China's Rare Earth and Critical Mineral Leverage in U.S. Trade Negotiations: Analysis and Recommendations
Executive Summary
During the 2025 tariff standoff, China used export controls on rare earths and magnets as leverage to secure a tariff rollback from Washington, resulting in the Busan Agreement, which entered renewal negotiations in September 2026. The United States protests that its imports of key items like yttrium have plummeted contrary to promises, but Beijing still controls the pace of implementation. As PIIE analysis shows, years of tariffs against China have failed to reduce real dependence at the refining and processing stages, and this asymmetric structure is unlikely to be resolved in the short term. South Korea should pursue a dual strategy of continuing to utilize China's refining network while simultaneously joining U.S. security-linked supply chains. It also needs to separately track the implementation status of individual items like yttrium to prepare for potential supply disruptions.
I. Situational Analysis
China's Emerging Rare Earth and Critical Mineral Leverage in U.S.-China Trade Negotiations: A Situational Analysis
1. Background and Developments
Ahead of the Trump-Xi summit in October 2025, Washington approached the negotiations with confidence in its superior position [1]. U.S. Treasury Secretary Besant summarized this confidence by stating, "What do we have to lose if China raises tariffs?" [1]. The logic was that the United States, as a trade-deficit country, had no reason to be outmaneuvered on tariffs.
However, behind this framing lie the actual events of 2024–2025. In response to high tariffs, Beijing implemented strict export controls on rare earths, a move that has a precedent of successfully forcing a tariff rollback from Washington [4]. The so-called "Busan Agreement," reached in Busan, was established on the condition that China would ease its export restrictions on rare earths and minerals [12]. Thus, local experts assess that the basic framework of U.S.-China relations in late 2025 was shaped not by tariffs, but by the chokepoint of rare earths.
The roots of this dynamic trace back to the securitization of supply chains during the COVID-19 pandemic. Supply disruptions of masks and pharmaceuticals escalated into a concern over dependence on China, and the scope of securitization subsequently expanded to semiconductors, batteries, and rare earths [9][6]. The United States and Europe responded with subsidies through the CHIPS Act and the Inflation Reduction Act [6], but China's comparative advantage in refining and processing was not overcome due to structural factors such as wage gaps and environmental regulatory arbitrage [3].
2. Current Situation
In September 2026, the renewal of the Busan Agreement and the establishment of a U.S.-China Trade Committee were back on the table, starting with talks in New York between Treasury Secretary Besant and Acting Chinese Vice Premier Li Qiang [10][18]. The fact that the meeting was hosted at JPMorgan Chase headquarters suggests that these discussions were aimed at market stabilization rather than being a purely diplomatic channel [10][15].
The U.S. side has specific complaints. A senior official assessed that Beijing's implementation of rare earth magnet supply "falls short of the standard" [16]. The Brookings Institution notes that U.S. officials have publicly protested that "China is only partially fulfilling its obligations," pointing out that the resolution of this issue is entirely under the Chinese government's control [5]. There are also reports that U.S. imports of yttrium, used in aerospace and defense, have plummeted since April 2025. This indicates that despite China's promise to suspend export controls, the actual supply has decreased [17].
Beijing's stance appears to be unhurried. The Brookings Institution described this approach as "Beijing isn't taking Trump's bait" [5]. In a separate analysis, the PIIE points out that years of tariffs on China have not actually reduced dependence. It argues that only the routes have changed, with Chinese content now indirectly entering the U.S. embedded in imports from third countries [8]. This implies that the U.S. weapon of tariffs has lacked structural effectiveness, which supports the view that Washington's actual leverage at the negotiating table is limited.
3. Key Actors and Positions
The Chinese government is explicitly using the supply of rare earths, magnets, and critical minerals as negotiating leverage. Its success in pressuring the U.S. during the 2025 tariff standoff has boosted Beijing's confidence in negotiations, and it is assessed that this has made policymakers less hesitant about the competitive dynamic with the United States [19]. There are also observations that China is not abandoning the option of "providing only uncertain access to chokepoint raw materials" by controlling the actual pace of implementation [13]. The possibility of extending this playbook to active pharmaceutical ingredients (APIs) is also being discussed [13].
