Pragmatism meets protectionism in China trade.
All is fare in love and war. That’s not a typo—anything can be sold, even and especially during a trade war.
In the unfolding drama of the US–China economic rivalry, a fragile ceasefire has emerged, not through diplomacy, but through mutual dependency. In the midst of heavy US transshipping tariffs—aimed at China, and hitting the whole world in the process—a “chips-for-rare-earths” truce has emerged: the US has momentarily lifted restrictions on Nvidia’s H20 chips, while China continues supplying critical rare-earth minerals.
Each side holds leverage: China controls between 60% and 70% of global rare-earth extraction and about 90% of processing capacity, while the US and its allies remain leaders in cutting-edge semiconductors.
As Gideon Rachman writes, China is enjoying more favorable tariff rates with the US than either Switzerland or India. But, as Rachman points out, China has been building up this reserve of strength in global economic negotiation, beginning with an oil-for-rare-earths trade with the Middle East in the 1980s; a gamble at the time, but evidently valuable in retrospect.
This arrangement is no alliance; rather, it’s a strategic circuit‑breaker—each side restrains from dramatic escalation despite mounting tensions. It’s a telling snapshot of today’s global economy: national economies seem to exist in a state of competition, rather than the cooperation theorized and championed by global liberal theorists, leading to a form of interdependence long thought extinct.
To understand how we arrived here, we must trace the contours of China’s economic model. State capitalism—more accurately, the socialist market economy—was articulated by Jiang Zemin in 1992 in pursuit of blending market mechanisms with firm state guidance. China is not quite “capitalist,” as Ronald Coase and Ning Wang argued, but the mid‑1990s ushered in radical reforms: price liberalization, tax reform, and a sweeping privatization of state‑owned enterprises (SOEs) transformed China’s economic landscape.
A watershed moment came in 2001, when China was admitted to the World Trade Organization (WTO). In accordance with the rules of membership, China surrendered to stricter conditions than other developing nations, undertook systemic legal overhaul, amending trademark, patent, and copyright laws, and liberalized its services and financial sectors. The sea change was significant, immense, and rapid: by 2005, private enterprise constituted 70% of GDP, and China had cemented its role in global supply chains. The reverberations are still being felt: “Made in China” is a ubiquitous phrase known around the world, for better or for worse.
The SOE-centric model evolved yet again: in certain key sectors, the state retained control, but non-SOEs surged in efficiency, outpacing state firms. A vertical structure emerged, where SOEs were protected upstream while competition thrived downstream. This may be the model Vietnam is pursuing in aiming to become a tiger economy—only time will tell if they’re successful.
Since entering the WTO, China was catapulted into the heart of global trade, and the world shifted with them: by 2023, around 70% of economies traded more with China than they did with the US—a steep climb from 2001. Those exchanges also grew, with more than half of those economies now trading twice as much with China as with America: almost all of Eastern Europe and Africa fall into this category.
Yet these developments did not erase the undercurrents of tension. China’s deep involvement in tiered global supply chains, combined with its vast trade surpluses, sparked alarm, and continues to do so, in Washington and beyond. The international system is fragmenting. Trade policies are regionalizing, and industrial policy is reasserting itself as geopolitical blocs remap global flows.
The “chips-for-rare-earths” deal is emblematic of broader shifts. The US is speeding efforts to reshore rare-earth production, injecting hundreds of millions into domestic capacity, as China continues facing technological bottlenecks. Meanwhile, trade tensions have spurred demand substitution: China is booking up to 10 million metric tons of soybeans from Argentina and Uruguay for 2025–26—effectively bypassing US exporters. As above, China has a history of negotiating assets with an eye to the future—there’s every chance that negotiations will feature access to foodstuffs increasingly often.
These adjustments reflect a recalibration of supply chains. John Waldron at the Financial Times defined the era in which we now live as one of “strategic interdependence,” where geopolitical risk, not efficiency, now governs trade decisions. Chinese outbound investment in the US is falling; US imports from China are declining; Vietnam and Mexico, among others, are rising, with Vietnam’s share of US imports doubling since 2017, and Mexico now becoming the US’s largest trade partner.
Analysts warn of a looming “second China shock”: not the price‑cutting surge of the early 2000s, but a systemic disruption in advanced manufacturing. US tariffs and restrictions may unintentionally accelerate China’s technological self‑sufficiency, isolating the United States and pushing global allies closer to China rather than further away.
Today, the US and China are locked in a high‑stakes balancing act. They barter because neither can afford to sever ties fully; global trade is an undeniable reality, not an optional extra. Meanwhile, China’s diversified trading network deepens, and its state‑capitalist apparatus evolves with renewed emphasis on domestic resilience (such as its dual circulation strategy and “Made in China 2025”).
The liberal, multilateral trading system that rose after 1945 is fragmenting. Where once trade meant efficiency-first globalization, it is now geography, security, and strategic positioning that matter most. The deal reached here over chips is not a resolution. It’s a stopgap in a world being re-stitched around competing blocs and economic models.
This is the new normal: competition cloaked in dependency, trade routes rerouted for security, markets shaped by state strategy. State capitalism has matured, and not just as an economic model, but as a geopolitical force. For all its contradictions, it is here to stay. And the rest of the world is already adapting.
