Rare Earths, Tariffs, and Trade Leverage: Assessing U.S.-China Strategic Interdependence

The U.S.-China trade conflict has evolved into a high-stakes game of economic chess, with rare earth elements (REEs) emerging as the most strategically contested pieces. As President Trump's administration escalates tariffs on critical materials and China retaliates with export restrictions, the global supply chain for REEs is being reshaped by geopolitical brinkmanship. This dynamic creates both risks and opportunities for investors, particularly in the rare earths and aerospace sectors, where supply chain resilience and technological innovation are now paramount.

The Strategic Importance of Rare Earths

Rare earth elements are indispensable to modern technology, defense systems, and the energy transition. Neodymium and dysprosium, for instance, are critical for high-performance magnets used in electric vehicles (EVs), wind turbines, and precision-guided weapons. China's dominance—controlling 90% of global refining capacity—has given it unparalleled leverage. In 2025, Beijing tightened export controls on seven heavy rare earths, including terbium and dysprosium, causing prices to surge by over 300% in Europe. These moves are not merely economic but geopolitical, as China seeks to weaponize its control over materials vital to U.S. national security.

The U.S. response has been equally aggressive. Under Section 232 of the Trade Expansion Act, tariffs on copper-intensive goods and rare earth derivatives now exceed 50%, while the Department of Defense (DoD) has invested $400 million in MP Materials to build a domestic magnet supply chain. This escalation underscores a broader shift: nations are no longer content to rely on open markets for critical resources. Instead, they are prioritizing strategic autonomy, even at the cost of short-term economic efficiency.

Geopolitical Brinkmanship and Supply Chain Resilience

The U.S.-China trade war has exposed vulnerabilities in global manufacturing. For example, a single F-35 fighter jet requires 417 kilograms of rare earth materials, and U.S. defense contractors have faced production halts due to Chinese export restrictions. Similarly, automakers in Europe and Japan have suspended EV production as rare earth shortages disrupt supply chains. These disruptions highlight the fragility of a system built on just-in-time logistics and single-source dependencies.

China's tactics extend beyond tariffs. By demanding sensitive corporate data from U.S. and European firms in exchange for rare earth access, Beijing is extracting intellectual property and expanding its influence over downstream industries. Meanwhile, U.S. companies are racing to diversify suppliers, with MP Materials and Lynas Rare Earths leading efforts to establish domestic refining and magnet manufacturing.

MP Materials, the sole large-scale rare earth producer in North America, has surged 367% year-to-date, driven by a $500 million capital raise and a 10-year off-take agreement with the DoD. Its Mountain Pass mine in California now produces neodymium-praseodymium (NdPr) metal in Texas, with plans to launch magnet manufacturing by 2028. The company's forward price-to-sales ratio of 24.61X reflects its premium valuation, but its strategic partnerships with Apple and the DoD justify this optimism.

Energy Fuels, another U.S. player, has expanded its capacity to produce 1,000 metric tons of NdPr annually at its Utah facility. While its stock has risen 87.4% year-to-date, it lags behind MP Materials due to higher production costs and reliance on global markets. However, its focus on downstream separation and alloy production positions it to benefit from U.S. government incentives aimed at reducing reliance on Chinese imports.

Lynas Rare Earths, based in Australia, has surpassed 2,000 tons of NdPr production in 2025 and is expanding into the U.S. with a Texas-based magnet manufacturing hub. Its forward P/S ratio of 13.67X is more conservative than MP Materials', but its global footprint and partnerships with European automakers make it a compelling long-term play.

Aerospace and Defense: The Frontline of the Rare Earth War

The aerospace sector is particularly vulnerable to rare earth shortages. High-performance magnets are essential for propulsion systems, stealth technology, and precision-guided weapons. U.S. defense contractors have already faced bottlenecks, prompting the DoD to accelerate domestic production. For example, the 10X Facility—a joint venture between MP Materials and the DoD—aims to produce 10,000 metric tons of magnets annually, reducing reliance on Chinese imports.

Tesla, a major consumer of rare earths for its EV motors, has seen its stock price fluctuate in tandem with rare earth price spikes. While the company is exploring rare earth-free motor designs, these technologies remain unproven at scale. For now, Tesla's exposure to supply chain risks highlights the broader vulnerability of the EV industry to geopolitical tensions.

Investment Risks and Opportunities

The rare earths sector is fraught with risks. Geopolitical tensions could escalate, causing further price volatility and supply disruptions. Environmental regulations and permitting delays also pose challenges for U.S. firms seeking to expand refining capacity. Additionally, technological substitution—such as developing motors that bypass rare earths—could reduce long-term demand.

However, the strategic importance of rare earths makes these risks manageable. China's dominance is unlikely to wane in the near term, but its aggressive tactics have accelerated global efforts to diversify supply chains. For investors, this creates opportunities in companies with strong technical capabilities, government backing, and strategic partnerships.

Conclusion: A New Era of Economic Security

The U.S.-China trade war has transformed rare earths from commodities into instruments of geopolitical power. While this dynamic introduces volatility, it also creates a compelling case for investing in companies that are reshaping the global supply chain. MP Materials, Energy Fuels, and Lynas Rare Earths are leading this transition, but their success will depend on sustained government support and the ability to scale production.

For investors, the key is to balance risk with reward. The rare earths and aerospace sectors offer not just financial upside but a role in securing the future of technology, defense, and energy. In an era where economic security is paramount, these industries represent a critical frontier.