The U.S. Trump administration publicly maintains its narrative of having the upper hand in negotiations [1], yet it displays a dual approach by repeatedly pointing out shortcomings in rare earth supply implementation at the working level [16][5]. Simultaneously, separate from its pressure on Beijing, it is also pursuing a parallel track of directly securing critical mineral assets in third countries like Venezuela and Brazil. A prime example is the acquisition of Serra Verde, a Brazilian rare earth producer, by USA Rare Earth, in which the U.S. government holds a stake [11]. This shows that Washington has concluded it cannot solve its supply chain problems through negotiations with China alone.
The U.S. Treasury and Commerce Department line (Besant, Greer) and their Chinese counterparts (Li Qiang, Li Cheng-gang) are operating a working-level channel to prepare summit deliverables that bundle AI, tariffs, and critical minerals [7][10][15]. However, flashpoints of conflict are also emerging from regulatory agencies like the FCC, not just the summit diplomacy track, leaving room for localized friction to persist regardless of the summit's outcome [9].
4. Key Issues
The first issue is the effectiveness of the Busan Agreement. The discrepancy between the promised easing of export restrictions and the actual customs clearance and delivery performance is the core of the U.S. complaint [16][17]. The second is the structural limitation of tariffs. If, as PIIE analysis suggests, tariffs have only rerouted trade without reducing fundamental dependence [8], then Washington's negotiating card was flawed from the design stage. The third is the durability of China's comparative advantage in refining and processing. Even with G7 and U.S. subsidies, as long as capital outflow driven by wage gaps and environmental regulatory arbitrage continues, China's advantage is likely to be structurally maintained for the next 3-5 years, a consensus view both domestically and internationally [3][6]. The fourth is the diversification of the U.S. response itself. The fact that two tracks—pressuring China in negotiations and directly securing assets in third countries—are proceeding simultaneously [11] suggests that Washington has already concluded that it cannot solve the problem through victory at the negotiating table alone.
II. In-Depth Analysis
China's Emerging Rare Earth and Critical Mineral Leverage in U.S.-China Trade Negotiations: An In-Depth Analysis
1. Analysis of Root Causes
The root cause of the current situation lies in the physical irreplaceability of the refining and processing stages. For rare earths, the bottleneck is not the reserves themselves but the refining process, in which China holds an overwhelming comparative advantage. According to experts from the International Energy Agency (IEA) and the Jamestown Foundation, China controls about 80% of the key tiers of the hardware supply chain, including rare earth magnets and actuators for humanoid robots [14]. This signifies control over the entire vertical chain, from processing and refining to component manufacturing.
This comparative advantage does not erode easily because of the underlying economic incentive structure. Despite years of subsidies from the U.S. and Europe, the problem of capital outflow due to wage gaps and environmental regulatory arbitrage has not been resolved [3][6]. The refining process entails significant environmental costs, which China has absorbed through relatively low regulatory standards. For Western companies, it is still cheaper to use China's refining network even with subsidies. As long as this structure remains unchanged, it is difficult to reduce dependency through policy intervention alone.
A second root cause is that the U.S. tariff strategy was based on a structural miscalculation. Foreign Policy points out that the Trump administration "inexplicably failed to foresee" that Beijing would use the chokepoint of rare earths and magnets as a retaliatory tool against U.S. tariffs [20]. Washington based its negotiating power on its status as a trade-deficit country, but this was merely an accounting advantage and did not reflect the physical dependency relationships within the real-world supply chain.
2. Structural Context
Economic Structure: The Structural Ineffectiveness of Tariffs
The PIIE's value-added trade flow analysis reveals the core of this problem. Data through 2024 shows that tariffs on China have only changed the routes through which Chinese content reaches the United States, without significantly reducing real dependence [8]. A structure has become entrenched where Chinese parts and materials are indirectly imported into the U.S., embedded in goods from third countries. This means the policy tool of tariffs has virtually no effect on the upstream refining and processing stages of the supply chain. This creates an asymmetric structure where Washington can raise tariff rates, but Beijing's dominance in the refining network remains intact.
