The New Geopolitical Divide: Navigating US-China Trade Tensions in Rare Earths and Semiconductors

The fragile equilibrium of the US-China trade framework, negotiated amid high-stakes talks in London, has thrust rare earth minerals and semiconductors into the heart of global supply chain politics. With Beijing and Washington locked in a contest over technological supremacy and strategic resources, investors face a precarious landscape of opportunities and risks. This article dissects the sector-specific dynamics and outlines a path for capitalizing on market volatility while hedging against geopolitical headwinds.

Rare Earths: China's Weapon of Choice

China's near-monopoly on rare earths—critical for EV batteries, wind turbines, and defense systems—remains its most potent bargaining chip. Controlling 70% of mining and 90% of refining capacity, Beijing has slashed rare earth exports to the US by 22% since 2024, destabilizing supply chains for industries from automotive to renewable energy.

The framework agreement offers a flicker of hope for normalization. If tariffs are reduced or export bans lifted, investors could see upside in MP Materials (MP), the US's largest rare earth producer, and Lynas Corporation (LYC), which operates outside China's dominance. Renewable energy infrastructure firms like TerraForm Power (TERP) also stand to gain as wind turbine magnet demand surges.

However, the deal's fragility looms large. Accusations of truce violations and China's reluctance to fully open its market cloud the outlook. Investors should prioritize firms with diversified sourcing or vertical integration, such as MP, which is vertically integrating mining and processing to reduce reliance on Chinese suppliers.

Semiconductors: The US Tech Fortress Under Siege

While China struggles to replicate the US's dominance in advanced semiconductors, Washington's export controls have become a double-edged sword. The US retains control over AI chip design, quantum computing hardware, and software tools like Synopsys (SNPS), but aggressive restrictions risk alienating key partners.

Companies like Applied Materials (AMAT) and Lam Research (LRCX), which supply semiconductor equipment, could benefit as manufacturers seek non-Chinese alternatives. Yet firms tied to China's market face peril: ASML (whose lithography machines are critical for chipmaking) and NVIDIA (NVDA) (whose GPUs power AI systems) are particularly vulnerable to widening sanctions.

The wildcard is Taiwan Semiconductor Manufacturing (TSM), which straddles both markets. Its ability to pivot production based on geopolitical winds makes it a cautious but essential holding for diversified portfolios.

Geopolitical Crossroads: July 9 Deadline

The looming July 9 deadline—when the US may impose retaliatory tariffs on $200 billion of Chinese goods—adds urgency to the calculus. If talks collapse, semiconductor ETFs like SOXX (the iShares Semiconductor ETF) could face sharp declines. Investors should consider hedging with inverse ETFs like SWIX or put options on PSI (the Global X Semiconductor ETF).

Meanwhile, China's resilience—bolstered by domestic demand and Southeast Asian trade diversification—suggests it will not fold easily. This stalemate favors cautious, sector-specific bets over all-in strategies.

Investment Strategy: Split the Difference

Short-Term (0–6 Months):
- Buy TSM if steel/aluminum tariffs are rolled back, easing manufacturing costs.
- Short SMIC (0981.HK) if export controls expand, exploiting its valuation gap versus US peers.

Medium-Term (6–18 Months):
- Overweight MP Materials as US rare earth production scales.
- Add KLA Corp (KLAC) to capitalize on global chip shortages and equipment demand.

Risk Mitigation:
- Allocate 10–15% of tech portfolios to inverse ETFs like SWIX.
- Use options to lock in gains if the truce holds, such as call options on LYC or TERP.

Conclusion: A Landscape of Fragile Equilibrium

The US-China trade framework is neither a panacea nor a crisis—it is a high-stakes chess match with sector-specific outcomes. Rare earths offer a resolution trade, while semiconductors remain hostage to geopolitical whims. Investors must treat these as distinct plays: bet on rare earths to thrive in normalization, and brace for semiconductor turbulence until controls ease.

As July approaches, the priority is diversification. Pair exposure to MP and TSM with hedges against volatility. The path to profit lies not in picking winners but in preparing for every contingency.

In the end, the only certainty is uncertainty. Navigate it with eyes wide open.