US-China escalation is here to stay

Sarah Beran The writer is former senior director for China and Taiwan affairs at the US National Security Council · 4 Nov 2025

Markets celebrated the deal reached between President Trump and President Xi last week, and with good reason: stabilising the US-China relationship is good for the Indo-Pacific region and the west. But the agreement is far from a silver bullet. Both countries are agreeing to a détente that is tactical, not strategic, with a limited set of deliverables and an uncertain timeline.

Structural competition between the US and China has opened a faultline that no summit or deal can easily mend. Both countries have sought to capitalise on their perceived advantages by weaponising their deep, complex interdependence. China’s vast rare earth export controls are the most recent escalation, and the latest truce only temporarily postpones the pain. With the export control framework now in place, future moves will be all the more destructive.

Washington and Beijing are both overconfident in the leverage they hold over one another. Beijing, which previously mirrored Washington’s actions through so-called “proportional retaliation”, has begun to hit hard and asymmetrically, buoyed by a belief that it can now deal with the US as an equal. Meanwhile, the US erroneously believes China’s economy is teetering on the edge and that it will concede in the trade war to avoid economic collapse.

In the short term, US and Chinese leaders will continue trying and failing to capitalise on their imagined advantages. With each round of escalation will come a renewed urgency to de-risk and limit the damage, igniting a painful effort to unwind interdependence.

Trump’s first trade war in 2017 sparked a Chinese effort to diversify away from reliance on US soyabeans, which fell from 40 per cent of Chinese imports in 2016 to roughly 9 per cent in 2025. US export controls on advanced semiconductors in 2022 intensified Chinese efforts to innovate, with Beijing championing Huawei’s Ascend chip series and DeepSeek’s AI models.

Beijing’s focus on self-reliance is not a new development; it has been core to the leadership’s approach since 1949. In this context, rare earth export controls have a dual purpose: to retaliate and help keep critical supply chains onshore, including rare earths and batteries.

China’s bureaucracy is ill-suited to implement this export control regime and has minimal co-ordination, inspection or enforcement capability. Riskaverse provincial officials and Ministry of Commerce officials will need political cover to grant licences. The application process will be cumbersome, opaque and prone to breakdowns. In turn, the US will perceive bad faith in China’s inability to guarantee an uninterrupted flow of rare earths, likely sparking new escalatory cycles. Meanwhile, licence applications will vacuum up information on foreign supply chains that can be weaponised in the future.

For now, there is little alternative to Chinese rare earths. Foreign companies will need to work closely with Chinese partners to fast track licences through the bureaucracy and identify channels for chambers of commerce or home governments to flag shipments caught up between the geopolitical rivals.

In the longer term, diversification away from China and, where possible, from rare earths, must be part of longterm planning for companies and countries. Licences for foreign companies with a military nexus in their supply chains will be unlikely to see relief, even under the terms of the Trump-Xi deal, so urgent alternatives will be needed. Mines and processing capabilities in the US and other countries will take years to come online and initial volumes will mean long wait times. This is not just about finding sources outside of China, it is also about relocating supply chains: Chinese companies also control over 60 per cent of global production and 90 per cent of refining and processing.

The failure to find alternatives before this shock was a market failure: cheaper, higher quality, more efficient compo- nents from China meant there was no economic incentive to change course. It will take an Operation Warp Speed-like effort for the shift to take place in time to make a real difference. In the meantime, companies must ready themselves for continued cycles of escalation, disrup- tions of supply chains and the slow pull- ing apart of the two economies.

As US-China dynamics drive a global push towards resilience and sovereignty, governments will make signifi- cant investments in securing critical supply chains, creating major opportu- nities for businesses that can position themselves as central to domestic innovation ecosystems. Escalation is here to stay and companies must develop the flexible, adaptable supply chains they need to weather the storm.