China’s rare earth restrictions aim to beat the US at its own game

Over the past three years, Washington has asserted broad authority to impose global rules barring companies anywhere in the world from sending cutting-edge computer chips or the tools needed to make them to China. U.S. officials have argued that an approach is needed to ensure China does not gain the upper hand in the race for advanced artificial intelligence.

But a sweeping set of restrictions announced by Beijing last week showed that two people can play this game.

The Chinese government has exerted its own influence on global supply chains by announcing new rules cracking down on the flow of essential minerals that are used in everything from computer chips to cars to missiles. The rules, set to take effect later this year, have shocked foreign governments and businesses, which may now have to acquire licenses from Beijing to market their products even outside China.

With its dominance over the production of these rare earth minerals and its control over other strategic industries, China may have an even greater ability than the United States to militarize supply chains, analysts say.

“The United States must now face the fact that it has an adversary that can threaten significant parts of the American economy,” said Henry Farrell, a political scientist at the Johns Hopkins School of Advanced International Studies. The United States and China are now very clearly “in a much more delicate phase of mutual interdependence,” he added.

“China has really started to understand how to learn from the American model and, in some sense, play this game better than the United States currently does,” Mr. Farrell said.

China’s move has reignited tensions between the world’s two largest economies, with President Trump threatening to increase already high tariffs on Chinese imports by imposing an additional 100% tax on November 1 unless Beijing reverses its new restrictions.

The type of supply chain restriction China is embarking on first came into play in 2020. Washington dusted off an obscure provision known as the Direct Foreign Products Rule to target Chinese tech giant Huawei, which the U.S. government considered a national security threat. But instead of restricting exports of American technology only to Huawei, the United States said that no company anywhere in the world could ship a product to Huawei if it contained American parts or was made with American equipment or software.

Due to the United States’ key role in the global chip manufacturing industry, the rules encompassed essentially all advanced technologies. It is a vast exercise of American economic power that has become the basis for a series of global technology rules under the Biden administration. Although foreign governments were irritated at being told what to do, many cooperated out of fear of being cut off from American technology.

The question now is: Will China’s restrictions persuade the Trump administration to roll back its long-standing tariffs or technology restrictions, or will the Chinese government first buckle under the pressure?

The administration appeared caught off guard by China’s restrictions, which could cripple U.S. industries. Mr. Trump on Friday threatened to cancel a planned meeting with Chinese leader Xi Jinping, as well as add a 100 percent tariff. After the stock market fell, the president said on social media on Sunday: “Don’t worry about China, everything will be fine!”

On Tuesday, Mr. Trump renewed his barbs, telling a crowd of reporters and Argentina’s president that Mr. Xi “is getting irritable because China likes to take advantage of people and they can’t take advantage of us.” That afternoon, Mr. Trump wrote on social media that the United States was considering ending its imports of cooking oil from China, as well as potentially other activities.

On Wednesday morning, Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer described China’s licensing system as a global power grab and said the United States was prepared to impose its tariffs if China moved forward.

“We hope this never goes into effect,” Mr. Greer said.

Chinese officials have long criticized the United States’ extraterritorial enforcement of economic measures and insist that Beijing has acted consistently in the face of renewed threats from Washington.

“The United States talks about commitment on one side while resorting to threats and intimidation on the other, imposing high tariffs and introducing new restrictive measures,” Lin Jian, a spokesperson for China’s Foreign Ministry, said on Wednesday. “This is not the right way to engage with China.”

Jiang Tianjiao, an associate professor at Fudan University, said Chinese officials had noticed recent U.S. efforts to revive its own rare earth industry and wanted to demonstrate their influence ahead of a possible meeting between Mr. Trump and Mr. Xi.

U.S. officials and analysts have said the impacts of China’s licensing system would be far broader than U.S. technology controls, which target only the most advanced computer chips.

China’s efforts to militarize supply chains also predate U.S. controls on chips, some analysts point out. Concerned about depending on antagonistic nations for oil and technology, the government has for decades implemented plans to develop strategic industries. And in 2010, China cut off rare earth exports to Japan during a maritime dispute.

It is unclear when Chinese authorities began developing the rare earth licensing system. But Mr. Trump’s aggressive actions — including new fees for Chinese ships docking in U.S. ports — have given Beijing an opportunity to try these measures.

In April, after Mr. Trump imposed additional 34% tariffs on China, Beijing established an initial licensing system for rare earths for exports to automakers and defense industries. American companies panicked over dwindling mineral reserves. Ford Motor and other automakers have halted some production. Mr. Trump responded by increasing his tariffs to a minimum of 145%, halting much trade between the countries.

In meetings this spring and summer, the countries reestablished a fragile truce in which the United States reduced tariffs and China allowed mineral exports to flow more easily. But the United States continued to impose technological controls, prompting China to take painful countermeasures.

China’s much more expansive mining licensing system follows a September 29 decision by the United States to extend trade restrictions to subsidiaries of any company on the so-called entity list, restricting the type of American technology they can buy.

Analysts say Chinese officials saw the move as disrupting an attempted thaw after Mr. Trump spoke by phone with Mr. Xi less than two weeks earlier and said they had agreed to a preliminary deal to divest TikTok’s U.S. operations from its Chinese parent company.

Beijing also responded with other restrictive measures. He announced controls on equipment needed to make batteries for electric cars, opened an antimonopoly investigation against U.S. chipmaker Qualcomm, imposed additional port fees on U.S. ships and added several U.S. companies to a restricted trade list.

But the mineral restrictions are notable for the authority they allow Beijing to claim over the global supply of the tiny chips that power virtually all electronic devices.

“It scares the rest of the world to see how far China is willing to go to disrupt the global supply chain,” said Xiaomeng Lu, director of Eurasia Group, a policy consulting and research group in Washington.

Chris Miller, a professor at Tufts University and author of “Chip War: The Fight for the World’s Most Critical Technology,” said the implications of China’s new licensing system could be “extraordinarily broad,” affecting nearly every semiconductor manufactured in the world.

Companies and governments in the United States, Europe, Japan, India, South Korea and elsewhere are also concerned about the extensive information about companies that the Chinese government requests as part of the licensing process.

Anticipating “a lot of resistance” to providing this information, Dr. Miller said it could accelerate efforts to build non-Chinese supply chains for rare earths. The argument is similar to one long made by critics of U.S. technology controls, that they could push the world to adopt non-U.S. chip technology.

The United States and China each operate a supply chain that the other has worked for years to strengthen domestically. But while China has spent billions on its chip industry, spurring the growth of its own chipmakers, the United States may need several years to restart rare earth production.

“If China is able to get around restrictions on chips but it takes longer for the United States to get around controls on rare earths, that’s going to be a big problem for the United States,” said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics.

Yeling Tan, a professor at Oxford University, said events in recent months have put China in a stronger negotiating position than it held under the first Trump administration. But she said the controls “could prove costly for China, as extraterritorial requirements could alarm other trading partners.”

“This threatens to undermine China’s credibility as a reliable trading nation,” she said. “It’s an incredibly delicate balance to strike.”

Xin Yun Wu And Amy Chang Chien contributed reporting from Taipei, Taiwan.