US and China deepen supply chain rivalry despite trade truce

The apparent calm in the trade relationship between the United States and China is misleading, as both nations continue to prepare for a potential economic confrontation. Although a truce reached last year has paused the escalation of tit-for-tat tariffs and extended until next January, neither Washington nor Beijing has taken steps to establish mutual assurances that would limit the outbreak of new hostilities. Instead, both countries are focused on gaining the upper hand in what appears to be an inevitable next round of conflict. This standoff has been defined by both sides as a national security priority, essential for ensuring economic, technological, and military supremacy.

This new form of arms race differs significantly from historical precedents. Rather than focusing solely on building weapons to destroy one another, the United States and China are concentrating on securing the resilience of international supply chains while simultaneously attempting to constrain or throttle the supply chains essential to their rival’s economic and technological progress. These paired strategies have roots in the period of the pandemic, when Chinese leadership called for tightening international production chains’ dependence on China to form a deterrent against foreign attempts to cut off supply. Similarly, early in the Biden administration, American national security adviser Jake Sullivan articulated a strategy to limit China’s access to advanced technologies with military applications without upending the global economic order. This approach was described as building a small yard of forbidden technology surrounded by a high fence of trade and investment controls.

However, the conflict has since breached the bounds of these initial rationales. Restrictions on American technology exports, investments, and technology transfers to China have proliferated over the last half-decade. These measures are not only affecting China’s military capabilities but are also slowing its broader technological progress. Conversely, China has become increasingly assertive, leveraging its dominance over the supply of critical minerals essential to high-tech industries for both civilian and military uses. Last year, Beijing stunned the Trump administration by throttling exports of rare earths and magnets to retaliate against US tariffs and efforts to restrict China’s access to high-end semiconductors and lithography machines. While some of these controls have been relaxed, many restrictions remain in place. These measures have been used not only to retaliate against American actions but also to penalise other countries for policies China dislikes. The International Energy Agency has estimated that if China were to block US and European access to rare earth magnets, it could cost their economies approximately 1.5 trillion dollars per year.

The Trump administration is responding by pouring hundreds of millions of dollars into projects to mine and process rare earths and other critical minerals, aiming to close China’s lead. It is also doubling down on efforts to limit China’s access to frontier semiconductors and to bar it from purchasing the machinery needed to manufacture them. In response, China has announced a range of high-tech export restrictions, covering areas such as artificial intelligence chips and solar power technology. It has also threatened to punish countries that work to reduce their dependence on its mineral inputs.

A path to a peaceful entente would likely require a shared understanding of what constitutes a legitimate national security risk warranting actions to block supply chains. Defining the scope of these restrictions is essential, as frustrations of standard commerce should not be dealt with on a wartime footing. China is likely to dominate renewable energy technologies, particularly the solar power industry, into the foreseeable future, and may also lead in the electric vehicle sector. While this may cause economic friction in Brussels and Washington, it is not necessarily a cause for war. However, China must also accept that its mercantilistic economic strategy, characterised by massive export growth with zero import growth, is not sustainable for the rest of the world.

The odds that the world economy will remain at peace appear slim. History offers cautionary examples, such as the Axis powers’ efforts to seize territories as the League of Nations curtailed their access to raw materials during the early stages of the second world war, or Franklin D. Roosevelt’s blocking of sales of American scrap steel and oil to Japan, which likely contributed to the decision to attack Pearl Harbor. Today, American fighter jets, submarines, and missiles rely on rare earth magnets. The potential consequences of China blocking access to these materials are significant. The current moment marks a shift from a time when trade was proposed as a tool to deliver world peace through positive-sum interdependence. That era is over. Interdependence has become a vulnerability, and as China and the United States fight over control of the next generation of technology, trade has become a theatre of war.