US-China Trade Calm Hides a $1.5 Trillion Supply Chain War

A full Chinese blockade of rare earth magnet exports to the US and Europe would cost those economies roughly $1.5 trillion per year, according to International Energy Agency estimates. That figure explains why the current quiet in the US-China trade war should worry executives more than the headline tariff fights ever did.

The truce Washington and Beijing struck last year has been extended until next January. It stopped the tit-for-tat tariff escalation and opened a door to some undefined future trade deal. But neither side has built the mutual assurances that would prevent new hostilities. Both are instead positioning for what they treat as an inevitable next round, defined by each government as a national security priority essential to economic, technological and military supremacy.

What does this war actually look like?

This arms race doesn't involve building weapons. Both countries are focused on securing the resilience of the international supply chains they depend on — and working out how to constrain, or if push comes to shove throttle, the supply chains their rival needs for economic and technological progress.

The strategies trace back at least to the Covid pandemic. China's Xi Jinping called on the nation to "tighten international production chains' dependence on China, forming a powerful countermeasure and deterrent capability against foreigners who would artificially cut off supply [to China]."

The American answer came early in the Biden administration. National security adviser Jake Sullivan described the goal as limiting China's access to a narrow set of advanced technologies with military applications, without upending the global economic order — a "small yard" of forbidden tech surrounded by a "high fence" of trade and investment controls.

The conflict has outgrown its original boundaries

Over the last half decade, restrictions on American tech exports, investments and technology transfers to China have proliferated. They are no longer hitting just China's military capabilities — they are slowing its technological progress writ large. Trump's wanton deployment of tariffs adds further friction.

China, meanwhile, is playing its strongest card: overwhelming dominance over critical minerals essential to high-tech industries, civilian and military alike. Last year it stunned the Trump administration by throttling exports of rare earths and magnets made from them, retaliating against US tariffs and against efforts to restrict China's access to high-end semiconductors and the lithography machines needed to make them.

Beijing has relaxed some of these controls but maintains many others — and has used them against countries beyond the US for policies it dislikes.

What does this change for business?

Both governments are escalating. The Trump administration is pouring hundreds of millions of dollars into projects to mine and process rare earths and other critical minerals, hoping to close China's lead. It is also doubling down on limits to China's access to frontier semiconductors and the machinery needed to make them.

China has announced its own range of high-tech export restrictions, covering artificial intelligence chips and solar power technology. It has also threatened to punish countries that work to reduce their dependence on its mineral inputs.

For procurement chiefs and supply chain planners, the message is stark. Today, American fighter jets, submarines and missiles use rare earth magnets — the same materials China could restrict at will. Interdependence, once sold as a guarantee of peace, has become a vulnerability.

Is there a path out?

A peaceful entente would require a shared definition of what counts as a legitimate national security risk — defining the "yard," in Sullivan's terms. Frustrations of standard commerce shouldn't be handled on a wartime footing.

Concessions exist on paper. China will probably dominate renewable energy technologies, especially solar, into the foreseeable future, and may dominate electric vehicles too. That may hurt in Brussels and Washington, but it's not worth a war. China, for its part, would have to accept that its mercantilist strategy — massive export growth combined with zero import growth — is not sustainable for the rest of the world.

The historical precedents argue against optimism. The Axis powers seized territories as the League of Nations curtailed their access to raw materials in the early stages of the Second World War. FDR's blocking of American scrap steel and oil sales to Japan likely contributed to Tokyo's decision to attack Pearl Harbor. As the two largest economies fight over who controls the next generation of technology, trade has become a theater of war — and the January truce expiry is the next date to watch.