The truce between Washington and Beijing has cooled their escalating trade conflict, but the apparent calm is misleading and the world is quietly moving toward an economic war of potentially epic proportions, according to an analysis by Eduardo Porter.
The truce, reached last year and extended until next January, ended the escalation of tit-for-tat tariffs and opened the door to an as yet undefined future trade deal. However, neither China nor the US has done anything to establish mutual assurances that could limit the outbreak of new hostilities. Both sides are focused on gaining the upper hand in what seems like an inevitable next round, in a standoff both have defined as a national security priority essential to ensuring economic, technological and military supremacy.
A New Kind of Arms Race
This new arms race differs from past ones. Rather than building weapons, China and the US are focusing on ensuring the resilience of the international supply chains they rely on and figuring out how to constrain, and if push comes to shove throttle, the supply chains essential to the economic and technological progress of their rival.
The paired strategies date back at least to the Covid pandemic, when China's Xi Jinping called on the nation to tighten international production chains' dependence on China, forming a powerful countermeasure and deterrent capability against foreigners who would artificially cut off supply to China. Early in the Biden administration, national security adviser Jake Sullivan articulated American goals: to limit China's access to a narrow set of advanced technologies with military applications without upending the global economic order, describing a strategy of a "small yard" of forbidden tech surrounded by a "high fence" of trade and investment controls.
Conflict Beyond Initial Rationales
The conflict has now breached these initial rationales. Restrictions on American tech exports, investments and technology transfers to China have proliferated over the last half decade, hitting not only China's military capabilities but slowing its technological progress writ large. China, meanwhile, is becoming increasingly assertive, leveraging its dominance over the supply of critical minerals essential to high-tech industries. Last year, it stunned the Trump administration by throttling exports of rare earths and magnets made from them to retaliate against US tariffs and efforts to restrict China's access to high-end semiconductors and the lithography machines needed to make them.
China has relaxed some of these controls but maintains many other restrictions, largely imposed to retaliate against American actions but also used to hit other countries for policies it dislikes. The stakes are high: the International Energy Agency has estimated that if China blocked the US's and Europe's access to rare earth magnets, it could cost their economies about $1.5tn per year.
Where the Supply Chain War Goes From Here
The Trump administration is pouring hundreds of millions into projects to mine and process rare earths and other critical minerals, hoping to close China's lead, and is doubling down on efforts to limit China's access to frontier semiconductors and bar it from buying the machinery needed to make them. China has announced a range of high-tech export restrictions covering artificial intelligence chips and solar power technology and has threatened to punish countries that work to reduce their dependence on its mineral inputs.
The analysis suggests a path to a peaceful entente would probably require some shared understanding of what constitutes a legitimate national security risk warranting actions to block supply chains, with defining the "yard" essential. It notes China will probably dominate renewable energy technologies, especially solar power, and the electric vehicle industry into the foreseeable future, which might hurt in Brussels and Washington but is not worth a war, while China will have to accept that its mercantilistic economic strategy, combining massive export growth with zero import growth, is not tenable for the rest of the world.
The odds that the world economy will remain at peace seem slim, the analysis concludes, recalling the Axis powers' efforts to seize territories as the League of Nations curtailed their access to raw materials in the early stages of the second world war, and FDR's blocking of sales of American scrap steel and oil to Japan. Today, American fighter jets, submarines and missiles use rare earth magnets, raising the question of what would happen if China blocked access to these materials. Trade, once proposed as perhaps the most powerful tool to deliver world peace through positive-sum interdependence, has become a theater of war as China and the United States fight over who will control the next generation of technology.
