Trade, Covid, rare earths and a real danger of global recession

China has prepared for a confrontation with the United States that ultimately could lead to a global financial collapse. The US appears not to have prepared, and perhaps Washington doesn’t have a Plan B other than talks.

America has upended its system and network of alliances and irritated allies and trading partners. It is surrounded by an unprecedented distrust not seen in at least 35 years. Taking advantage of this condition of relative US weakness, China has unleashed a preventive counteroffensive with sanctions on rare earth elements, backing America into a corner.

America has potential counter-countermeasures – but they are highly escalatory ones such as removing air traffic control services, which could be tantamount to an act of war by cutting off civil air traffic to and from China.

Other possible responsive measures would be largely ineffective. For example, if the supply of sophisticated chips for smartphones is cut off, those chips can be replaced by less efficient but ultimately still effective ones.

China’s rare earth elements sanctions are, conversely, effective, threatening to crash the markets and trigger a global recession immediately. Thus, they pit the markets against US President Donald Trump. In China, President Xi Jinping has full control over the markets, which are largely unhinged from the real economy, and politics is indifferent to market reactions.

For China, in many ways, the 2020 Covid pandemic was like a dress rehearsal for a state of war. Covid proved that, if the Chinese feel under threat, they adapt quickly and follow the government, trusting its good judgment. Anti-Covid measures worked even when Shanghai was in an almost besieged situation in 2022.

They only stopped working when, in Beijing, next to the center of power, people felt that such measures were no longer serving any purpose, given that the rest of the world was largely recovered from Covid. Then the country accepted a massive wave of infections and deaths – something that we still don’t fully understand today.

Indeed, a second “Chinese lockdown” today might be harder for the population to swallow.

Or it might not be.

Chinese people read in the domestic and foreign press that there is war in Europe and the Middle East, the United States is split and under the thumb of a tyrannical and unreasonable president who is oblivious of the democratic ideals that once charmed and seduced ordinary Chinese. So, they feel and they may continue to feel, that their government protects them best.

From a Chinese perspective, what should China do to confront the threat of high American tariffs undercutting its exports? If it waits and doesn’t move, it risks death by a thousand cuts because the United States wants to reduce China’s trade surplus, which is currently the only effective driver of the troubled Chinese economy.

That logic leads to a harsh and pure confrontation, with a series of measures that could cause the global markets to collapse.

While China is prepared for a collapse of the worldwide markets thanks to its general rehearsal with Covid, the United States and the world are not prepared. Indeed, Trump’s first administration was in denial about the need for anti-Covid measures as it vainly attempted to support the markets. In the end, Trump had to bow to reality and introduce restrictions. He still lost the election.

Apparently, China slipped many cards up its sleeve in advance of its faceoff with the United States. The US, conversely, prepared only for a straightforward trade negotiation. Treasury Secretary Scott Bessent speaks about it.

But for China, it’s a matter of national security. That is, if the US were to take things properly, National Security Advisor/Secretary of State Marco Rubio should address it. But if the US makes that switch it can shake the markets, signaling an escalation of tension. If it doesn’t, it’ll be like going with a knife to a gun fight.

From Beijing’s point of view, it seems that Washington entered this confrontation without a real carrot or a stick to hold out to Beijing, without an effective incentive or disincentive.

The US, then, is in a vise. There is no simple trick for getting out of it.

Trump needs a plan, but does he want it? China bets he doesn’t and thus drives a hard bargain; so far, that has proved the successful course. The bets are that, after a lot of huffing and puffing, the US will fold. It doesn’t have instruments ready, and it will take at least a few years for the US to replace Chinese rare earths elements. Meanwhile, China will have gained time. And in a couple of years it will be in a different situation, anyway.

Still, it’s not the end of the story. The Netherlands government has just nationalized the Chinese tech company Nexperia due to security concerns. About 60 years ago, many developing countries followed a similar path when they nationalized assets from former colonial powers. All Chinese assets abroad could now be at risk. Moreover, more voices are calling for a concerted global response to Chinese rare earths sanctions.

Even if the US folds, something is unfolding rapidly around China and it could become very complicated very soon.

Francesco Sisci is the director of Appia Institute, which first published this article. It is republished with permission.