Political Structure: The Separation of Bureaucratic and Summit Diplomacy Tracks
Flashpoints in U.S.-China conflict emerge not only from the White House's summit diplomacy track but also at the level of individual regulatory agencies. A prime example is the accumulation of independent technology restrictions against China, such as the U.S. Federal Communications Commission's (FCC) review of a ban on optical transceivers [9]. This bureaucratic track is a structural factor that perpetuates localized friction regardless of summit outcomes. Conversely, on the rare earths issue, Beijing controls the pace of its response by "only partially fulfilling its obligations" on a matter that is entirely under government control [5]. This asymmetry—where the U.S. applies pressure from multiple, decentralized agencies while China controls the pace of implementation from a single window—tilts the rhythm of negotiations in Beijing's favor.
Security Structure: The Securitization of Resources
Since the supply disruptions of masks and pharmaceuticals during the early COVID-19 pandemic escalated into a concern over dependence on China, the scope of securitization has sequentially expanded to semiconductors, batteries, and rare earths [9][6]. In this process, rare earths were redefined from simple industrial materials to security assets directly linked to aerospace and defense. The case of yttrium, an element used in defense, where U.S. imports plummeted despite a promise to suspend export controls [17], suggests that China is using its rare earth supply not just as a tool for tariff retaliation but also as leverage in the security domain.
3. Historical Precedents and Comparative Cases
The most direct precedent is the tariff-rare earth confrontation of 2025 itself. Beijing countered Washington's high tariffs with strict export controls on rare earths and successfully forced a U.S. tariff rollback [4]. This successful experience led to a concrete outcome: the Busan Agreement. The core of the Busan Agreement was an exchange structure where the U.S. would adjust tariffs in return for China easing its export restrictions on rare earths and minerals [12]. In other words, the current negotiations to renew the Busan Agreement are not a new game, but a repetition of a previously tested method of leveraging power.
The political effect of this precedent extends beyond the negotiations. Foreign Affairs assesses that the experience of wielding the rare earth chokepoint "has boosted China’s confidence and made its policymakers and strategists less cautious in discussing competition in the U.S.-China relationship" [19]. This means that one successful exercise of leverage has had a learning effect, emboldening Beijing's stance in all subsequent negotiations.
An external case for comparison is the U.S. attempt to secure resources in Venezuela and Brazil. The U.S. signed an agreement securing access to about 20% of Venezuela's oil reserves, and in Brazil, USA Rare Earth, in which the U.S. government holds a stake, acquired local critical minerals producer Serra Verde [11]. While these are Washington's attempts to secure alternative supply sources to counter China's dominance in refining, the PIIE points out that this method is being carried out in a way that infringes on the sovereignty of the partner countries [11]. Such an approach may contribute to short-term resource acquisition, but it has the limitation of being unable to quickly replace the refining and processing infrastructure that China has built over decades.
4. Key Variables Shaping Future Developments
The first variable is the method of verifying implementation in the renewed Busan Agreement negotiations. A senior U.S. official has already publicly stated that Beijing's implementation of rare earth magnet supply "falls short of the standard" [16]. The future effectiveness of the agreement will depend on what metrics are used to verify implementation and what penalty clauses are linked to them.
The second variable is whether the conflict will escalate to AI hardware supply chains. Washington is adamant that it cannot abandon its national security export controls on advanced semiconductors, semiconductor manufacturing equipment, and software. In response, it is observed that Beijing will not give up its option of providing uncertain access to chokepoint items, including rare earths, critical minerals, and even active pharmaceutical ingredients (APIs) [13]. If a dynamic solidifies where both sides treat their respective chokepoints as bargaining chips, negotiations are likely to become protracted in the form of item-by-item package deals.
