Trade Truce Uncertainties: Navigating Rare Earths and Semiconductors in a Tariff-Tainted Landscape

The potential extension of the U.S.-China 90-day tariff truce deadline, set to expire in late 2025, has become a linchpin for global supply chain stability and strategic commodity investments. As trade negotiations oscillate between cooperation and confrontation, sectors reliant on rare earth metals and semiconductors—critical for defense, technology, and energy—are facing heightened risks. This article analyzes how prolonged trade uncertainties favor companies with self-sufficiency or diversified suppliers and offers actionable investment insights.

Supply Chain Vulnerabilities in a Tariff-Driven World

The current U.S.-China framework agreement, pending final approval, has temporarily eased tensions over rare earth minerals and semiconductors. However, the six-month window for China's export relaxation of rare earths—coupled with lingering U.S. restrictions on semiconductor sales to Chinese firms—highlights the fragility of this truce.

The has fluctuated in tandem with tariff headlines, rising by 35% in 2024 amid fears of a trade collapse. For sectors like electric vehicles (EVs) and renewable energy, where rare earths are indispensable, prolonged uncertainty could force companies to seek alternative supply chains.

Rare Earth Metals: The Geopolitical Battery

China dominates 80% of the world's rare earth production, leveraging this dominance as a strategic tool. The U.S. and its allies are racing to diversify supply chains. MP Materials (MP), the largest U.S. rare earth producer, stands to benefit if the truce is extended but faces long-term pressure to scale production. Meanwhile, Lynas Corporation (LYD) in Australia and Northern Minerals (NTU) in Canada are also key players in reducing reliance on Chinese exports.

Investors should prioritize firms with operational control over their supply chains. ETFs like the Global X Rare Earth/Strategic Metals ETF (REMX) offer diversified exposure to this space, though they carry geopolitical risk.

Semiconductors: A Sector Between a Rock and a Hard Place

The semiconductor industry is caught in crossfires of U.S. export controls and China's push for self-reliance. While the truce may temporarily ease tensions, the 55% tariffs on Chinese goods—including semiconductor components—remain a drag on global tech supply chains.

Companies like ASML (ASML), a Dutch giant supplying advanced chip-making tools, face pressure to navigate U.S.-China export rules. Intel (INTC) and TSMC (TSM) are investing in domestic U.S. manufacturing to insulate themselves from tariffs, a strategy that could pay off if trade barriers persist.

Investment Strategies for Prolonged Uncertainty

1. Focus on Diversification Leaders:
2. TSMC (TSM) and Intel (INTC): Benefit from U.S. subsidies for domestic chip production.

3. MP Materials (MP): A play on rare earths as the U.S. seeks to reduce China dependency.

4. Short-Term Plays on Truce-Related Volatility:

5. Consider shorting companies like Western Digital (WDC) or Micron (MU), which are highly exposed to cross-border data storage and semiconductor tariffs.

6. ETFs for Sector Exposure:

7. VanEck Vectors Semiconductor ETF (SMH) for broad semiconductor exposure.

8. REMX for rare earths and strategic metals.

9. Hedging with Options:
   Use put options on semiconductor ETFs to mitigate downside risk if the truce collapses.

Conclusion

The tariff truce's potential extension offers a temporary reprieve but does not resolve the underlying tensions. Investors should favor companies with diversified supply chains and geopolitical resilience. Rare earths and semiconductors remain high-stakes sectors, where preparedness for prolonged uncertainty is key. As the clock ticks toward the July 9 and August deadlines, portfolios should balance strategic commodity exposure with hedging tools—ensuring investors are ready for any outcome.