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U.S. and China reach rare trade deal easing export curbs on tech and minerals

In a significant diplomatic development, U.S. and Chinese officials announced a framework deal in London on Tuesday, aimed at easing their protracted trade tensions. The agreement, forged after two days of intensive negotiations, promises to remove China’s recent export restrictions on crucial rare earths and magnets, reciprocated by the U.S. lifting some of its own export controls on high-tech goods. This tentative accord is seen as a vital step to get their fragile trade truce back on track, offering a glimmer of hope amidst a period of profound global economic uncertainty.

U.S. Commerce Secretary Howard Lutnick, a seasoned financier known for rebuilding Cantor Fitzgerald after the September 11 attacks, told reporters that the framework deal “puts meat on the bones” of a previous agreement reached last month in Geneva. That earlier consensus had aimed to ease bilateral retaliatory tariffs that had spiraled into crushing triple-digit levels, severely disrupting supply chains and inflicting considerable costs on businesses worldwide. However, the Geneva accord had faltered over China’s continued restrictions on critical minerals, prompting a swift response from the Trump administration with its own export controls on sensitive goods like semiconductor design software and aircraft components.

Now, with both sides set to present this new framework to their respective presidents for approval, the world watches with bated breath. As Lutnick stated, “And if that is approved, we will then implement the framework.” China’s Vice Commerce Minister Li Chenggang, a career diplomat and seasoned trade negotiator who assumed his current role in April 2025, echoed this sentiment in a separate briefing, confirming that a trade framework had been reached in principle.

The Unraveling of the Truce: A History of Economic Friction

To truly appreciate the significance of this latest development, one must look back at the origins of the US-China trade war, a conflict that has reshaped global commerce over the past few years. It officially began in January 2018 when then-President Donald Trump initiated imposing tariffs and other trade barriers on Chinese goods. The stated aim was to force China to address what the U.S. perceived as longstanding unfair trade practices, including intellectual property theft, forced technology transfers, state subsidies to domestic industries, and a persistent trade deficit.

Beijing swiftly retaliated with tariffs on U.S. products, sparking a tit-for-tat escalation that saw duties reach unprecedented levels. These tariffs weren’t just theoretical numbers; they translated into real pain for businesses and consumers. American companies relying on Chinese imports faced sharply increased costs, which were often passed on to consumers, leading to higher prices for everything from electronics to clothing. Conversely, Chinese exporters saw their sales to the U.S. plummet, impacting production and employment. The global supply chain, a finely tuned network built on decades of increasing interdependence, began to fray. Businesses that once relied on just-in-time inventory models found themselves grappling with delays and the urgent need to diversify their sourcing away from China, often at significant additional expense.

The Geneva Accord: A Glimmer of Hope That Faltered

Earlier in 2025, a seemingly hopeful agreement was reached in Geneva. Both the U.S. and China committed to lowering certain tariffs by 115% while retaining an additional 10% tariff, a move aimed at de-escalating the costly trade war. This was presented as a significant step towards restoring balance and predictability to the bilateral economic relationship.

However, the fragile nature of this truce quickly became apparent. The Geneva deal faltered when China maintained its restrictive export policies on critical minerals, particularly rare earths. This move, perceived by the U.S. as a violation of the spirit of the agreement, prompted a swift and decisive response from the Trump administration. In May, the U.S. announced its own export controls, revoking previously issued licenses for shipments of vital technology to China. This included sensitive items such as semiconductor design software, chemicals crucial for chip manufacturing, and aviation equipment. This escalation underscored the deep-seated mistrust and strategic competition that continued to simmer beneath the surface of diplomatic talks.

London Breakthrough: “Meat on the Bones” of a Truce

The London negotiations were thus critical, serving as a second attempt to solidify a working truce. The breakthrough largely hinged on the highly strategic issue of rare earth minerals and semiconductor technology.

Rare Earths: The Silent Engines of Modernity

Rare earth elements are not “rare” in their geological abundance, but rather in their concentrated, economically extractable deposits. More importantly, they are incredibly difficult and environmentally intensive to process. These 17 elements are indispensable for nearly every piece of modern technology we use today. From the vibrant screens of our smartphones to the precision-guided missiles that underpin national defense, rare earths are foundational. They are critical components in:

  • Electric Vehicle (EV) Motors: High-performance electric motors, essential for the booming EV market, rely heavily on powerful rare earth magnets, particularly neodymium-iron-boron (NdFeB) magnets.
  • Consumer Electronics: Components in laptops, tablets, and advanced cameras utilize rare earths for their unique magnetic and optical properties.
  • Wind Turbines: These clean energy behemoths use rare earth magnets to generate electricity efficiently.
  • Advanced Military Equipment: Fighter jets, drones, precision-guided munitions, and nuclear facilities all depend on these minerals for their sophisticated systems.

