The Hidden Risks in China's Trade Truce: Why U.S. Industrial Metals Offer a Strategic Opportunity

The fragile U.S.-China trade truce announced in London this June has been hailed as a stopgap to prevent immediate escalation, but it masks deeper vulnerabilities. For Chinese small and medium-sized enterprises (SMEs) reliant on U.S. demand—particularly in low-margin sectors like appliances, textiles, and construction materials—the truce's unresolved tariff structure is a death sentence. These SMEs now face a stark choice: operate at losses or abandon export markets entirely. This dynamic creates an asymmetric opportunity for investors: U.S. industrial metals firms, positioned to capitalize on supply chain gaps, may offer one of the most compelling tactical plays in 2025.

The Squeeze on Chinese SMEs: A Cost-Benefit Collapse

The framework agreement leaves core tariffs intact: the 10% universal tariff on U.S. imports and the 20% tariff on Chinese goods remain. For SMEs in labor-intensive industries—already grappling with rising wages and energy costs—these levies are terminal. Consider a manufacturer of kitchen appliances: if U.S. tariffs eat into 20% of revenue, and prices cannot be raised without losing market share, margins vanish. The elimination of the de minimis exemption for small packages has further crippled e-commerce exporters like Shein and Temu, which relied on low-cost, high-volume shipments.

This pain is not confined to consumer goods. China's trade surplus, driven partly by exports of low-margin goods, has shrunk by 15% year-on-year in 2025. Yet Beijing's hands are tied. Raising export subsidies would risk violating World Trade Organization rules, while currency devaluation invites accusations of “currency manipulation.” The result is a silent crisis: SMEs are retreating from U.S. markets, creating voids in sectors like aluminum extrusions, steel components, and—critically—critical minerals.

The Supply Chain Shift: U.S. Firms Step Into the Breach

As Chinese SMEs retreat, U.S. producers of industrial metals stand to gain. Take the rare earths sector: China's dominance in processing these materials has long been a vulnerability. U.S. companies like MP Materials, the largest rare earth producer outside China, are now ramping up production to meet demand from defense, EV, and semiconductor firms. Similarly, aluminum giants like Alcoa and Century Aluminum could benefit as U.S. buyers turn to domestic suppliers to avoid tariffs on Chinese imports.

The data supports this thesis. While Chinese aluminum exports to the U.S. have fallen by 30% since early 2024, U.S. domestic production has risen by 12%, with prices holding steady despite broader market volatility. Meanwhile, rare earth prices—crucial for magnets in EV motors—have surged 25% in 2025, driven by supply chain concerns.

Why This Is a Tactical Long Play

The truce's fragility is its own catalyst. Beijing cannot indefinitely tolerate the collapse of its SME sector, which employs over 100 million workers. Pressure to resolve the tariff issue on terms favorable to U.S. producers is inevitable. A breakthrough on fentanyl-related tariffs (the linchpin of the 20% U.S. levy) could accelerate this: if Washington removes these sanctions, China's retaliatory tariffs would logically follow, reducing costs for U.S. metals exporters.

Investors should note that U.S. metals firms are also beneficiaries of domestic policy. The Inflation Reduction Act's tax incentives for clean energy projects, which rely heavily on aluminum and rare earths, provide a floor for demand. Even if trade tensions persist, the U.S. government's focus on supply chain resilience ensures these sectors remain priority investments.

The Investment Case: Allocate, but Hedge

The tactical play here is clear: overweight U.S. equities with exposure to industrial metals. Key targets include:
- Rare earth processors: MP Materials (MP), Ucore Rare Metals (UCU)
- Aluminum producers: Alcoa (AA), Century Aluminum (CENX)
- Critical mineral miners: Freeport-McMoRan (FCX),南方稀土 (GME)

However, hedging is essential. Tariff disputes could flare anew if fentanyl talks fail, or if China retaliates against U.S. chip restrictions. Investors should pair these positions with inverse ETFs (e.g., ProShares Short China (FXP)) or options to mitigate downside risk.

Conclusion: The Truce Is a False Dawn for China's SMEs—But Dawn for U.S. Metals

The trade truce's narrow focus on avoiding crisis has left SMEs to drown in a sea of tariffs. For investors, this is a rare moment to profit from structural shifts: as China's low-margin exporters retreat, U.S. industrial metals firms are poised to capture market share, backed by policy tailwinds and supply chain logic. This is not a bet on a permanent U.S.-China detente, but on the immutable calculus of cost and survival. The time to position is now—before the next round of trade talks resets the playing field.