ES #131: China's Tariff Retaliation Taps Critical Mineral Leverage

Energy Shots #131:

President Trump’s April 3 Rose Garden announcement tacked reciprocal tariffs of 10%-50% on goods from nearly all U.S. trading partners. According to the U.S. Trade Representative, targeted countries’ ‘Discounted Reciprocal Tariff Rate’ was calculated as: (the exporter’s trade surplus against the United States divided by the exporter’s total exports to the U.S.) divided by two.

China’s $319.1 billion trade surplus against the United States in 2024 earned it a 34% discounted reciprocal tariff rate, which the Trump administration and U.S. Trade Representative compared to a 67% tariff rate charged to the U.S. when accounting for China’s currency manipulation and other trade barriers.

Unlike the 50+ trade partners that reportedly initiated talks with the Trump administration by the end of the week, however, China responded with a series of retaliatory measures on Thursday and Friday—several of which attempt to harness China’s most powerful source of leverage on Western economies: its dominance over refined critical mineral supply chains.

• China’s Ministry of Commerce and General Administration of Customs issued Announcement 18 of 2025 to impose export controls on seven medium and heavy rare earth minerals plus their oxides, alloys, compounds, and mixtures.

• The seven minerals with export restrictions include: Dysprosium, Gadolinium, Lutetium, Samarium, Scandium, Terbium, and Yttrium.

This week’s export controls follow similar restrictions announced on 1) bismuth, indium, molybdenum, tellurium, and tungsten after President Trump’s initial 10% tariff announcement in February, 2) antimony, gallium, and germanium in December 2024, and 3) rare earth magnet production technology in December 2023.

China’s Mineral Leverage

The rare earth export controls implemented by the Chinese Ministry of Commerce this week tap into China’s decadal control over rare earth production and refining.

According to the U.S. and British geological surveys, China produced approximately 240k-270k metric tons of rare earth minerals in 2024—more than 3.6x the combined output of the next three largest producers and nearly 70% of the world’s total rare earth supplies. As shown below, China produces nearly 6x more rare earths than the United States.

The USGS estimates China’s rare earth reserves at approximately 44 million metric tons—equivalent to the next seven largest national deposits combined.

Still, aggregate figures on China’s total rare earth output overshadow categorical dominance over several individual rare earth elements like dysprosium—a heavy rare earth element in powerful magnets required for defense equipment, electric vehicles, wind turbines, and other emerging technologies.

• China’s dysprosium production accounts for an estimated 99.9% of global supplies.

As noted above, however, this week’s export controls follow similar moves for minerals that the U.S. imports almost exclusively from China.

• China is the U.S. top supplier for the minerals listed below. Percentages indicate the U.S.’ overall dependence on imports. Highlighted bars indicate minerals with Chinese export restrictions.

While the U.S. maintains mineral stockpiles that will buffer critical technologies against near-term supply shortfalls, China’s grip on rare earth elements will pose a long-term strategic threat to high-tech equipment like EV motors, disk drives, drones, robotics, advanced optics, stealth technologies, and industrial catalysts.

• President Trump signed an executive order early in term 2.0 to expand U.S. critical mineral mining capacity domestically and abroad. Domestic projects alongside 1) proposals from foreign governments like the Democratic Republic of Congo and 2) fluid negotiations in Ukraine and Greenland could ease critical mineral vulnerabilities over the next 5-8 years.

A Different Trade War for China

China’s immediate escalatory response to the Trump administration’s reciprocal tariffs will likely invite swift retaliatory measures. Several factors suggest a protracted trade war between the U.S. and China is less likely than median headline narratives.

• During President Trump 1.0, China consistently raised tariffs on U.S. goods above the U.S. rate while 1) shifting to a 1+ export strategy to evade border levies by offloading goods in an intermediate country before re-exporting to the U.S. and 2) moving manufacturing operations to neighboring countries like Vietnam, Indonesia, and Thailand.

• The Trump administration’s sweeping tariffs in Wednesday’s announcement will limit China’s ability to repeat the 1+ export strategy. China’s foreign manufacturing operations will face similar hurdles as Vietnam, Thailand, and Indonesia received reciprocal tariffs of 46%, 36%, and 32% on Wednesday.

• As a result, the economies of scale that made China the world’s largest manufacturer will instead invite rapid inventory buildup as near-term price growth limits U.S. consumption. Furthermore, China lacks sufficient domestic consumption to absorb this excess capacity.

• With the Chinese economy on the tail end of an extended property sector crisis, China is ill-equipped to survive a protracted trade war with the United States. Still, risks to the U.S. and global economic activity are material.

While downside risks to global energy consumption are evident in the near-term, the downstream effects of 1) lower interest rates and 2) higher liquidity should be considered in the mid-term outlook.

Yield Context: A 100 bp decrease in 10YR yields offers annual savings of ~$150-300 billion on the U.S.’ $28.2 trillion in publicly-held federal debt.

See you next Sunday.

ES.

This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation concerning the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is intended for Mobius clients only and is not considered promotional material.