The conflict between the American and Chinese governments about the restriction of exports—rare earths in one direction and other goods in the other direction—has been branded a new “supply chain” trade war. The Wall Street Journal wrote (“Supply Chains Become New Battleground in the Global Trade War,” June 11, 2025):
A key lesson from the latest skirmish in the U.S.-China trade war: The era of weaponized supply chains has arrived.
Weaponization is what governments do when they intervene in the affairs of others. Not only do they weaponize trade against foreign rulers, but tariffs and other trade barriers are a weapon for a government to favor some domestic producers against domestic consumers, as well as against other domestic producers.
The conflict over exports marks a return to the 17th and 18th centuries. National governments frequently restricted not only foreign imports but also foreign exports. Grain exports were banned when bad harvests caused prices to rise or government price controls caused shortages. In France, even grain movements between regions were controlled. As I explained in a previous post, the British government once forbade the exportation of some machinery to prevent foreign textile manufacturers from competing with domestic manufacturers. It also tried to prevent the emigration of specialized workers familiar with these machines. Embargoes were weapons of war.
As economists have quipped, protectionism is what we do to ourselves that is done by foreign enemies in time of war. Of course, the “what we do to ourselves” must be read as “what some of us do to others among us.”
Rare earths are chemical elements found in minerals and used in the fabrication of magnets and many high-tech products with both civilian and military use, as is true of many goods. Restricting or blocking their exportation from China would increase their prices in the rest of the world and thus reduce their use to their next most valuable ones. For example, the price of dysprosium more than doubled in the past two months. People not familiar with economics often ignore the role of prices in avoiding shortages. Note also that substitutes virtually always exist, but the less perfect a substitute is, the less efficient or more costly its use will be (see my post “War and the Economic Concept of Substitution”). Moreover, 30% of the rare earths are located outside China, including in the US. It is true that nine-tenths of their processing is concentrated in China and new plants take time to build, but at least one private company is already planning one in the US—an argument made by Don Boudreaux (see also “Rare-Earths Plants Are Popping Up Outside China,” Wall Street Journal, May 18, 2025).
In the current situation, the US government, in the person of Donald Trump, launched a trade war. As the Chinese government retaliated, the US government further increased the tariffs on goods imported from China. In mid-May, a meeting of the two governments’ representatives in Geneva partially rolled back tariffs and paused the cycle of retaliation. But the Chinese government later limited the export of rare earths while the US government intensified its export controls on chips and on education (by limiting Chinese student visas in America). On June 5, Mr. Trump, who had waited in vain for a submissive call from Mr. Xi and lied about receiving one, finally blinked and phoned him.
A two-day meeting between cabinet-level aides of the two camps followed last week in London. The two delegations agreed on an unpublished “framework” to revert to the Geneva agreement. In exchange for the Chinese government temporarily easing its restrictions on rare-earth and magnet exports to America, the Trump administration proposed to relax its own restrictions on the sale of jet engines and ethane as well as on Chinese student visas (“Trump Has No China Trade Strategy,” Wall Street Journal, June 11, 2025). But, as the editorial says, “details are few.”
After once declaring pompously that “trade wars are good, and easy to win,” the ruler of a great national collective more or less begged the ruler of another large collective to please let us import what we need! Since collective rulers, in their grandeur, don’t like to beg, threats are never far behind their deals. “I will forbid my subjects to import from and export to yours,” can morph into “I will get from you what I want.”
Looking at all that from the point of view of the ruled instead of the rulers, which is what we should do, the liberty of individuals and their private organizations to trade is a necessary condition for prosperity, peace, and security.
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Yahoo! Back to the Seventeenth Century, by Pierre Lemieux and ChatGPT
READER COMMENTS
steve
Jun 15 2025 at 12:45pm
Someone recently had a debate with some pro-tariff advocates. They opposed tariffs but came to the conclusion that maybe it was worth it to some people to incur higher costs and lower growth rates if they could have tariffs. However, the pro-tariff people just didnt believe that there could be any costs or downsides to tariffs. It appears that there is a sizable group of people who think trade wars are easy to win (with no basis other than total faith in Trump AFAICT) and that there truly are no costs to tariffs. I have no idea how you discuss the topic with them.
Steve
Pierre Lemieux
Jun 15 2025 at 3:56pm
Steve: You write:
This is a real problem. It seems to me that there has been a race between popular knowledge and mob rule (unlimited democracy), in the sense that you cannot have both. It seems that mob rule is winning the race. Perhaps one can even replace “mob rule” with the millennia-long submission of mankind to Trump-like tribal chiefs, strongmen, or kings. Public schooling was often deemed necessary for democracy, even a limited democracy. Why a few centuries of schooling and education have not contributed more to popular knowledge in this sense is a pregnant question.
vikingvista
Jun 16 2025 at 12:08am
I think what you mean, is that they don’t believe there is a cost to pay by the country levying the tariffs. They must believe that there is a cost to pay by the foreign country, since that is their whole point. And it is pretty hard to deny that a tax is a cost to someone.
One way to argue with them is with tax incidence analysis. IA destroys a lot of common tax arguments from the “targeted tax cut” arguments on the right to the “tax the rich” arguments on the left. In spite of how conceptually easy IA is, most people simply avoid it so they can proceed with their tribal rhetoric.
But Tariff defenders are different. They depend on IA for their argument, since, e.g., the US is incapable of levying taxes on nonresident foreign nationals. All tariffs levied by the US government must be levied directly on US residents or expats. So for any cost of that tax to be felt by the foreign trader, incidence analysis must be assumed.
