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Key Takeaways
- The U.S. economy could take a massive hit if China follows through on threats to restrict its exports of rare earth minerals.
- Rare earths are used in defense, cars, electronics, and other high-tech products, and China nearly completely controls the market for them.
- Cutting off rare earths would drag down economic growth and push inflation to double-digit levels, according to one analysis.
If the latest skirmish of words between President Donald Trump and Chinese leader Xi Jinping devolves into a full-scale trade war, the U.S. could take an economic hit on par with the onset of COVID-19.
That’s according to an analysis Tuesday by Oxford Economics, which underlined the extremely high stakes of the ongoing trade dispute between the U.S. and China. Late last week, Chinese officials said they were imposing new restrictions on exports of rare earth minerals crucial for the high-tech industry. Trump retaliated Friday by threatening to impose “massive” tariffs on China, but softened that threat over the weekend, saying “it will all be fine.”
The threats of tariffs and rare earth restrictions were both set to take effect in November and may ultimately prove to be nothing more than bargaining ploys. Each side is trying to gain an advantage ahead of an expected meeting between Trump and Xi later this month in South Korea, several experts said.
However, there is still a chance the trade dispute could heat up and seriously hurt the economy at a time when job growth is already slowing, and inflation is on the rise.
“Each side is brandishing leverage but preserving a narrow window for compromise,” Matt Colyar, an economist at Moody’s Analytics, wrote in a commentary. “Ultimately, the rare-earth move and tariff threat are less about trade than power. Both sides want to show they can’t be coerced. But posturing can harden into policy.”
China has already flexed that leverage this year in response to Trump’s imposition of triple-digit tariffs on China in April. The two sides settled into a temporary truce in May, with the U.S. lowering its tariffs and China lifting restrictions on rare earth materials. The latest back-and-forth threats undermine that truce.
What This Means For The Economy
If negotiations between the U.S. and China go wrong, China could cut U.S. industries off from crucial supplies, decimating the economy and stoking inflation. The ensuing slowdown in economic growth, combined with higher prices, would be financially painful for U.S. households.
Covid-Like Shock
China dominates the market for refined rare earth metals, which are used in weapons, cars, electronics, and other high-tech products. By cutting off the U.S. from those crucial resources, China could seriously damage the U.S. economy, Louise Loo, head of Asia economics at Oxford Economics, wrote in an analysis Tuesday.
“If implemented in full, the controls announced by China last week would have a punishing impact on downstream industries globally by delaying production processes, potentially leading to supply chain chokepoints,” Loo wrote.
The disruption would ripple through the economy and cause “a shock akin to the early-2020s supply snarls,” Loo wrote. Growth in the Gross Domestic Product would slow by an entire percentage point, and wholesale inflation would surge to double-digit levels, similar to the aftermath of the pandemic, Loo estimated.
Oxford’s experts believe the worst-case scenario will likely be avoided, but the risks are sky-high if either side miscalculates in the upcoming talks.
“Rare earths appear to be being used as bargaining chips, with both sides probing red lines while leaving room for another tariff truce, which is still our forecast working assumption,” Loo wrote.
