How America and China spooked each other
As officials meet in London, the costs of their trade war are now abundantly clear
Officials from America and China met for the latest round of trade talks, starting on June 9th, in Lancaster House, a neoclassical mansion near Buckingham Palace. It was commissioned in 1825 by the “Grand Old" Duke of York, whose military manoeuvres have been immortalised in a children’s song. A fitting venue, then, for a trade war of escalations and climbdowns.
The aim of the talks is modest. America wants to restore the truce it thought it had secured a month ago in Geneva. In particular, it wants China to ease controls on rare-earth exports, and the magnets that contain them. The discussions are “going well...we’re spending lots of time together", said Howard Lutnick, America’s commerce secretary, on June 10th. But even if peace is restored, things will not be quite the same. To invoke a Chinese expression, not all the water spilled in the past few weeks can be returned to the pot.
China’s officials will have gained new confidence in their economic clout and grit. The London meeting represents the second time in two months that the world’s pre-eminent superpower has come asking for help. In Geneva the Americans needed China to cut its tariffs in tandem with theirs, allowing both economies to step back from the precipice. In London they are asking China to make good on its promise to “suspend or remove" restrictions on rare earths, alleviating a supply-chain crunch most glaring in carmaking. This asymmetry of neediness extends even to the two countries’ leaders. The London meeting follows a call between President Donald Trump and his opposite number, Xi Jinping, on June 5th—their first since Mr Trump’s inauguration. It was, Mr Trump said, a “very good" call. But it was also one Mr Xi seemed in no hurry to take.
This was not how America imagined the trade war. After Mr Trump unveiled sweeping tariffs on April 2nd, he said countries were “kissing his ass" to make trade deals. China took a different approach, matching his tariffs tit-for-tat. China’s leaders showed they were prepared to take risks with their own economy in order to defy Mr Trump. Although their retaliatory tariffs did not hurt America much in themselves, they provoked Mr Trump into a wild cycle of escalation that threatened economic agony for both countries. America decided it could not live with the self-inflicted pain, sparing China, too.
Before April many economists had assumed that if Mr Trump followed through on his tariff threats, China’s exports would collapse and its currency plunge. Sales to America did indeed drop sharply in April and May, falling by 28% in the two months combined, compared with the same period of 2024. But exports have risen by 6% overall, owing to increased shipments to Europe and South-East Asia. China’s currency, meanwhile, is stronger now against the dollar than it was before April 2nd.
As well as showing China’s defiance, and Mr Trump’s limited tolerance for pain, recent events have demonstrated one of China’s most potent economic weapons. In April it imposed export restrictions on seven rare earths, such as terbium and dysprosium, which help keep the magnets used in electric-vehicle engines and wind turbines working at high temperatures.
The interruption has caused alarm. In late May Ford idled a plant in Chicago that makes sport-utility vehicles. The Motor & Equipment Manufacturers Association, a lobby group, has warned of broader disruption. It contributed to a joint letter highlighting that a lack of access to these elements and magnets would hamper production of a multitude of car parts.
Such complaints show that China has a potent chokehold over America. This was already known within industry circles, but perhaps not fully appreciated in the Oval Office. The past two months amount to a “weapons test", showing the power of China’s instruments of economic coercion.
After Geneva, the Americans may have hoped that China would remove its restrictions altogether. Instead, the government began reviewing applications for licences to sell the products to approved buyers. The process, however, is slow and opaque. It is overseen by an understaffed ministry buried beneath an avalanche of applications. The delays have angered American officials. “Maybe it’s a glitch in the Chinese system," said Scott Bessent, America’s treasury secretary, “maybe it’s intentional." Mr Trump is less equivocal. China “has totally violated its agreement with us", he has written on his social-media platform.
There is not much America can do to ease China’s grip in the short term, since building an alternative supply chain could take at least three years and would still not meet all America’s needs. Sometimes the best way to escape a chokehold is to establish one of your own. America has several options. In the past month officials have warned firms making chip-design software not to sell to China. They said they would revoke the visas of Chinese students in America. They also stopped the sale of inputs essential to China’s homegrown passenger jet. America will presumably ease these if China expedites rare-earth approvals.
The trade war has not proceeded as Mr Trump envisaged. Neither America nor China is in a position to rout its economic adversary. Each remains dependent on the other, albeit in different ways. That reality, always clear to China, should now be obvious to both sides. Neither of them will achieve a decisive victory; nor will they disarm. More likely they will keep mobilising and demobilising their economic arsenals to keep the other in check. It is a pattern the old Duke of York might recognise.
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