The third variable is the speed of securing alternative supply sources. The fact that the U.S. is rushing to secure offshore resources, even at the risk of sovereignty issues as seen in the Brazil and Venezuela cases [11], reflects an internal anxiety in Washington that reducing dependence on China is taking longer than expected. The sooner these alternative sources translate into actual production capacity, the more Beijing's negotiating power will be relatively diminished.
The fourth variable is the alignment between the summit and bureaucratic tracks. The fact that actions against China by individual regulatory agencies like the FCC are accumulating separately from the agreements reached at summits [9] leaves open the possibility of friction re-igniting at the working level, even if an agreement is reached between the leaders in Washington and Beijing. The key will be at what point Beijing's so-far restrained retaliatory stance crosses a critical threshold.
III. Final Policy Recommendations
China's Emerging Rare Earth and Critical Mineral Leverage in U.S.-China Trade Negotiations: Comprehensive Policy Recommendations
1. Overall Assessment and Recommended Actions
The essence of the current situation is the disconnect between the accounting metric of tariffs and the physical reality of refining and processing supply chains. Washington based its negotiating advantage on its status as a trade-deficit country [1]. However, Beijing is exercising real negotiating power by controlling the pace of implementation for its rare earth magnet supply [16][5]. PIIE analysis shows with data that years of tariffs on China have failed to reduce actual dependence [8]. This asymmetry is not an issue that will be resolved in the short term.
The implications for South Korean companies and the government are twofold. The assessment that China's dominance in the refining network will not be significantly shaken in the next 3-5 years aligns with the assessments of previous EAI reports [3][6]. At the same time, a parallel trend is the strengthening of the U.S. principle of prioritizing allocation to domestic firms in the defense and aerospace sectors [6]. The United States is also attempting to directly secure critical mineral assets in allied countries, as seen in the acquisition of Brazil's Serra Verde [11]. The fact that these two trends—continued dependence on China's refining network and the U.S. reorganization of security-linked supply chains—are proceeding simultaneously defines South Korea's strategic position.
The recommended course of action is as follows. A dual strategy should be maintained: continue to utilize China's refining network for the time being, while simultaneously pursuing entry into U.S. security-linked supply chains [6]. However, the scale of equity investments should be limited to a level that can absorb policy volatility [6]. The detailed provisions of the renewed Busan Agreement, especially the export implementation status of specific items like yttrium, must be tracked separately [17]. This is because friction is highly likely to recur during the implementation phase rather than in the agreement itself.
2. Short-, Medium-, and Long-Term Action Plan
Short-term (3-6 months): The outcomes of the renewed Busan Agreement negotiations should be disaggregated and monitored on an item-by-item basis. In particular, it is necessary to track actual export statistics for items related to aerospace and defense, such as yttrium and rare earth magnets [17]. Whether the U.S.-China Trade Committee is established and the scope of its jurisdiction are also points to verify [10]. Domestic semiconductor, battery, and finished automobile companies should review the maturity structure of their current raw material procurement contracts and re-examine buffer clauses to ensure that alternative supply lines can be activated immediately in the event of a supply disruption.
Medium-term (1–2 years): In the defense and aerospace materials sectors, where the U.S. principle of prioritizing domestic firms is taking shape, South Korea should pursue exemptions through the ROK-U.S. supply chain consultation channel[6]. Concurrently, efforts should be made to secure alternative procurement sources to reduce dependence on China's refining networks; this strategy should be designed for risk diversification rather than complete replacement. The ripple effects on the semiconductor supply chain from localized frictions on the bureaucratic track, such as the FCC's regulations on optical transceivers, must also be managed separately[9].
Long-term (3–5+ years): On the premise that China's comparative advantage in refining and processing is based on structural factors like wage gaps and regulatory arbitrage on environmental standards[3], investments to secure domestic refining capacity should be designed as long-term projects linked to government financial support. The inability of private capital alone to bear this cost differential was a key reason for past policy failures[6]. The government must simultaneously pursue fiscal planning to close this gap and secure tangible benefits through bilateral channels with allied nations such as the United States, Japan, and Australia.
