As trade tensions with China escalate, experts warn that Chinese President Xi Jinping could retaliate with moves like cutting rare earth exports or dumping U.S. treasuries — actions that could cripple U.S. defense systems, spike borrowing costs and trigger a global financial shock.
A total ban on rare earth mineral exports, for example, could render American missiles, fighter jets, and even consumer technology like smartphones inoperable. As tensions with Washington rise, Beijing could also retaliate by dumping U.S. treasuries — a threat that has already sent jitters through financial markets.
“There is not one of our jet airplanes in the United States Air Force that does not have rare earths in multiple forms, particularly in magnets,” said Mark Smith, CEO of NioCorp and a 40-year veteran of the mineral mining industry. “If China stops exporting rare earths, the effect on U.S. military readiness would be immediate.”
“Night vision goggles, hyper-sonic missiles, smart missiles that become dumb missiles — I mean you literally can shoot them, but they’re not going to go wherever they go with a smart missile,” he added.
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China holds $761 billion in U.S. debt, making it the second-largest foreign holder after Japan. A mass sell-off could drive down the value of U.S. bonds and cause yields to spike, sharply increasing borrowing costs for the federal government. It could also weaken the U.S. dollar and send shock waves through global financial markets.
Beyond treasuries, China could further devalue the yuan — a tactic it has used repeatedly — to make its exports more competitive while pricing American goods out of its domestic market.
President Donald Trump announced Wednesday that he was issuing a 90-day pause on tariffs, except for China, which would face a 125% levy on its goods. China had responded to earlier tariffs with an 84% tax on U.S. imports.
But for all the tough talk of escalation, Trump predicted a “deal” might be on the horizon.
“China wants to make a deal. They just don’t know how quite to go about it. You know, it’s one of those things I don’t know quite yet. Proud people. And, President Xi is a proud man,” he said Wednesday.
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Last week, China placed seven kinds of medium and heavy rare earths on an export control list. While the controls stop short of an outright ban, Beijing can still gum up trade by limiting the number of export licenses it issues.
China dominates 90% of the global rare earths market — a group of 17 elements essential to the defense, energy and electronics industries.
And it wouldn’t be the first time China has used its market dominance to punish an adversary. In 2010, the Chinese Communist Party halted rare earth exports to Japan during a diplomatic dispute. More recently, Beijing has restricted shipments of other critical minerals — including germanium, gallium and graphite — to the U.S. over the past two years.
U.S. companies, meanwhile, would struggle to fill the gap. It takes an average of 29 years to go from mineral discovery to production in the U.S.
In China, where environmental regulations are nearly nonexistent and the state bankrolls such projects, it can take just a few short months.
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Xi’s next move may depend on how much pain he’s willing to inflict on his own economy — trade wars hurt both sides in nearly every scenario.
“He’s not the same leader he was in 2018,” said Nazak Nikakhtar, a trade expert and former Commerce Department official. “He’s indigenized lots of high-tech manufacturing capabilities in China, including semiconductors and AI. He’s consolidated power — he’s nearing the end of an unprecedented third term, looking for a fourth, and he’s purged political opponents. He’s just more economically powerful than he was before, so I think he is willing to hit back hard.”
Nikakhtar predicted Xi would escalate retaliation by continuing to dump U.S. treasuries and expanding bans on critical mineral exports.
“I think he really, genuinely is willing to take as much pain as necessary internally to inflict pain on the West. And I think he can get away with it because the Chinese government controls all the levers of the economy. They don’t have free market forces moving things,” she said.
Nikakhtar also warned that China could retaliate against countries helping the U.S. work around export bans.
“They’re going to punish third countries for shipping things they’re getting to the United States, too,” she said. “So I think this is quite serious.”
But Nikakhtar said the U.S. has more tools in its arsenal as well.
“Are we capable of doing much more than we’ve done in terms of not only tariffs, export controls, capital flow restriction? Absolutely. Is the Treasury Department potentially willing to go sort of all the way through some serious sanctions that can cripple the Chinese banks? I think they are,” she said.
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