Rare Earth Truce: Navigating Strategic Opportunities in a Paused Trade War

The U.S.-China trade truce finalized in May 遑2025 marks a tactical pause in a conflict that has reshaped global supply chains for a decade. While tariffs remain elevated in many sectors, the temporary rollback to 10% on non-strategic goods creates a critical window for investors to reposition capital in rare earth minerals and technology supply chains—two areas where the truce's terms and underlying geopolitics present both opportunities and risks. Here's how to parse them.

The Rare Earth Opportunity: Betting on U.S. Production

The truce's exclusion of rare earths from tariff relief underscores their strategic importance. While the 25% Section 301 duties on these materials remain, the 90-day window provides a respite for companies to scale domestic production. The U.S. has long relied on China for 80% of its rare earth supply, a vulnerability exposed during the trade war's peak. Now, firms like MP Materials (MP)—the sole U.S. rare earth miner—stand to gain as demand for EV motors, wind turbines, and defense systems surges.

MP's stock rose 45% in 2024 amid bipartisan support for domestic mining incentives. The Infrastructure Investment and Jobs Act allocated $1.2 billion to rare earth projects, while the Inflation Reduction Act offers tax credits for EV battery minerals. Investors should consider MP as a core holding, but also monitor smaller players like Great Western Minerals Group and Lundin Mining, which are expanding exploration in Nevada and Canada.

China's Tech Liberalization: A Narrow Door, Wide Risks

While the truce focuses on tariffs, China's parallel moves to liberalize its tech sector—particularly in data centers and semiconductors—create nuanced opportunities. Under the June framework agreement, Beijing has:
1. Allowed full foreign ownership of data centers in free trade zones like Shanghai and Hainan, a sector previously off-limits to foreign firms.
2. Softened restrictions on semiconductor equipment imports, easing access for U.S. companies like ASML Holding (ASML) and Applied Materials (AMAT) to supply tools to Chinese chipmakers.

Semiconductor equipment stocks surged post-truce, with ASML rising 18% in June alone. However, risks linger: China's data governance laws still require foreign firms to store data locally and undergo strict security reviews. U.S. investors in this space must prioritize firms with existing onshore partnerships (e.g., Intel's joint ventures with SMIC) or non-Chip 4-affected supply roles (e.g., materials suppliers like Entegris).

Backtest the performance of ASML and AMAT when 'buy condition' is triggered by China-U.S. trade truce agreements (e.g., tariff pauses or tech liberalization frameworks) since 2018, holding for 60 trading days post-agreement announcement.

Historically, when such truces were announced, ASML averaged a 17.28% gain over the following 60 days since 2018, while AMAT underperformed with an average -1.46% return during the same period. This highlights ASML's stronger correlation to geopolitical détente, though AMAT's struggles underscore the need for caution in firms lacking deep onshore ties.

Geopolitical Risks: The Truce's Fragile Foundation

The 90-day pause is not a resolution. Key uncertainties include:
- Rare Earth Export Controls: China's April 2025 licensing slowdown for U.S. buyers persists, with approvals delayed for 70% of applications. A post-truce spike in tariffs (to 34% on U.S. goods) could reignite the conflict.
- Tech Decoupling: The U.S. retains bans on AI chip sales to Huawei and other entities, while China's subsidies for domestic tech under Made in China 2025 fuel a parallel innovation track.
- Legal Uncertainty: A U.S. trade court ruled Trump's tariffs illegal in May, a decision the administration is appealing to the Supreme Court.

Investors should treat the truce as a short-term catalyst, not a buy-and-hold signal. Positions in rare earths or China-exposed tech stocks should be paired with hedges (e.g., inverse China ETFs like FXI) or kept to a small portion of a portfolio.

Investment Strategy: Play the Truce, But Stay Nimble

1. Buy U.S. Rare Earth Producers: MP Materials and junior miners with scalable projects offer leveraged exposure to decarbonization and defense spending.
2. Dip into Semiconductor Equipment: ASML could benefit from China's need for advanced tools, with historical data showing an average 17.28% gain over 60 days following truce announcements. However, AMAT's average -1.46% return in similar scenarios suggests caution—set tight stop-losses to account for policy reversals.
3. Avoid Pure-China Plays: Even under liberalization, sectors like cloud computing or social media remain constrained by data sovereignty laws.

The truce's greatest gift is time—not to “solve” the U.S.-China rivalry, but to diversify supply chains and rebalance investments before the next round of tariffs or export controls. For now, the rare earths and semiconductors space offers a high-reward, high-risk game of geopolitical chess. Play it with a small bet, a clear exit, and an eye on the Supreme Court's next move.

Final Take: The U.S.-China truce is a breather, not a victory. Investors who bet on rare earths and tech liberalization gains can profit—but must also prepare for the fog of trade war to return.