Does China Hold All the Cards? Rare Earth Leverage, Tariffs, and the Strategic Balance in Great Powers Era 2.0T

Highlights

• China controls 90%+ of rare earth separation and permanent magnet manufacturing, putting $6.5 trillion in downstream global manufacturing at risk.
• Four converging deadlines—a September Xi-Trump summit, November export-control expiration, January 2027 DFARS restrictions, and Middle East instability—create a compressed crisis timeline.
• The U.S. defense industrial base remains exposed to Chinese rare earth supply chains despite billions invested in domestic processing and allied sourcing.
• Great Powers Era 2.0 marks a shift from efficiency-driven globalization to resilience-driven industrial policy, making supply chain control a core national security asset.
• China's rare earth dominance is real but not permanent—structural economic headwinds including property sector weakness, deflation, and demographic decline constrain Beijing's long-term leverage.

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Economist Steve Hanke (opens in a new tab) argues that China's dominance in rare earth processing and permanent magnets gives Beijing sufficient leverage to discourage President Donald Trump from escalating tariffs before a potential September summit with President Xi Jinping. Rare Earth Exchanges agrees that China possesses formidable leverage—but disagrees that Beijing "holds all the cards."

China controls today's industrial bottlenecks. The United States and its allies are attempting to build tomorrow's industrial ecosystem. Between now and January 2027, however, Washington faces one of the most difficult strategic balancing acts in decades: maintaining economic and military readiness while reducing dependence on the very supply chains it seeks to replace.

The next four months could become one of the most consequential periods in the history of critical minerals.

Four Dates Investors Cannot Ignore

Rare Earth Exchanges® believes investors should focus less on headlines and more on four converging milestones. September 2026: President Xi Jinping is expected to visit Washington for a summit with President Trump, assuming current diplomatic planning proceeds. Rare earth export controls, tariffs, and broader trade relations will almost certainly be among the most sensitive issues.

November 10, 2026: The temporary 12-month easing of portions of China's rare earth export licensing regime is expected to expire. If Beijing chooses not to extend existing accommodations, Western manufacturers could again face tighter access to critical rare earth oxides, metals, alloys, and permanent magnets.

January 1, 2027: The Department of Defense's DFARS restrictions take full effect, requiring many defense contractors to eliminate magnets and certain critical materials originating from China, Russia, Iran, and North Korea from covered defense systems. While the rule is strategically important, many industry participants acknowledge that replacement supply chains remain incomplete.

An increasingly unstable Middle East: Continued tensions involving Iran and its regional proxies increase the strategic importance of assured defense manufacturing. Precision-guided munitions, missile systems, radar, electronic warfare equipment, aircraft, and naval systems all depend—directly or indirectly—on rare earth elements and other critical minerals.

Taken together, these four developments create an unusually compressed timeline for policymakers and industry.

China's Leverage Is Real—and Immediate

Steve Hanke's central point deserves serious consideration. China today controls roughly 60% of global rare earth mining, more than 90% of separation and refining, and approximately 90%+ of permanent magnet manufacturing. Those capabilities support industries ranging from electric vehicles and robotics to fighter aircraft, naval propulsion, missile guidance systems, satellites, and advanced communications.

The IEA has warned that disruptions to Chinese exports could place approximately US$6.5 trillion of annual downstream manufacturing outside China at risk.

Rare Earth Exchanges has argued that the strategic vulnerability is not primarily mining.

It is the midstream:

• separation;
• metals;
• alloys;
• permanent magnets;
• specialty chemicals.

Those industrial capabilities cannot be recreated overnight.

America's Defense Industrial Base Still Faces a China Problem

This reality becomes especially important as global security risks rise. The United States is investing aggressively in expanding production of precision-guided weapons, missile interceptors, naval systems, aerospace platforms, drones, and electronic warfare capabilities. Nearly every one of those systems depends on materials that remain heavily concentrated inside China's supply chain.

That does not mean every finished weapon contains Chinese components. Many defense systems already source compliant materials through qualified suppliers. However, at the industrial level, the broader ecosystem for rare earth oxides, metals, alloys, magnets, graphite, tungsten, antimony, gallium, and other critical inputs remains significantly exposed to Chinese production and processing.

This is precisely why Washington has committed billions of dollars to domestic processing, magnet manufacturing, strategic stockpiles, and allied supply chains. Policymakers recognize that rebuilding industrial resilience cannot be accomplished in a single budget cycle.

Great Powers Era 2.0™: Resilience Replaces Efficiency

Rare Earth Exchanges has consistently argued that globalization is entering a new phase.

For thirty years the world's supply chains optimized for efficiency. The next thirty years are increasingly likely to optimize for resilience.

Governments are now rewarding:

• domestic production;
• allied sourcing;
• redundant manufacturing;
• strategic inventories;
• vertical integration;
• trusted supply networks;
• industrial security.

This represents a fundamental change in economic thinking. Industrial capacity itself has become a strategic asset.

China Also Faces Structural Headwinds

China's leverage should not be mistaken for invulnerability. Beijing continues to wrestle with structural economic challenges, including:

• prolonged weakness in the property sector;
• demographic decline and population aging;
• weak consumer confidence;
• local government debt;
• producer-price deflation;
• slowing productivity growth;
• excess industrial capacity;
• persistent export dependence.

Ironically, the same industrial policies that enabled China to dominate rare earth processing have also produced recurring overcapacity across multiple manufacturing sectors. State-supported investment can sustain production even when market demand weakens, leading to oversupply, margin compression, trade friction, and periodic dumping allegations from trading partners.

Xi's continued emphasis on fiscal stimulus, industrial upgrading, technological self-reliance, and domestic consumption reflects an effort to manage these structural imbalances while preserving China's leadership in strategic industries.

Rare Earth Exchanges' View

Steve Hanke is correct that China possesses extraordinary leverage today. But leverage is not the same as permanent strategic advantage. The next four months may determine how much leverage Beijing ultimately retains.

If a September summit produces meaningful progress, tensions could ease temporarily. If the November export-control deadline results in renewed restrictions while the January DFARS requirements remain on schedule, Western governments and manufacturers may face their most significant critical-minerals stress test in years.

This is the essence of Great Powers Era 2.0.

The competition is no longer primarily about tariffs, GDP growth, or comparative advantage. It is about whether nations can build complete industrial ecosystems—from mines to separation plants, metals, alloys, magnets, components, and finished defense systems—that remain operational during geopolitical crises.

In that environment, resilience increasingly becomes more valuable than efficiency, and control of critical mineral supply chains becomes as strategically important as the weapons, energy systems, and advanced technologies they enable.