Tariffs Return with a Vengeance?

The stock market, which had been merrily rolling along since the tariff issues subsided in April, was jolted on Friday by President Trump’s threat of ‘massive’ tariff increases on China. What had appeared resolved with China, albeit temporarily, is back in the forefront. On Truth Social, the President wrote:

“Some very strange things are happening in China! They are becoming very hostile, and sending letters to Countries throughout the World, that they want to impose Export Controls on each and every element of production having to do with Rare Earths, and virtually anything else they can think of, even if it’s not manufactured in China. Nobody has ever seen anything like this but, essentially, it would “clog” the markets, and make life difficult for virtually every Country in the World, especially for China.”

“We have been contacted by other Countries who are extremely angry at this great Trade hostility, which came out of nowhere. Our relationship with China over the past six months has been a very good one, thereby making this move on Trade an even more surprising one.”

The President’s post closed with this:

“I never thought it would come to this but perhaps, as with all things, the time has come. Ultimately, though potentially painful, it will be a very good thing, in the end, for the U.S.A. One of the Policies that we are calculating at this moment is a massive increase of Tariffs on Chinese products coming into the United States of America. There are many other countermeasures that are, likewise, under serious consideration.”

Markets reacted swiftly. By Friday’s close, NASDAQ was down 3.5%and the S&P 500 was down 2.7%. The 10-Year and 30 year Treasury yields were down almost basis points (a basis point is 1/100 of a percent); crude oil and copper were down 4%+, while safe havens gold and silver continued to rally, both up more than 1%.

Although not discussed openly, we believe it is very clear that China is not just an economic competitor, but also a political adversary. As such, the U.S. has been engaged in an economic war that began when the U.S. realized its enormous dependency on China for manufactured goods during the pandemic. Since then, there has been increasing pressure to on-shore or friend shore manufacturing, which has become very intense since Trump took office.

While the U.S. dominates most trade relationships globally, China is one country that has some meaningful ability to counter that, specifically, rare earth elements, which are critical to advanced technology systems, both military and commercial. China mines about 70% of global rare earths and processes about 90% of global rare earths.

China has been holding this capability over the head of the U.S. for some time. Below is a brief history of Chinese export controls thus far in 2025:

      • April 4, 2025: China implemented its initial export license requirement for seven medium and heavy rare earths, following U.S. tariff increases.
      • May 11, 2025: The U.S. and China agreed to a 90-day tariff truce during talks in Switzerland. The agreement included restoring U.S. access to rare earths, but this stability proved to be short-lived.
      • May–June 2025: U.S. manufacturers experienced ongoing shortages as China delayed issuing export licenses despite the agreement. Some auto plants in the U.S. and Europe were forced to suspend production.
      • June 11, 2025: Following further negotiations in London, a new trade framework was reached, intended to ease restrictions and restart the flow of rare earths.
      • August 2025: China started approving some export permits but continued to scrutinize and deny applications for military-related uses.
      • October 9, 2025: China announced new and expanded restrictions ahead of a planned meeting between President Trump and President Xi. The latest controls targeted additional rare earths, processing technology, and related permanent magnets.

The heavy U.S. reliance on China for these rare earth materials, creates enormous supply chain vulnerabilities and increase the potential for production slowdowns and higher costs. Sectors hit particularly hard by these export controls include:

      • Defense and aerospace: Critical minerals like dysprosium and samarium are essential for advanced military hardware, including F-35 fighter jets, missiles, and radar systems. The new rules explicitly block exports for military use, creating a “chokehold” on US defense capabilities.
      • Technology and semiconductors: The semiconductor industry relies on rare earths for manufacturing equipment and polishing compounds and therefore faces potential disruption.
      • Clean energy and EVs: The clean energy transition depends on rare earths for permanent magnets used in EVs and wind turbines. China’s controls could cause shortages and increase costs.

The U.S. is actively pursuing strategies that will lessen dependance on China. The U.S. investments in MP Materials (MP, up 8% Friday), and USA Rare Earth (USAR, up 5% Friday) are recent examples, but will take years to commercialize.

Our assumption has been, and remains, that we are in an economic war with China and as such, events like this should be expected as each side struggles for a strategic advantage. While these disruptions to date have been fairly short lived, there is always the risk that a confrontation lingers with negative consequences for the economy. For now, the fact that these are threats and not actions gives us hope that this episode will be short-lived as well

Have a great week!

 

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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

 

 

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By: Adam