China’s rare-earth escalation threatens trade talks—and the global economy

China’s newest restrictions on rare-earth materials would mark a nearly unprecedented export control that stands to disrupt the global economy, giving Beijing more leverage in trade negotiations and ratcheting up pressure on the Trump administration to respond.

The rule, put out Thursday by China’s Commerce Ministry, is viewed as an escalation in the U.S.-China trade fight because it threatens the supply chain for semiconductors. Chips are the lifeblood of the economy, powering phones, computers and data centers needed to train artificial-intelligence models. The rule also would affect cars, solar panels and the equipment for making chips and other products, limiting the ability of other countries to support their own industries. China produces roughly 90% of the world’s rare-earth materials.

Global companies that sell goods with certain rare-earth materials sourced from China accounting for 0.1% or more of the product’s value would need permission from Beijing, under the new rule. Tech companies will probably find it extremely difficult to show that their chips, the equipment needed to make them and other components fall below the 0.1% threshold, industry experts said.

“These rare-earth minerals and the ability to refine them are just the basis of modern civilization," said Dean Ball, who recently left his White House role as an AI policy adviser to become a senior fellow at the Foundation for American Innovation, a think tank. He added that the rules could cause a U.S. recession if implemented aggressively because of how important AI capital spending is to the economy.

The U.S. and other countries are pouring hundreds of billions of dollars into data centers, making AI a key economic engine. China gaining control of the technology would potentially let it catch up in the AI race and upend the world order, experts said.

“It’s an economic equivalent of nuclear war—an intent to destroy the American AI industry," said Dmitri Alperovitch, co-founder of the Silverado Policy Accelerator think tank. He called it a “blackmail tactic" ahead of a potential meeting between President Trump and Chinese leader Xi Jinping in South Korea in the coming weeks to continue trade talks and didn’t think China will follow through on fully implementing the rule.

A rare-earths production site in China, in 2010.

Trump said at a cabinet meeting that Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick would figure out how to respond. “We import from China massive amounts and maybe we will have to stop doing that," Trump said. The rules were announced without notice to the U.S., and appear to be an effort to control the world’s technology supply chains, a White House official said.

China has used rare earths to gain leverage in trade talks throughout the year. Restrictions in April sent shock waves through supply chains, helping lead to a trade truce announced in June.

Former administration officials and experts suggested the U.S. could respond by adding to its tariff regimen, cutting China off from Western semiconductor manufacturing equipment and accelerating efforts to build out domestic rare-earths capacity. Some analysts expect Trump to hit back hard.

The U.S. levies are now in the range of 30% to 50% on Chinese imports—higher than the levels negotiated with Vietnam, Japan and Indonesia. China’s average tariffs on U.S. exports are at around 33%.

While positioned as retaliation for recent U.S. export-control actions targeting Chinese tech companies, Beijing’s decision is a calculated power play, according to people familiar with the Chinese government’s decision-making process. China is trying to strengthen its leverage over Trump—whom it sees as eager to strike a deal—in a bid to extract concessions on tariffs and tech controls, the people said.

During the last round of negotiations with senior American officials in Madrid last month, China’s chief trade negotiator, Vice Premier He Lifeng, asked for the full removal of tariffs and export controls, The Wall Street Journal has reported. The latest rare-earth action, the people said, is a tactic aimed at achieving that goal.

The action, the people noted, is part of a pattern of China responding to what it perceives as feeble actions from Washington with disproportionately strong moves.

The new rules also cover goods that could be used for military purposes. They would expand on previous restrictions on rare-earth metals and related products that have already hit companies around the world.

Beijing sees President Trump, listening to Secretary of State Marco Rubio, as keen for a trade deal with China.

The semiconductor supply chain is vulnerable to actions like China’s because large chip plants require big capital investments from an ecosystem of companies providing specialized equipment, intricate technical processes and final packaging. Companies in the U.S., Taiwan, Japan and the Netherlands all collaborate with one another.

The Trump and Biden administrations have offered subsidies and other policies to aid the process, but domestic capacity generally remains in its infancy.

Some analysts said the new rules will fuel new urgency for big tech companies to invest more in these areas.

“This is a real vulnerability for U.S. AI companies," said Joseph Hoefer, chief AI officer at lobbying firm Monument Advocacy, which represents tech companies.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com and Lingling Wei at Lingling.Wei@wsj.com