The current trade confrontation between the United States and China may look like a repeat of the episode from earlier this year: Washington has rolled out sky-high tariffs, while China has clamped down on the supply of rare earths. Many observers, reportedly including Chinese President Xi Jinping, expect the outcome will be the same, too: markets slide, American manufacturers warn of shuttered factories, and U.S. President Donald Trump backs down.
Yet if Trump plays his cards right, Xi may find he has miscalculated. Several big factors that hurt the United States in the spring are now playing in its favor. For starters, China’s complex new rules will be far harder to enforce than its earlier restrictions. The global scope of those rules also means that this time, it is Beijing, not Washington, that has escalated first—and done so by taking on the entire world at once. That gives the Trump administration a chance to build an international coalition, rather than facing one itself. Meanwhile, one of the main drivers of Trump’s earlier walk back, the U.S. bond market, is far more quiescent than it was in April.
The current trade confrontation between the United States and China may look like a repeat of the episode from earlier this year: Washington has rolled out sky-high tariffs, while China has clamped down on the supply of rare earths. Many observers, reportedly including Chinese President Xi Jinping, expect the outcome will be the same, too: markets slide, American manufacturers warn of shuttered factories, and U.S. President Donald Trump backs down.
Yet if Trump plays his cards right, Xi may find he has miscalculated. Several big factors that hurt the United States in the spring are now playing in its favor. For starters, China’s complex new rules will be far harder to enforce than its earlier restrictions. The global scope of those rules also means that this time, it is Beijing, not Washington, that has escalated first—and done so by taking on the entire world at once. That gives the Trump administration a chance to build an international coalition, rather than facing one itself. Meanwhile, one of the main drivers of Trump’s earlier walk back, the U.S. bond market, is far more quiescent than it was in April.
Alongside those advantages, the Trump administration and U.S. allies have far more effective responses than Trump’s proposed tariffs, which will hurt the U.S. economy as much as China’s. Plausible options include curbing China’s tech sector, limiting low-value Chinese imports, and going after companies buying Russian oil. The real question is whether the administration will use them.
China’s new restrictions on rare earth sales come with a twist. Instead of simply controlling the export of rare earths from China—the move it made in April—Beijing announced that it will require a license for any cross-border sale worldwide. That means a distributor in France that resells Chinese-origin rare earth magnets to a German auto manufacturer will need a license from the Chinese Ministry of Commerce. China’s new rules also specify that buyers tied to foreign militaries will have their applications denied, and companies producing advanced semiconductors will get extra scrutiny.
Thanks to Chinese dominance in rare earth processing—China controls about 90 percent of the market for turning rare earths into usable metals—its rules will affect a wide range of industries and consumer products. Rare earths are present in numerous defense systems, including fighter jets, warships, missiles, and drones. Permanent magnets are used to make all kinds of electronics, from everyday devices like air conditioners to more specialized equipment like industrial robots. Makers of weapons systems, electric vehicles, batteries, and telecommunications equipment are at particular risk.
Why did China announce these controls now? Commentators have offered two primary explanations. The first is that Beijing is aiming to gain leverage in the midst of trade negotiations. The second is that it was merely responding to recent actions by the Trump administration, including a change to the treatment of subsidiary companies on the U.S. export control list, that it saw as a violation of the trade truce agreed to earlier this year.
U.S. actions may have driven the specific timing of China’s rules, but the scale of the response suggests a calculated escalation driven by a perception of weakness on the U.S. side. After seeing Trump rapidly abandon his global tariffs in April, Xi likely believes the United States cannot endure a prolonged confrontation. Chinese negotiators have reportedly become frustrated that the U.S. side has so far refused to remove all tariffs and technology export controls; they may believe that by threatening supplies of critical minerals once again, they will bring the Trump administration around. Convenient as it may be for Beijing to argue that the United States broke the cease-fire, China’s escalation was probably driven just as much by a desire to gain greater leverage over what it likely sees as a chaotic and reactive U.S. administration.
As dramatic as the U.S. reaction to the new rules has been, the rules’ bark may be worse than their bite. Beijing has a habit of announcing export control actions only to largely let goods flow anyway. In 2022, the Chinese government published a list of technologies it was considering controlling, including LiDAR sensors used in self-driving cars, CRISPR tools for gene editing, and equipment used to make solar panels. Three years later, little on the list has actually been controlled. In 2023, China started requiring licenses to export gallium and germanium, and in 2024, it added antimony to the list. Yet exports of all three have continued. Some importers have periodically struggled to get licenses, but Beijing has seemingly used the requirement more to gather data than to block sales.
