America could win this trade war if it wanted to

I was waiting to write about the new trade war between China and the U.S., because there was always the chance that it would be resolved within a day by a “deal” in which both China’s leaders and Donald Trump retreat from their threats and business goes on as usual. In fact, that outcome is still very possible, but it’s been over a week now, and the situation hasn’t been resolved, so I guess it’s time to write about it.

Basically, what happened is that China slapped extremely stringent new export controls on rare earth metals, in an attempt to extract concessions from Trump and the United States:

China has unveiled broad new curbs on its exports of rare earths and other critical materials…Overseas exporters of items that use even traces of certain rare earths sourced from China will now need an export license…Certain equipment and technology for processing rare earths and making magnets will also be subject to controls…[China] later announced plans to expand export controls to a range of new products…[these] five more rare earths — holmium, europium, ytterbium, thulium, erbium — plus certain lithium-ion batteries, graphite anodes and synthetic diamonds, as well as some equipment for making those materials.

Trump immediately responded with bellowing bravado, announcing new 100% tariffs on Chinese goods, as well as various new export controls. Trump’s treasury secretary, Scott Bessent, joined in, calling China’s trade negotiators “unhinged”.

But just a few days later, Trump and Bessent were already backing down in the face of China’s threats. Trump admitted that 100% tariffs on China were “not sustainable”, and declared that “[W]e’re doing very well. I think we’re getting along with China.” Bessent offered a “truce” in which the U.S. suspends tariffs on China in exchange for China suspending its threat of export controls.

The most likely outcome, therefore, is that China simply wins this round of the trade war, as it won the last round. In April, Trump announced big tariffs on China. China retaliated by implementing rare earth export controls, causing Trump to back down and reduce tariffs to a low level. But China didn’t reciprocate — it kept its export controls in place, allowing America to keep buying rare earths only through some short-term conditional arrangements. China then used these controls to extract even more concessions from the hapless Americans:

Trump ratcheted up his new tariffs on imports from China to 145% in April…China responded by raising its new duties on shipments from the US to 125%…Before the economic pain of these sky-high levies really started to bite…The US reduced its new levies on Chinese imports to 30%…China agreed to match the US reciprocal rate, lowering its new tariff on American goods to 10%…

American officials were under the impression this would entail a lifting of Chinese restrictions on the export of rare earths…But China’s government continued to limit the issuance of export licenses…A framework deal was then agreed in June, under which China agreed to issue export permits for “controlled items” that “meet the conditions in accordance with the law.” In return, the US agreed to lift countermeasures it had introduced targeting exports on products such as ethane that’s used to make plastic, chip software and jet engines.

This was also entirely consistent with the pattern of Trump’s first term, in which he agreed to suspend planned tariffs on China in exchange for empty promises of agricultural purchases that China never ended up keeping. It fit the common caricature of Trump as a cowardly bully who acts with extreme aggression toward weak opponents, but who retreats from any rival who stands up and hits back.

If the pattern holds this time, then Trump will retreat from his threats of sky-high tariffs, but China will keep its new export controls in place. Lingling Wei and Gavin Bade report that China’s leaders believe they have the American President over a barrel:

In its trade standoff with Washington, Beijing thinks it has found America’s Achilles’ heel: President Trump’s fixation on the stock market…China’s leader, Xi Jinping, is betting that the U.S. economy can’t absorb a prolonged trade conflict with the world’s second-largest economy, according to people close to Beijing’s decision-making. China is holding a firm line because of its conviction, the people said, that an escalating trade war will tank markets, as it did in April after Trump announced his Liberation Day tariffs…The market’s sharp negative reaction on Friday to China’s new rare-earth restrictions and the potential U.S. retaliation served as a reminder of the economic vulnerability Beijing seeks to exploit.

Meanwhile, op-eds in Chinese state media portray the U.S. as weak and irresolute. This is the TACO trade, but it probably isn’t just that. Dictatorships — and China now truly deserves to be called by that name — tend to flatter themselves with the idea that their unity of command gives them a consistency and willpower that democracies, enslaved to their fickle electorates, naturally lack. That assumption proved disastrously false for the Axis and the communist bloc in the 20th century, but with American society divided by various political and social conflicts, it might prove correct this time.

If so, that’s very bad news for the United States — and for the democratic world in general. If China learns that its control of rare earths is a trump card that it can use to extract anything it wants from other industrialized countries, it will push that advantage as far as it can. After surrender on trade issues, the obvious next set of demands is geopolitical — control of Taiwan, dominion over the South China Sea, U.S. troops and ships out of Asia, and so on.

Another possible move for China, instead of making demands, is to simply cut other industrialized countries off from rare earth supplies entirely. If other nations weren’t able to manufacture electronics or other high-tech products, it would allow the Chinese leadership to fulfill their vision of China being the only country that does a significant amount of high-tech manufacturing. This would deindustrialize America, Europe, Japan, and India, reducing them to selling natural resources and services.

A few years ago I predicted that something like this would be part of China’s long-term strategy. The threat of forced deindustrialization was one of my arguments for why the U.S. shouldn’t shy away from Cold War 2:

Ultimately, if China gains control of the global economy, it will choose to use that control to weaken the U.S. Its leaders rightfully see American power as a threat to Chinese power, and would seek to use things like interdiction of seaborne trade and strategic control of resources to reduce that threat by weakening the U.S. economically. It would similarly work to economically weaken key American trading partners like Japan, South Korea, and the EU, in order to reduce their power as well; this would have negative knock-on effects for the U.S. economy.

A poorer U.S. would not be a boon for China economically, but the country’s leaders clearly don’t think in purely economic terms…Minimizing China’s ability to strategically impoverish the U.S. is an important reason to resist Chinese power instead of simply acceding to it.

This prediction is coming to pass even earlier than I expected.

So it will be an incredible shame if Trump does end up backing down from this new trade war. And it will be do