Then you ask them, “If two *domestic* traders share various portions of a tax depending upon widely varing price elasticities, what is the mechanism whereby imposing a political border between traders suddenly makes one perfectly inelastic, and the other perfectly elastic regardless of the entity being traded, and depending only upon the nationalities of the traders?”
There is no nonsilly answer. So hopefully they are forced to concede at least *some* immediate cost to both traders.
Craig
Jun 15 2025 at 1:55pm
“It appears that there is a sizable group of people who think trade wars are easy to win”
Depends on the goal, I suppose. I mean if Trump said, “Our tariff is whatever you want your highest tariff to be” I think that would result in 0 for 0 quickly, but he doesn’t seem to want zero.
vikingvista
Jun 16 2025 at 12:25am
Tariffs are always a function of intense special interests gaining at the collective expense of the levying country. This is true in China as in the US. Governments everywhere, democratic or not, are largely run by special interests. So a tit-for-tat tariff regime would be highly stable, and very costly.
This is why the whole postwar bipartisan and international freer trade movement was so difficult, so unlikely, so complicated, and so impure. It required somehow appeasing countless special interests around the world in nonprotectionist ways. That’s also why it is such a shame that one man could bring it, possibly permanently, to a sudden end.
Craig
Jun 15 2025 at 2:07pm
“Restricting or blocking their exportation from China would increase their prices in the rest of the world and thus reduce their use to their next most valuable ones.”
On the one hand Ford CEO Farley notes that Chinese EV makers are an exitential threat to Ford’s business. https://247wallst.com/cars-and-drivers/2025/06/12/ford-ceo-jim-farley-says-china-is-existential-threat/
Meanwhile apparently Ford also needs rare earths out of China without which it might need to shutter factories: https://www.cbsnews.com/news/ford-ceo-china-rare-earth-shortage-car-production/
China found a leverage point/pressure point.
David Seltzer
Jun 15 2025 at 6:12pm
Craig said “China found a leverage point/pressure point.” I like your comment. Re tariffs and protectionist policies; what political authoritarians do to others of us, our enemies would do to us in war.
Pierre Lemieux
Jun 16 2025 at 11:07am
Craig: I would replace your last sentence by, “Xi chose a good strategy to promote his personal self-interest.”
Lye Siew Kuan
Jun 15 2025 at 11:10pm
Powerful trading nations will used all kind of tactics when its back is against the wall when trading with China. Currently it is tariff which is less unethical because there was a time in the 1800s, when opium was used .
Pierre Lemieux
Jun 16 2025 at 11:18am
Lye: Welcome to EconLog. Regarding your first sentence, one sees these things differently when one realizes that “nations” do not trade; only individuals and their organizations trade. (What are the pronouns of a nation? Its? his? her? I for one have never seen the back of a nation.) And when rulers interfere in trade or bargain themselves, it is still individuals or organizations (in the Hayekian sense) of individuals who trade.
Mactoul
Jun 16 2025 at 12:09am
Not everything depends upon America and Trump. China has generally restricted export of rare earths. Indian EV industry is experiencing shortages of rare earth magnets though India is not involved in any trade war with China.
You should also note that EU is also attempting to decouple from China and has imposed tariffs in Chinese EVs.
Embargo is quite a different thing from protection. It is a facet of war. You might say that economic efficiency is against war but so what? There is no alternative to war because land is the ultimate scarce resource and who gets to possess land is not decidable by trade but only by war.
Pierre Lemieux
Jun 16 2025 at 10:59am
Mactoul: What do you mean by “efficiency”? With due respect, your last sentence looks more like a random alignment of words that feels nice in the zeitgeist. As a hint, you may want to read Julian Simon’s 1981 book The Ultimate Resource.
Pierre Lemieux
Jun 16 2025 at 11:27am
Mactoul: But you did inspire me to devote a whole post to the concept of efficiency. Thanks for that, I’ll try to do it. (Of course, the harvest is plentiful and the laborers are few.)
Mactoul
Jun 17 2025 at 12:27am
What are they fighting over in Ukraine, Gaza, Kashmir and elsewhere, if not for land?
Jon Murphy
Jun 16 2025 at 12:18pm
As a literal statement, this is not true. Possession of land changes all the time without war. It’s called “buying property.” My colleague and I are concluding a deal where I take possession and ownership of some of his land and property in exchange for dollars. He will, in turn, take those dollars and use them to exchange possession of someone else’s land. These sorts of peaceful change in possessions of land happen millions of times a year in America alone.
Furthermore, historically, humans have been very good about creating more land. We build up (skyscrapers, for example) or out (like filling in Boston’s Back Bay or Dubai’s artifical islands). Land, rather than being “the ultimate scarce resource” is fairly easy to create.
If your hypothesis is true then it leads to an awkward question: why is war so rare?
vikingvista
Jun 16 2025 at 3:44pm
Land cannot be brought or sold?
Mactoul
Jun 17 2025 at 12:25am
Buying and selling are only possible when your country possesses the land in the first place, uniformly as a consequence of victory in a war.
Student of Liberty
Jun 16 2025 at 10:15am
I am pretty sure he did not dial himself, someone next door to the oval office must have called Xi and, once they got somebody from Beijing on the line, the phone rang on the desk of Donald Trump so that it feels as if Xi called him…
Pierre Lemieux
Jun 16 2025 at 10:51am
Student: Your scenario is indeed what nearly certainly happened. But I don’t think it contradicts what I said. First, my link under “lied” refers to the time, around April 25, when Trump falsely claimed that he had talked with Xi on the phone after the latter phoned him. Secondly and more generally, and relating either to who placed the call in early June or (say) whether Haitians in Springfield ate American pets, somebody who consciously only echoes the soundbites of the minions he rewards for lying is himself lying.