The U.S.-China trade relationship marked its third year of turmoil in 2022, as great-power competition began reshaping the world’s largest economic relationship. China is the biggest foreign holder of US government debt, at about $760 billion. This further entrenches its role as a significant choke point in global trade and its impact on global finance. Most recently, China vowed to push back against US tariffs and other trade restrictions. At the same time, it projects a willingness to compromise, finding the all-important balance between stick and carrot.
In recent years, the trade war has shone a light on their dominance of critical sectors. The country’s manufacturing prowess means it now dominates the production of consumer goods worldwide. It serves an important function in providing substances like rare earth elements. These materials are the functional basis for many high-tech uses. For example, they are vital to military platforms like F-35 fighter jets and for emerging industries like artificial intelligence and robotics.
China’s Economic Leverage
China is the second-largest holder of US government bonds, after Japan. This provides China, a foreign adversary, with tremendous leverage to manipulate US financial markets and the broader economic health. This economic interdependence makes their trade relationship more complex because escalatory moves by China risk a deep impact on both sides.
Additionally, China has become the largest exporter in the world, No. 1 in sectors such as electronics and machinery, clothing, building materials and many others. This massive penetration into global supply chains highlights its vital role in global trade. As US tariffs threaten to upend these relationships, China would likely look for other markets to absorb some or all of the potential losses from US restrictions. For example, if the US were to raise tariffs, the company might decide to source materials elsewhere. This expensive and risky move would allow them to further cut their reliance on American markets.
Rare Earth Elements: A Critical Resource
This gives China a significant geopolitical and economic advantage through its monopoly on rarity earth elements. These ingredients are key to everything from advanced consumer technology to cutting edge defense systems. China continues a virtual complete monopoly on heavy rare earths and holds a big fist-tight grip on refined products. This growing dominance is especially worrisome for any industry that is counting on these materials to manufacture their products.
The significance of rare earths goes well beyond smart phones and tablets. They are essential to the manufacture of next generation military capabilities. Even US Air Force’s F-35 fighter jets rely on these critical minerals for them to operate. On top of that, the demand for artificial intelligence and robotics is expected to drive demand for rare earths even further. China’s dominance in the production of magnets only deepens its chokehold on this critical supply chain.
The Current State of China’s Economy
Though China does command significant leverage with its trade practices and critical mineral supply, its economy is arguably the weakest it has been in decades. With recent reports that China’s economic growth engine is beginning to sputter, many are asking if that boom can be sustained in the long-term. This economic slowdown would have serious repercussions on its ability to sustain its aggressive favor-trade policies or invest massively in global supply chains.
China’s pledge to circumvent US tariffs demonstrates a nuanced and strategic resolve. This strategy allows them to wriggle through the minefield that is their deadly and escalating trade war. By expressing openness to negotiations while simultaneously asserting its influence through economic means, China demonstrates a multifaceted strategy aimed at maintaining its economic position on the global stage.
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