China Readies Itself for the Next Round in the Trade Wars

Beijing appears to have prepared two trump cards for the upcoming rounds in its trade war with Washington. One is China’s command of much of the world’s supply of refined rare earth elements. The other is its powerful position in global pharmaceutical supplies.

Though neither is as secure as Beijing would like, for the time being, these are the best that China has. A better answer would be a less export-dependent economy, but Beijing so far seems unable to arrange that.

China’s greatest leverage lies with rare earth elements and permanent magnet materials. These inputs are crucial to the production of smartphones, electric vehicles, and robots, among other high-technology products. China currently controls some 70 percent of the global mining of rare earths and 90 percent of the global smelting and processing.

Beijing has already threatened to cut off these supplies—no doubt a major factor in winning concessions from Washington—in particular, a delay in the imposition of threatened tariffs and leeway in getting access to American-made advanced semiconductors.

Though down from last year, these rare earth elements have accordingly continued to flow onto global markets. In the first half of this year, Chinese exports of smelted and separated rare earth elements equaled 32,000 tons, down 11.3 percent from the same period in 2024, hardly the threatened cutoff.  Exports of permanent magnet materials reached 22,000 tons, down 19 percent from last year.

To prepare for future negotiations, Beijing has tightened its hold on all existing and new rare earth mining, processing, and exporting. The rules extend to the processing of imported raw materials in China, which is then re-exported, typically to the mining country. According to the chief analyst for Guojin Securities, Li Chao, this new system improves on the quotas on which Beijing had relied and allows much greater “control over the entire rare earth supply chain.”

On the surface, China looks equally well-positioned in pharmaceuticals. Chinese producers in the first half of 2025 signed fully one-third of all agreements with global drug companies, including such big names as Pfizer, AstraZeneca, and Rogenron. That constitutes fully 144 deals worth the equivalent of $60 billion.

But there are limitations on how much trade leverage all this deal-making gives China. About half of these agreements are for what is called “out-licensing.” These imply that the development and patents lie not with the Chinese party but with the foreign licensor. Chinese production under license is no doubt aimed at capturing the Chinese market for the foreign patent holder and is no doubt worth a lot to the licensed Chinese company. Still, none of this constitutes much basis for a threat in Beijing’s negotiations with Washington, Tokyo, or the European Union.

It is little wonder then that Chinese Premier Li Qiang, even as he announced the deals, emphasized the need to “strengthen original innovations, address core technological challenges, and mobilize resources for the government and market to achieve breakthroughs quickly.” Without it, China will remain something of a handmaiden to foreign pharmaceutical innovation.

China has significantly more leverage with rare earth elements, but ultimately not as much as Beijing seems to believe. Despite the name, rare earth elements are not all that rare; deposits exist the world over.  China has come to dominate the industry because the mining of these metals and their refining are terribly polluting, and China, unlike many other developed countries, is willing to accept that burden. Indeed, the pollution is why so many rare earth mining operations—in the United States and elsewhere—send their raw material to China for smelting and refinement.

If Beijing were to play the rare earth card too often or too aggressively, other nations, including the United States, rather than give up their technologies, would find ways to tolerate the pollution or better control it. China would then lose its near monopoly and with it any leverage on trade.

For now, Beijing retains considerable leverage, to which the shape of its past negotiations with Washington testifies. That leverage is no doubt why the Trump administration has gone harder on India than China over either country’s support of Russia. But China’s command cannot last indefinitely—the more Beijing uses it, the more it will encourage alternative sourcing, weaken that leverage, and hasten the day when it will cease to exist.

China would find better protection from tariffs and aggressive trade tactics if it built up a domestic engine of economic growth and thereby reduced its economy’s dependence on exports. Beijing has paid lip service to this end, but so far has been unable to accomplish much of the needed shift.