Chinese policymakers have already begun to signal that they will be similarly flexible this time around. On Oct. 11, a spokesperson noted that the controls “are not export bans” and emphasized that “licenses will be granted.” Although Western defense companies are likely to be shut off, for other buyers, the effect is likely to be more muted. “Provided the export license applications are compliant and intended for civilian use, they will be approved,” a Commerce Ministry spokesperson said on Oct. 16. Although the rules call out chip producers, some chip companies have built stockpiles to cushion against shutoffs, and the elements controlled by the rules are less central to chipmaking than to other industries.
China will also find enforcing its new rules a tricky business. Earlier this year, its approach involved requiring a license for all exports of specific minerals, not trying to single out individual industries or track sales abroad. Resuming that approach, this time with truly global rules, would cause short-term chaos but would also help unite the world against China’s tactics.
A more targeted approach, on the other hand, risks being ineffective. Just look at the U.S. experience with export controls. Although Washington has managed to keep specific advanced semiconductor manufacturing equipment out of China, it has struggled to fully enforce its restrictions on AI chips, which are far easier to hide than huge chipmaking machines. Smugglers have funneled tens of thousands of chips into the country since Washington imposed controls in 2022, and Huawei has used cutouts to order millions of chips from TSMC. Tracking and enforcing controls on rare earths and magnets in every country in the world will be a far greater challenge than monitoring sales of bulky AI servers to a single country. China also lacks the global financial reach of U.S. regulators, making it harder to punish violators.
In response to China’s threats, Trump seems to be rerunning his existing playbook: jack up tariffs to unsustainable rates and hope that stress on the Chinese economy will push Xi to agree to a deal.
That strategy was hardly a success last time. Trump launched an unsustainable trade war on almost every country in the world, then rapidly backed down after stocks crashed and the bond market shuddered. With the short-term financial panic over, the Trump administration repeatedly signaled desperation to restart the flow of rare earths. Once the two sides reached a trade truce, U.S. policymakers then reportedly limited new actions on China for fear of triggering a renewed confrontation—one that then arrived anyway.
Repeating that strategy is a recipe for another failure. Beyond somewhat higher tariffs, the United States gained no fresh ground in the truce: China merely agreed to remove its new controls. At the same time, the U.S. side apparently limited its ability to continue routine national security actions, from export controls to investment restrictions, that the Biden and Trump administrations had both previously pursued without prompting dramatic escalation from Beijing. Unilateral tariffs are not likely to move Beijing any more this time around, as they do just as much harm to the U.S. economy, and China has plenty of other export markets.
Luckily, Trump has a chance to take a smarter approach on the second go-round. At the strategic level, he has two things going for him that he didn’t in the spring. First, China, not the United States, made the big escalatory move this time. And Beijing has repeated Trump’s mistake by going after the entire world at once. That should make it easier for the United States to build a global response with the G-7, Europe, and other major partners like India. The administration will have to shelve its antagonism toward allies, but if it can get out of its own way, a coalition is there for the making.
At the same time, the U.S. financial situation is healthier than it was in the spring. Beijing reportedly believes that Trump will fold if U.S. equity markets slide, but in April it was the bond market, not stocks, that pushed Trump off his global tariff regime. After Treasury prices fell sharply—the reverse of the normal pattern during periods of economic uncertainty—Trump backed down. “The bond market is very tricky,” he said after announcing the pause. “People were getting a little queasy.” This time, while stocks slid on the news of a renewed trade war, yields on two-year Treasurys are at three-year lows, and liquidity is high. If the bond market remains calm, Trump will have more room to maneuver.
To use it wisely, he needs to demonstrate to Beijing that the United States and its allies can impose more short-term pain on the Chinese economy than the other way around. If China is intent on deploying its rare earths weapon, Trump’s best bet is to coordinate the U.S. response with the G-7 and the EU, while communicating what lies further up the escalation ladder if Beijing doesn’t back down. Potential responses include restricting sales to major Chinese tech companies, which remain reliant on foreign suppliers; limiting imports of low-value Chinese consumer goods, to threaten export-dependent Chinese regional economies; going after Chinese firms that buy Russian oil; and threatening limits on the sale of advanced chips used in consumer devices, which China has limited capacity to produce domestically.
If Xi is betting that Trump will not be able to stomach a stock market decline, the United States and its allies should demonstrate that the pain on the Chinese side will be just as bad: shuttered factories, empty shelves, snapped supply chains, and laid-off workers.
The trick will be to pick headline policies that can be traded away to reach a deal, while demonstrating to Beijing that future dramatic escalation by either side would be a mistake. If the administration can do that, the United States and China may be able to return to a more stable phase of competition, in which Washington can resume national security measures that were paused by the trade talks this summer without provoking an outsized reaction. China, for its part, will likely continue to explore new ways to pressure the United States, while avoiding uncontrolled escalation spirals.
Beijing’s decision to prompt a global showdown has handed Trump a chance to fix his broken China strategy. Now he has to take it.