China holds a near-monopoly on the mining, processing, and supply of rare earth elements, controlling over 80% of the global supply in some instances. This dominance gives Beijing immense leverage in global supply chains. China’s decision in April to suspend exports of a wide range of critical minerals and magnets, including those crucial for EVs, sent shockwaves through global industries. Automotive executives, in particular, voiced dire warnings, with one anonymously stating that “We’re about 60 days away from having to shut down EV production lines if the rare earth magnet situation isn’t resolved.” The impact was immediate, prompting European manufacturers to report production disruptions and Japanese electronics firms to scramble for contingency plans.

Semiconductor Design Software and Aviation Equipment: Choke Points in the Tech Race

In response to China’s rare earth curbs, the U.S. strategically targeted its own technological “choke points.” This included halting shipments of sophisticated semiconductor design software (EDA tools), specialty chemicals for chip manufacturing, and aviation components. These tools are absolutely vital for China’s ambitious goals in developing its domestic chip industry and modernizing its aerospace sector. U.S. companies like Cadence Design Systems and Synopsys are dominant in the EDA software market, making their tools indispensable for designing cutting-edge chips. The suspension of existing export licenses and imposition of new licensing requirements were a direct hit, aiming to slow China’s technological advancement in these critical areas.

The London agreement, according to Lutnick, would remove restrictions on Chinese rare earth exports and some of the recent U.S. export restrictions “in a balanced way.” While details remain sparse, the implication is a mutual de-escalation of export controls on strategically important goods, demonstrating a willingness to address immediate points of friction.

The Global Economic Fallout: A Shadow Over Prosperity

The US-China trade war has not been a contained bilateral skirmish; its repercussions have rippled across the entire global economy, creating a shadow of uncertainty and hindering growth.

World Bank’s Grim Forecast

The World Bank on Tuesday underscored this stark reality by slashing its global growth forecast for 2025 by four-tenths of a percentage point, from an earlier estimate of 2.7% down to a mere 2.3%. This projection marks the weakest pace of growth, excluding periods of recession, since the 2008 global financial crisis. In its latest Global Economic Prospects report, the World Bank explicitly cited escalating international trade tensions and policy uncertainty as the primary culprits behind this downturn.

The impact is far-reaching: approximately 70% of countries across all regions and income levels are projected to experience a decline in growth. Developing nations are particularly vulnerable, with about 60% of these economies forecast to slow, and average growth estimated at just 3.8% in 2025. This deceleration poses a significant threat to efforts to create employment, reduce extreme poverty, and narrow the income gap with advanced economies. Income per capita growth in these countries is expected to be a meager 2.9%, well below the pre-pandemic average.

Industry Disruptions and Supply Chain Reckoning

The trade war has inflicted significant financial damage, costing companies tens of billions of dollars in lost sales and higher operating costs. Global supply chains, particularly in the electronics, automotive, and textile sectors, have been profoundly affected. Firms dependent on Chinese manufacturing faced higher input costs, crippling delays, and the urgent need to reconfigure their logistics. Major corporations like Apple, for instance, have begun shifting some of their assembly processes to countries like Vietnam and India to mitigate risk exposure. Similarly, automotive giants like General Motors reported increased operational costs due to metal tariffs and delayed delivery of parts.

The uncertainty fostered by shifting tariff policies has also led to widespread port congestion and confusion, creating delivery delays of up to 6-8 weeks for critical components. This has severely impacted business and household confidence in both economies, putting investment plans on hold and forcing a broader reconsideration of global sourcing strategies. The concept of “trade diversion” has become prominent, as countries like Vietnam and Mexico have seen surges in their exports to the U.S., benefiting from the tariffs imposed on Chinese goods.

Small and medium-sized enterprises (SMEs) have often borne the brunt of these trade hostilities. Unlike multinational corporations with vast resources to reroute supply chains or absorb costs, smaller firms are far more vulnerable. They are heavily reliant on consistent cash flows to finance investments and inventories, and the steep tariff hikes have eaten directly into those funds. In the U.S., SMEs import a significant portion of goods from China (around 40% of all imports), making them particularly susceptible to increased costs. These costs are often passed on to consumers, making everyday goods more expensive.

