Rare Earths and Treasury Bonds: China’s Silent Weapons
The Leverage Points Few Saw Coming
When the trade war between the United States and China erupted in 2018, public attention focused primarily on tariffs, manufacturing jobs, and intellectual property disputes. Behind these visible battlefronts, China had already established two powerful economic leverage points that would prove decisive in the early phases of the confrontation: near-monopolistic control of rare earth elements and massive holdings of U.S. Treasury bonds. These two economic weapons gave China significant advantages that American negotiators initially underestimated.
Rare Earth Elements: The Technology Metals China Controls
In March 2019, as trade tensions escalated, Chinese President Xi Jinping made a highly publicized visit to a rare earth mining operation in Jiangxi Province. The message was clear without a single threat being verbalized: China held the keys to the minerals powering American technological advancement.
Rare earth elements comprise 17 metallic elements on the periodic table with unique magnetic, luminescent, and electrochemical properties. Despite their name, most rare earths are relatively abundant in the Earth’s crust. What makes them « rare » is the difficulty and environmental cost of extraction and processing. By 2018, China controlled approximately 80% of global rare earth processing capacity and supplied about 80% of U.S. rare earth imports.
The Strategic Value of Rare Earths
These elements are essential components in technologies that define modern life and national security:
- Neodymium and praseodymium for powerful permanent magnets used in electric vehicles, wind turbines, and precision-guided missiles
- Lanthanum for camera lenses, battery electrodes, and petroleum refining
- Europium, terbium, and yttrium for color displays, lighting, and radar systems
- Dysprosium for laser materials and nuclear reactor control rods
A single F-35 fighter jet requires approximately 920 pounds of rare earth materials. Each Virginia-class submarine needs around 9,200 pounds. The technological superiority of the American military depended on reliable access to these materials.
How China Achieved Dominance
China’s rare earth strategy began decades before the trade war. In the 1980s, while American mines shut down due to environmental concerns and lower-cost competition, China strategically invested in developing its rare earth resources. By the early 1990s, Chinese leader Deng Xiaoping reportedly stated: « The Middle East has oil. China has rare earths. »
Through state subsidies, lax environmental enforcement, and technical investments, China systematically built its dominance in the rare earth supply chain. Foreign companies seeking to manufacture technology products relocated to China partly to secure access to these critical materials.
When the trade war began, this decades-long strategy gave China immediate leverage. American manufacturers from defense contractors to consumer electronics producers realized they depended on supply chains vulnerable to Chinese disruption.
The Message Sent in 2019
In May 2019, following escalating tariffs, Chinese state media published a thinly veiled warning: « Don’t say we didn’t warn you. » This phrase had precedent in Chinese communications before major policy shifts. Shortly after, rare earth prices spiked as markets anticipated export restrictions.
Though China never implemented a full embargo during this period, the threat alone sent American policymakers scrambling. The Pentagon began urgent reviews of defense supply chains. The Department of Energy accelerated funding for rare earth alternatives. However, developing new mines, processing facilities, and supply chains would take years—time America didn’t have in the immediate trade confrontation.
Treasury Bonds: The Financial Deterrent
As the United States imposed tariffs on Chinese goods in 2018, financial analysts anxiously watched for signs that China might deploy its « nuclear option »—liquidating its massive holdings of U.S. Treasury bonds. By 2018, China held approximately $1.13 trillion in U.S. government debt, making it the largest foreign creditor to the United States.
The Double-Edged Sword
This financial position represented both leverage and constraint for China. A sudden sell-off of U.S. debt could potentially:
- Drive up U.S. interest rates across the economy
- Increase American government borrowing costs
- Devalue the U.S. dollar relative to other currencies
- Trigger financial market instability
However, such actions would also harm China’s own interests by devaluing its remaining Treasury holdings and potentially destabilizing the global economy upon which Chinese exports depended. This mutual financial assured destruction provided some restraint during the escalating trade tensions.
Subtle Shifts Rather Than Sudden Moves
Instead of dramatic liquidation, China employed more subtle financial pressure. Between April 2018 and May 2019, China reduced its Treasury holdings by approximately $67 billion—a warning shot rather than an all-out assault. These measured reductions sent signals to American policymakers without triggering market panic.
The strategic reduction coincided with periods of trade negotiation impasse. Financial markets noted the correlation between negative trade war developments and decreases in China’s Treasury positions. Interest rates on 10-year Treasury bonds fluctuated noticeably following Chinese statements about potential diversification away from dollar assets.