3. Monitoring Indicators and Trigger Points
First, monthly fluctuations in export statistics to the United States for each rare earth and magnet item must be tracked. Recurring sharp declines in specific items should be interpreted as a signal that Beijing is intentionally controlling the pace of implementation[17].
Second, it is necessary to confirm whether the U.S.-China trade commission is actually established and to ascertain its scope of authority[10]. If this body is granted substantive power, a path toward tariff relief will open up. However, if it remains a purely formal entity, the dynamic of applying pressure via chokepoints will persist.
Third, individual actions by U.S. regulatory agencies, especially the accumulating trend of technology regulations against China by the FCC, must be monitored separately[9]. This bureaucratic track operates independently of summit outcomes and thus serves as a potential trigger for the recurrence of localized friction even after a summit agreement is reached.
Fourth, it is necessary to monitor for additional transactions similar to U.S. acquisitions of critical mineral assets in allied and partner nations, such as deals involving Venezuelan oil or Brazil's Serra Verde[11]. Such developments would signal a U.S. shift from a market-based approach to a strategy of direct asset acquisition, which could in turn affect the negotiating position of South Korean companies.
Fifth, it is important to monitor whether the U.S. side officially reaffirms its assessment of Beijing's "partial implementation"[5][16]. If this assessment is repeated or reinforced, it could raise questions about the very effectiveness of the summit agreement.
4. Summary and Conclusion
This current phase reveals a disconnect between the accounting variable of tariffs and the physical variables of refining and processing. While Washington's negotiating confidence was rooted in its status as a trade-deficit nation[1], the actual rhythm of the negotiations is being dictated by the pace at which Beijing implements its commitments on rare earth magnet supplies[16]. The PIIE's value-added trade analysis confirms with data that years of tariffs have failed to alter this underlying structure[8].
South Korea's response must be a dual strategy, not a single-track approach. It should continue to utilize China's refining networks for the time being while simultaneously pursuing entry into U.S. security-linked supply chains, managing the scale of investment to a level that can absorb policy volatility[6]. The most realistic approach currently available is to maintain a scenario-independent response framework using three distinct triggers: the item-specific implementation status of the renewed Busan Agreement negotiations, the substantive authority of the U.S.-China trade commission, and the accumulation of individual actions by U.S. regulatory agencies.
References
[1] [Foreign Affairs] China Still Has What America Needs
[2] [PIIE (Peterson Institute for International Economics)] China Still Has What America Needs
[4] [Bangkok Post] China confirms Xi to visit US this week for Trump talks
[5] [Brookings Institution] Why Beijing isn’t taking the bait with Trump
[7] [DigiTimes Asia] Trade, AI, rare earths, and Iran shape Xi-Trump 2.0 talks
[10] [South China Morning Post] US announces AI dialogue with China, launches Board of Trade
[12] [Wired] AI, Tariffs, Rare Minerals: What to Expect From Trump’s Upcoming Summit With Xi Jinping
[14] [Business Times (SG)] The tough AI questions looming over the Trump-Xi summit
[15] [Daily Sabah] Top US, Chinese officials set for AI, trade, minerals talks
[16] [Al Jazeera] US proposes AI safety notification mechanism in talks with China
[17] [The Diplomat] 4 Fault Lines that Could Shape the Trump-Xi Summit
[19] [Foreign Affairs] The Emerging U.S.-China Détente
[20] [Foreign Policy] China, Not Iran, Is Trump’s Real Foreign-Policy Debacle
[23] [Business Times (SG)] Xi rolls into Trump summit with China’s trade engine roaring
[25] [DW (Deutsche Welle)] As US and China talk, middle powers jostle for position
*This text is an AI translation of an original written in Korean. Some translations or nuances may be inaccurate.
This report is an in-depth analysis planned by an EAI researcher, grounded in sophisticated AI-assisted research, and finalized by the EAI researcher.
How can I help you?