However, the crisis has also spurred innovation and adaptation. SMEs have had to become more agile, exploring new export destinations in tariff-friendly zones like Southeast Asia and Africa, and rapidly digitizing their operations to bypass disrupted physical trade routes. Digital logistics platforms have become crucial tools for managing shipments, comparing freight quotes, and navigating complex customs procedures, helping these businesses stay afloat and even expand into new markets. The human ingenuity in adapting to these global disruptions is a testament to entrepreneurial spirit.

Deep-Seated Differences and the Looming Deadline

Despite the recent framework deal, the fundamental disagreements between the U.S. and China remain profound. The U.S. continues to express concerns about China’s state-led, export-driven economic model, which it views as distorting global trade through subsidies, market restrictions, and unfair competitive practices. China, on the other hand, sees its economic model as a sovereign choice and a key driver of its remarkable development. These differing philosophical approaches to economic governance form a deep chasm that cannot be bridged by a single trade deal.

As Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center, aptly put it, the two sides are “back to square one but that’s much better than square zero.” This highlights the tentative nature of the current progress. The Geneva agreement, while a step forward, lacked the specificity needed for effective implementation, leading to its rapid unraveling over critical minerals. The London framework aims to rectify this by adding “meat on the bones,” but the true test will be in the detailed implementation.

The clock is ticking. The two sides have until August 10 to negotiate a more comprehensive agreement to truly ease trade tensions. If they fail to do so, tariff rates are set to snap back dramatically: from about 30% to a punishing 145% on the U.S. side, and from 10% to 125% on the Chinese side. Such a resurgence of high tariffs would undoubtedly cause significant economic damage, further disrupting global trade and potentially pushing more economies towards recession. It’s a high-stakes deadline that puts immense pressure on negotiators to find common ground.

Market Reaction: Cautious Optimism and Lingering Questions

Global financial markets, having endured the whiplash of Trump’s “Liberation Day” tariff announcement in April (which saw global stocks recover hefty losses), offered a cautious response to the London deal. MSCI’s broadest index of Asia-Pacific shares outside Japan rose a modest 0.57%. This subdued reaction suggests that while the news is positive, investors understand that the “devil will be in the details.”

As Chris Weston, head of research at Pepperstone in Melbourne, noted, “The lack of reaction suggests this outcome was fully expected.” Investors are no longer easily swayed by headline announcements; they demand concrete actions and clear implementation plans. The critical elements will be the degree to which rare earth exports are truly freed up for the U.S. and the reciprocal freedom for U.S.-produced chips to flow eastward.

Early signs of the curbs loosening did surface in China, with several Shenzhen-listed rare earth magnet firms, including JL MAG Rare-Earth Innuovo Technology and Beijing Zhong Ke San Huan, reporting that they had obtained export licenses from Chinese authorities. This indicates that China is beginning to operationalize its part of the agreement, instilling a degree of confidence.

The Path Ahead: Dialogue Amidst Distrust

The path forward for US-China trade relations remains complex and fraught with challenges. The current framework deal is a testament to the fact that both economic superpowers recognize the immense mutual damage caused by a full-blown trade war. As European Central Bank President Christine Lagarde aptly stated during a rare visit to Beijing, a resolution to the trade war “may require policy adjustments from all countries to treat financial imbalances or otherwise greatly risk mutual economic damage.” This highlights the need for broader cooperation beyond bilateral agreements.

The ongoing U.S. appeals court decision, which recently allowed Trump’s most sweeping tariffs to stay in effect while it reviews a lower court blocking them, also underscores the continued pressure points in this relationship. This legal battle keeps alive the threat of the 34% “reciprocal” duties, serving as leverage in negotiations.

Ultimately, this latest agreement signifies a renewed commitment to dialogue and negotiation, even as deep differences persist. The world’s two largest economies are seeking to manage their strategic competition while avoiding a full-scale decoupling that would have catastrophic consequences for global trade, stability, and prosperity. The human element of economic interdependence – from the small business owner struggling with supply chain disruptions to the consumer facing higher prices – will continue to drive the urgent need for a more durable resolution. The London framework is a fragile but necessary step, reminding us that even in the most tense geopolitical landscapes, the pursuit of common ground remains paramount.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

11th June, 2025

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