President Trump didn't wait long to follow through on the "massive increase" in tariffs he threatened on Friday afternoon in response to Beijing holding the world "captive" with its near-monopoly of rare earth materials and magnets. Late in the day, Trump said a 100% tariff will apply on top of current levels. The S&P 500 reversed sharply lower and kept falling after hours. Rare earth stocks including MP Materials and USA Rare Earth surged.
Trump also halted exports of "critical software." That may refer to advanced chip design software developed by Cadence Design Systems and Synopsys. Trump had blocked sales of the software this spring but then reversed course amid U.S.-China negotiations on restarting rare-earth exports to the U.S.
On Thursday, China applied a default ban on defense-sector exports of rare earth minerals and related technologies. The move may have been an effort to apply leverage in U.S.-China talks ahead of a possible meeting between President Donald Trump and Chinese President Xi Jinping later this month. However, Trump indicated Friday that he's disinclined to meet with the Chinese leader, saying "there now seems to be no reason to do so."
U.S.-China Cease-Fire At Risk
Trump said that the U.S.-China relationship "has been a very good one" in recent months. However, the positive turn came only after China froze rare-earth exports, bringing much of U.S. auto production to a halt. To restart the flow of rare earths, Trump slashed reciprocal tariffs on imports of Chinese goods and reversed some national-security-related restrictions on technology exports to China.
However, Beijing's latest moves seem to signal that there won't be a grand bargain with the U.S. unless Trump is prepared to go much further in removing Biden-era restrictions on exports of advanced chips and chip equipment to China.
President Trump asserted that he will be able to "financially counter their move" through tariffs and other countermeasures. Yet that may underestimate China's rare-earth leverage that forced Trump to back down this spring.
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China's Rare-Earth Leverage
China has had a near monopoly on processing of heavy rare earth materials that feed into end products like samarium-cobalt magnets. Such magnets maintain their magnetic properties under temperatures high enough to liquefy lead. They are critical for military hardware like Lockheed Martin's F-35 and Tomahawk missiles.
Thursday's updated Ministry of Commerce rules for rare earth exports appeared to be an effort to more broadly guard China's rare earth advantage, extending restrictions on exporting its mined output to certain downstream technologies and even the intellectual property in processing them.
CNBC reported that applications for rare-earth exports for advanced semiconductor manufacturing would be reviewed on a case-by-case basis.
The uncomfortable reality is that U.S. national security has been overly reliant on Chinese mineral exports. Beijing seems to be putting its foot down, saying this can't continue if the U.S. is going to withhold its most-advanced chips and chipmaking gear from China.
Trump's concessions to get rare earth exports from China flowing again included retracting a ban on exports of chip-design software and a ban on exports of Nvidia's H20 inferencing chip, while slashing tariffs. However, Beijing has since turned its nose up at using Nvidia chips that have U.S. government-imposed limitations.
Non-China Rare Earth Supply Chain
Replacing China's rare earths is a long-term project, though both MP Materials and USA Rare Earth are tied to U.S. government efforts to secure a non-China supply chain, including for military uses.
The Pentagon, along with its recent $400 million investment in MP Materials for a 15% stake, also provided a $150 million loan for the company to separate heavy rare earth minerals at its Mountain Pass mining complex.
On Sept. 29, USA Rare Earth announced the $227 million acquisition of U.K.-based Less Common Metals, which prior to the merger received a grant from the U.S. Department of Defense to expand samarium production in the U.K. in support of U.S. industry needs. USA Rare Earth also has mining rights to a deposit of heavy rare-earth materials in Texas from which it has extracted gallium and heavy rare earth concentrates.
USA Rare Earth recently confirmed discussions with the White House over possible new financing.
MP Materials, USA Rare Earth Soar
The S&P 500 fell 2.7% on Friday, its sharpest loss since April 10. MP Materials stock jumped 8.4%. USA Rare Earth rose 5% in the regular session, then added 7.6% after hours.
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