The three-week-old U.S.-China trade truce is on the ropes after President Trump charged on Friday that Beijing has "violated" the deal, and China returned fire early Monday. S&P 500 futures are solidly lower, with Trump's plan to double steel and aluminum tariffs to 50% also adding to renewed trade risk for markets.
Trump lashed out because Beijing is keeping a tight rein on exports of rare-earth magnets key to EV motors, F-35 fighter jets, Tomahawk missiles and much more.
Shares of MP Materials, the only major U.S. producer of rare earth minerals and magnets, surged over 10% on Friday and are tacking on further gains early Monday.
U.S.-China Risk Shifts From Tariffs To Tech
The focus of U.S.-China trade tensions has turned from tariffs to technology. Even if the truce falls apart, it's not clear that Trump would send tariffs on Chinese imports back to the stratosphere, leaving store shelves empty.
But nontariff measures also have potential to roil the S&P 500. The U.S. says that China's rare-earth restrictions violate its agreement to undo nontariff measures adopted in the wake of Trump's April 2 "Liberation Day" tariffs.
Beijing shot back that U.S. technology export controls announced since terms of the deal were announced early May 12 have "seriously undermined" the deal and threatened to take "resolute and forceful measures to safeguard its legitimate rights and interests."
Since the deal signed in Geneva, concern had grown that China was slow-walking rare-earth export license approvals. Beijing removed any doubt, saying that it has responded to U.S. actions of recent weeks.
On the same day that the U.S. and China revealed their surprisingly large tariff cut, the Trump administration said it would ensure America's "global AI dominance" in part by imposing criminal sanctions on companies "using (Chinese) Huawei Ascend chips anywhere in the world."
Beijing also highlighted the U.S. halt of chip-design software to China, which sent shares of Cadence Design Systems and Synopsys diving last week, as well as a revocation of visas for Chinese students.
What's Next In U.S.-China Trade Fight?
Treasury Secretary Scott Bessent described the U.S.-China talks as "a bit stalled" on Friday, but that seems to understate what's at stake in their disagreement.
On Sunday, the Trump administration raised expectations that Trump will have a talk with Chinese President Xi Jinping as soon as this week to break through the current impasse. Based on past precedent, Xi may be reluctant to talk unless Trump is prepared to reverse U.S. moves to contain China.
Defense Secretary Pete Hegseth's weekend comments that an invasion of Taiwan "may be imminent" may have only raised the bar to Xi getting on the phone.
Beijing seems to have drawn a line in the sand over U.S. chip export controls aimed at slowing China's progress and ensuring America's leadership in AI. The so-called chip war, started by Trump and escalated by President Biden, has become fundamental to U.S strategic interests.
Here's the problem: While U.S. export controls on China may hold back its progress, to the extent they work, China's export controls of key industrial materials may have harsh consequences for the U.S. economy in the relatively near term.
The Wall Street Journal reported on Friday that auto companies are among those that have warned the Trump administration that a prolonged ban on rare-earths exports by China could wreak havoc on supply chains. Rare earths are used in catalytic converters as well as most EV motors.
Tesla CEO Elon Musk said on an April 22 earnings call that the company was seeking a rare-earth export license from China. The magnets are needed to build thousands of Optimus humanoid robots by year-end.
The Pentagon reportedly has a limited stockpile of rare-earth magnets. But nonmilitary users could face trouble right away if Beijing takes a hard line.
S&P 500
S&P 500 futures are off 0.4% in early Monday stock market action. On Friday, the S&P 500 closed fractionally lower, finishing the week just 3.8% below the Feb. 19 all-time closing high.
The S&P 500 reclaimed its 200-day moving average with the announcement of the U.S.-China deal on May 12 and has remained above that level, but a retest may lie ahead.
MP Materials stock is climbing 5% to 22.90 early Monday as it tries to reclaim its 50-day moving average.
