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| (Photo: TRENDS Research & Advisory) |
The relationship between China and the United States is often framed as a contest between rival superpowers, a high-stakes battle over tariffs, tech supremacy and global influence. But beneath the dramatic surface of trade wars and diplomatic showdowns lies a quieter reality: The U.S. has engineered a system of dependency on China that keeps the U.S. industrial machine on a leash, with China never needing to yank it violently.
This is not a Cold War-style standoff. It's a slow suffocation, delivered not through embargoes or blockades but through precise, administrative drip-by-drip control of the materials and components that power American industry and defense.
The ongoing negotiations on tariffs post “Liberation Day” highlight these structural dynamics precisely. The U.S. lacks trade resilience, and China has no pressing need to cut the U.S. off — in fact, it's better not to. And the U.S. under Trump bloviates about “wins” but is, instead, boxed into an economic cul-de-sac. This dead-end isn't of Trump's making, but Trump's attempts to bluff Americans out of their predicament does little but worsen the situation.
Illusion of trade resilience
Despite years of rhetoric about decoupling and supply chain security, the United States remains dependent on China for upstream inputs that are essential to economic functioning, national security and a viable social settlement. From rare earth magnets and graphite to gallium, germanium and lithium derivatives, China controls between 70 and 90 percent of global processing capacity. Even where the raw materials exist elsewhere, China often dominates the refining, separation and chemical transformation processes. China is not just a mining superpower; it is the industrial furnace of the 21st century.
As Richard Baldwin has pointed out, American industry is far more dependent on Chinese upstream supplies than Chinese firms are on American supply chains. Govini, the defense consultant to the Pentagon, has noted the extent to which the U.S. military industrial complex is dependent on Chinese suppliers. Its analysis concludes that the U.S. defense system relies upon supply from more than 10,000 Chinese companies.
Indeed, about 40 percent of America's imports from China are intermediate or capital goods. As for the end consumer market, it is those imports from China that have helped the U.S. keep a lid on inflation over the past three decades. While inflation has plagued the services sector, consumer goods have experienced real price drops in the years since 2000. Without these imports, low-income households in particular would be even worse off than they are today, given that real wages have been stagnant for the bottom 50 percent of U.S. households for the better part of the past 40 years.
Why China doesn't pull the plug
Given persistent American efforts to curtail China's access to various technologies, not to mention the forever tariff wars initiated by the first Trump administration — all aimed at containing China's economic rise — one might wonder why China doesn't simply cut off key supplies to the U.S. as a form of retaliation. The answer is that a cutoff is not just a blunt instrument. It would also be a suboptimal approach from Beijing's point of view.
An outright embargo would galvanize America's political will. It would trigger massive investment in alternative sources, activate emergency powers and unite allies behind a wartime-style industrial mobilization. Instead, China has a more effective strategy: strategic patience and administrative throttling.
Beijing doesn't need to block exports; it simply requires export licenses, reviews or certifications under various environmental or national security standards to enable a more managed interface with the United States. Recent examples include the imposition of export licensing requirements on various rare earth elements necessary for the manufacture of certain magnets. This comes on the back of gallium and germanium export controls in 2023, which disrupted semiconductor supply chains without ever imposing a formal ban. The tightening of graphite export procedures has also impacted electric vehicle battery makers.
The genius of the drip approach is that it never triggers a full-scale crisis, but ensures that American companies and politicians exist in a state of perpetual anxiety. For manufacturers, the supply will most likely arrive, but it might be delayed. Inventories shrink to manage costs and procurement becomes a game of roulette.
Meanwhile, Beijing can modulate the pressure depending on the political climate. If negotiations are going well, flows may resume. If tensions rise, flows can tighten. It's a supply chain tap, not a guillotine. So while the U.S. imposes outright prohibitions and hikes tariffs with the aim of pricing Chinese goods out, China's approach is more subtle — more like acupuncture.
Investment death spiral
Investment is where the strategy ultimately shapes the landscape in the long run. Because supply is still available, albeit with possible inconsistency, there is no sharp market signal to build substitutes. But because the flow may be unreliable, no one can fully trust it. The result is investment paralysis.
From a capital allocation perspective, building non-Chinese capacity is a high-risk proposition. Chinese companies can ease export controls to boost volumes at any moment, rendering new entrants unprofitable. Long-term demand is uncertain, as buyers are unwilling to lock into premium contracts for materials they may yet get from China. The political commitment in Washington is inconsistent, with few solid guarantees to anchor investor confidence.
All this uncertainty is compounded by Trump-era policy vacillations, which continue to reverberate. One day tariffs go up, the next day they're paused for negotiations. “Phase One” deals are declared to be historic wins, only to collapse under the weight of their own vagueness. The post-Liberation Day situation simply reminds the market of the administration's own inconsistency and capriciousness. No one knows what the trade regime will look like a year from now, or even a quarter from now.
This policy incoherence adds another layer of risk to an already unstable investment landscape. No serious funder can build a reliable business case for rare earth processing, graphite purification, or gallium extraction if the price, the politics, and the market demand can all shift on a tweet.
America on a leash
What this means is that the U.S. is not just dependent on Chinese materials, it is actually dependent on China's willingness to maintain the illusion of supply. The materials are not being withheld outright. They're being doled out — just enough to avoid alternatives but never enough to feel secure. It's the industrial equivalent of a morphine drip: enough to function, but always just a little short, and never free from fear.
This dependency now affects the defense-industrial complex, where precision weapons, guidance systems and communications rely on materials that China dominates. America's efforts to wean itself off this dependency isn't as easy as many would like to believe. High-end manufacturing and tech, where semiconductors, AI accelerators and photonics need gallium, germanium and tungsten, are also exposed to these uncertainties.
What makes this situation all the more striking is that it's not the product of Chinese deception or cunning but of American delusion and decades of policies that incentivized financialization at the expense of industrial capital formation. For decades, the U.S. offshored its industrial base to cut costs and boost returns. As for rare earths, as Julie M. Klinger has shown in her book “Rare Earth Frontiers,” the U.S. offshored the industry over many decades. Nobody stole it from under its nose. Market efficiency and a desire to offload dirty and dangerous industries to others was the god that dictated decisions in corporate boardrooms and in the corridors of political power.
Now, that theology has come due, and there is no clean exit. The usual laundry list of solutions — reshoring, friend-shoring, strategic stockpiling, public-private partnerships — is mostly theater. It sounds proactive but doesn't resolve the fundamental problem, which is that no one can justify investment when China can tighten the supply pipeline to create panic and then turn it back on to deflate that investment. Chinese supply chains can also release large volumes of product to market with the likelihood of destroying potential competitors the moment a player appears to be gaining traction.
This drip-feed approach doesn't provoke a response; it prevents one. It keeps the patient alive, dependent, and permanently too weak to resist.
This is not a standoff with options on the table. It is a cul-de-sac paved by decades of American complacency and justified by short-term profit logic. The United States has not been outmaneuvered because it lacked warning (although its strategic approach to the present round of tariff negotiations has been left wanting). The U.S. finds itself in this predicament because it chose to privilege finance capital above all else. And now, with every passing month of security and strategic drift, the walls are only closing in further.
The way out is to see China not as an adversary but as an equal partner. Using materials supplied by China to build missiles to point at China is unlikely to garner any friends in Beijing. But that's precisely where we are.
