leverage and that the trade war, as it stands now, is not hurting. On the US side, the stock market is booming and the economy is holding up. On the Chinese side, despite much higher tariffs than at the start of the year, their exports have been surging to record levels. In fact, exports rose 8.3% year over year in September, the fastest pace in six months. Exports to the US fell 27% but this was more than offset by exports everywhere else, including Southeast Asia (+16%), Europe (+15%), Latin America (+15%), and Africa (+56%). In other words, the rest of the world can’t get enough of Chinese goods.
As long as this dynamic continues, we may just reach a tense stalemate, but hopefully no ratcheting up of tit-for-tat actions. At the end of the day, the Trump administration will not want to upend the stock market rebound, let alone invite a big tariff-induced economic downturn, while China will want to continue trade with the US.
For more content by Sonu Varghese, VP, Global Macro Strategist click here.
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