China-Japan Trade Tensions and the Quest for Undervalued Alternatives in Global Defense and Tech Supply Chains

The intensifying trade tensions between China and Japan, fueled by geopolitical posturing over Taiwan and broader strategic competition, have triggered a seismic shift in global supply chains for dual-use goods. China's recent export restrictions on critical materials-ranging from rare earth elements to synthetic diamonds-have exposed vulnerabilities in defense and technology sectors reliant on these inputs. However, these disruptions also highlight opportunities for investors to capitalize on undervalued alternatives emerging in response to the crisis.

Rare Earths: A Strategic Bottleneck and Its Alternatives

China's dominance in rare earth processing- accounting for over 90% of global refining capacity-has long been a lever of geopolitical influence. In 2025, Beijing escalated its control by imposing export restrictions on seven rare earth elements, including dysprosium and terbium, essential for electric vehicle motors and defense technologies. These measures, coupled with extraterritorial rules requiring licenses for products containing Chinese-origin materials, have driven prices for critical elements like dysprosium to triple in Europe.

Yet, diversification efforts are gaining traction. Japan, once 90% reliant on Chinese rare earths, has reduced this dependency to 50% through partnerships with Australian miner Lynas Rare Earths and investments in domestic recycling technologies. Meanwhile, the U.S. has committed $400 million to MP Materials, its primary rare earth producer, to expand the Mountain Pass facility. While U.S. production remains a fraction of China's scale, the geopolitical urgency to decouple from Chinese supply chains is accelerating regionalization. Undervalued players like Energy Fuels and NioCorp, which are scaling up domestic processing, present compelling long-term investment cases.

Synthetic Diamonds: A New Frontier of Control and Opportunity

China's November 2025 export controls now extend to synthetic diamond micropowders, single crystals, and CVD equipment, citing national security concerns. These materials are vital for semiconductor manufacturing and precision industrial tools. However, the global synthetic diamond market is rapidly diversifying. Companies like Element Six (a De Beers-3M joint venture), Diamond Foundry, and Sumitomo Electric Industries are leading the charge, with the CVD synthetic diamond market projected to grow at a 10.3% CAGR through 2032.

Notably, firms such as IIa Technologies (Australia) and Huanghe Whirlwind (China) are leveraging advanced CVD technologies to capture market share. For investors, these companies represent undervalued alternatives to Chinese-dominated supply chains, particularly as demand surges in defense and high-tech manufacturing.

Monitored Chemicals and the Broader Dual-Use Landscape

China's 2026 Catalogue of Dual-Use Items expanded to 846 entries, including 74 monitored chemicals and 159 nuclear-related technologies. These restrictions, aimed at curbing military applications, have forced industries to seek alternative suppliers. Japan's recent additions to its List Control items- such as peptide synthesis equipment and refractory metal powders-reflect a parallel tightening of export rules.

In this context, regions like Europe and North America are emerging as key players. For instance, U.S. firms specializing in chemical precursors and advanced materials are benefiting from increased demand for compliance-friendly alternatives. While specific undervalued companies remain elusive in current data, the broader trend toward regionalized supply chains suggests that firms with robust ESG credentials and diversified sourcing networks will outperform.

Investment Implications: Navigating the New Geopolitical Reality

The China-Japan trade standoff underscores a fundamental shift: supply chain resilience is now a non-negotiable priority for defense and tech sectors. Investors should focus on three areas:1. Rare Earth Producers: U.S. and Australian firms like MP Materials and Lynas Rare Earths, which are scaling production amid geopolitical tailwinds.2. Synthetic Diamond Innovators: Companies with proprietary CVD technologies, such as Element Six and Diamond Foundry, positioned to meet surging demand.3. Chemical and Material Diversifiers: Firms in North America and Europe with capabilities to replace restricted Chinese inputs, particularly in monitored chemicals and advanced manufacturing.

While the road to full decoupling from China is long, the current landscape offers fertile ground for investors willing to bet on innovation and geopolitical adaptation.