The Early Advantage: American Vulnerabilities Exposed
The first phase of the trade war revealed American economic vulnerabilities that had developed over decades of globalization. U.S. manufacturers discovered their supply chains depended critically on Chinese rare earth processing. American financial markets realized their sensitivity to Chinese Treasury holdings. These realizations shifted the negotiating dynamics in China’s favor during early trade talks.
The Defense Sector Scramble
The Pentagon found itself particularly exposed. A 2018 Department of Defense review identified approximately 280 different rare earth-dependent vulnerabilities in U.S. weapons systems. Military planners accelerated stockpiling efforts and sought alternative suppliers, but immediate options were limited.
Australia’s Lynas Corporation, the only significant non-Chinese rare earth processor, suddenly found itself courted by American defense officials. Plans for government-funded processing facilities in Texas were hastily advanced. However, building this infrastructure would require years, while the trade war presented immediate challenges.
Manufacturing Sector Exposure
American technology manufacturers faced similar constraints. Companies producing everything from smartphones to electric vehicles discovered they had few alternatives to Chinese rare earth materials. Some began stockpiling inventory, driving prices higher and ironically increasing Chinese export revenues in the short term.
General Motors and other automakers accelerated research into motor designs requiring fewer rare earth elements. Apple examined its supply chain for vulnerabilities. However, these adaptations required product redesigns that couldn’t be implemented quickly enough to influence early trade negotiations.
China’s Strategic Restraint
Perhaps the most telling aspect of China’s approach was its strategic restraint. Rather than immediately deploying its rare earth and Treasury bond leverage to maximum effect, Chinese officials exercised measured pressure. This approach demonstrated sophisticated economic statecraft.
When China restricted rare earth exports to Japan during a 2010 territorial dispute, the international backlash had accelerated Japanese efforts to reduce dependence on Chinese materials. Learning from this experience, China avoided explicit rare earth embargoes during the trade war, instead allowing the implicit threat to influence American calculations.
Similarly, rather than dumping Treasury bonds outright, China implemented measured reductions while publicly maintaining its commitment to being a responsible stakeholder in the global financial system. This calibrated approach maximized leverage while minimizing blowback.
The American Response Begins
By mid-2019, American policymakers had begun crafting substantive responses to these vulnerabilities, though remedies would take years to implement fully:
- Executive Order 13817 designating rare earths as critical minerals and directing a whole-of-government response
- Department of Defense funding for rare earth separation facilities on American soil
- Diplomatic initiatives with Australia, Canada, and European allies to develop alternative supply chains
- Research funding for rare earth alternatives and recycling technologies
The financial exposure proved more difficult to address. As the world’s reserve currency issuer and largest debtor nation, the United States faced structural constraints in reducing Chinese Treasury bond influence. Efforts focused instead on building resilience against market volatility and diversifying the foreign holder base for U.S. debt.
Lessons from the First Round
The early phase of the U.S.-China trade war revealed how economic interdependence can become a strategic vulnerability. America’s pursuit of economic efficiency had created dependencies that became leverage points during geopolitical competition. China’s decades-long planning had positioned it to exploit these dependencies when strategic competition emerged.
For American businesses, the trade war’s first round delivered a wake-up call about supply chain resilience. Companies began comprehensive vulnerability assessments and diversification strategies that would accelerate in subsequent years. The concept of « strategic depth » in supply chains returned to corporate planning after decades of just-in-time efficiency optimization.
For policymakers, the experience highlighted how economic security and national security had become inseparable in the 21st century. The post-Cold War assumption that economic interdependence would prevent major power competition proved naïve. Instead, economic relationships themselves became the battleground for that competition.
The Next Moves Emerge
As 2019 progressed, both countries recalibrated their approaches based on lessons from the initial confrontation. The United States began a fundamental reassessment of its economic relationship with China, moving beyond tariffs to address structural dependencies. China accelerated its dual circulation strategy, focusing on domestic consumption while maintaining export competitiveness.
The first round of the trade war demonstrated that China held significant advantages in the economic confrontation’s opening phase. The country’s patient, decades-long positioning of rare earth dominance and Treasury bond accumulation had created leverage points that American negotiators struggled to counter in the short term.
However, the very deployment of these advantages—even in limited form—accelerated American efforts to reduce the dependencies that created them. This dynamic would shape the next phase of economic competition between the world’s two largest economies as both sides prepared for a protracted struggle beyond tariffs and trade balances.
This article is an excerpt from the book The First Round – Inside the US-China Trade War and China’s Early Edge by Olivia Brown -ISBN 978-2-488187-20-6.
