China Uses Rare Earth Metals as Leverage Against the U.S.

The regulation, published Thursday by China’s Ministry of Commerce, is seen as another escalation in the U.S.-China trade conflict because it threatens the supply of key components for semiconductors. Chips are the backbone of the modern economy: they power phones, computers, and data centers needed to train artificial intelligence systems. The rule will also affect other sectors—automotive manufacturing, solar panels, and chipmaking equipment—undermining other countries’ ability to sustain their industries. China produces about 90% of the world’s rare-earth materials.

Under the new rules, global companies whose products contain more than 0.1% of Chinese-origin rare-earth materials by value will be required to obtain an export license from Beijing. Industry experts say tech companies will find it extremely difficult to prove that the share of Chinese materials in their microchips, manufacturing equipment, or components falls below the threshold.

“These rare-earth minerals and the ability to refine them are the foundation of modern civilization,” said Dean Ball, who recently left the White House, where he worked on AI policy, to become a senior fellow at the Foundation for American Innovation. He added that if the rules are strictly enforced, the U.S. could face a recession given how crucial AI investment has become to the American economy.

The U.S. and other countries are investing hundreds of billions of dollars in data centers, making AI a central driver of growth. By tightening control over these technologies, China could narrow its gap in the AI race and shift the global balance of power, analysts say.

“This is the economic equivalent of nuclear war—an attempt to destroy the American AI industry,” said Dmitri Alperovitch, co-founder of the Silverado Policy Accelerator. He described the move as “a form of blackmail” ahead of a possible meeting between Donald Trump and Xi Jinping in South Korea, where trade talks are expected to resume. Alperovitch does not believe China will fully implement the measures.

At a cabinet meeting, Trump said that Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick would lead the effort to craft a response. “We import enormous volumes from China, and we may have to stop doing that,” he said. According to a White House spokesperson, the new rules were introduced without prior notice to the U.S. and appear to be an attempt by Beijing to assert control over global technology supply chains.

Over the past year, China has already used rare-earth metals as a tool of leverage in negotiations. Restrictions introduced in April disrupted manufacturing supply chains and led to the declaration of a trade truce in June.

Former officials and analysts believe the U.S. could respond by imposing new tariffs, blocking China’s access to Western chipmaking equipment, and accelerating the creation of its own supply chain for rare-earth mining and processing. Analysts expect Trump to react forcefully.

Currently, U.S. tariffs on Chinese imports range from 30% to 50%—higher than those applied to goods from Vietnam, Japan, or Indonesia. China’s average tariff level on U.S. products is about 33%.

According to people familiar with the matter, although Beijing presents the move as retaliation for recent U.S. export restrictions on Chinese technologies, in reality it is a calculated step aimed at increasing pressure on Trump, whom Chinese officials see as eager for a deal. The goal is to secure concessions on tariffs and technology controls.

During the latest round of negotiations in Madrid last month, Vice Premier He Lifeng demanded the complete removal of tariffs and export barriers, The Wall Street Journal reported. The new measures on rare-earth materials are seen as part of a broader strategy to achieve that goal.

According to sources, Beijing’s actions fit a familiar pattern—China tends to respond to what it perceives as weak moves by Washington with disproportionately tough measures.

The new rules also cover products that could have military applications. They expand on existing export controls on rare-earth metals and related goods, which have already affected companies around the world.

The semiconductor supply chain is highly vulnerable to moves like China’s, as large chip manufacturing plants require massive investments and depend on an ecosystem of companies providing specialized equipment, complex technical processes, and final packaging services. The production process relies on close collaboration among firms in the U.S., Taiwan, Japan, and the Netherlands.

Both the Trump and Biden administrations have offered subsidies and other forms of support, but the U.S.’s domestic capacity remains in its infancy.

Analysts say the new restrictions will only increase pressure on major technology companies, forcing them to invest more aggressively in expanding production.

“This is a real vulnerability for U.S. companies working in artificial intelligence,” said Joseph Hoefer, chief AI officer at the lobbying firm Monument Advocacy, which represents the interests of the tech industry.