Taco and Rare Earths (Part 2)

Same story, different day! Just as equity markets had fully erased the losses linked to Liberation Day and investors were focusing on the slowdown in the U.S. labor market, tariff risk has returned to center stage, along with the associated volatility. In practice, it’s China that has turned up the pressure ahead of the upcoming meeting between the leaders of the two superpowers — wielding its ultimate weapon: rare earths.

As a reminder, China controls 70% of rare earth mines, but more importantly 90% of the refining capacity (a highly polluting process) and 90% of the production of permanent magnets, which are essential in many critical industrial applications (technology, energy, and defense). According to the Chinese government’s announcement, as of December 1, any user of Chinese rare earths will have to obtain authorization for any commercialization of finished products.

In theory, an American AI chip manufactured in the United States for a U.S. client but using Chinese rare earths would therefore require Beijing’s approval for its use — essentially, a Chinese version of the U.S. Foreign Direct Product Rule.

Unsurprisingly, this announcement provoked the ire of the White House occupant, who in response promised tariff lightning upon the Middle Kingdom in case of implementation — with additional duties of 100% on all Chinese goods imported into the United States and, to top it off, the cancellation of the much-anticipated meeting on the sidelines of the APEC* summit on October 31 in South Korea.

This war of words between the two leaders is reminiscent of last April, when Donald Trump threatened China with 100% tariffs. Tensions eventually eased thanks to the truce agreed in May and renewed in August. But the effective tariffs (30% on Chinese goods and 40% on U.S. goods) have already had the desired effects: bilateral trade between the two nations has adjusted downward much faster than during the Republican leader’s first term.

A few days after this threat from the White House occupant, he drastically changed his tone, declaring that “the United States wants to help China, not hurt it.” This backpedaling was immediately interpreted by investors as yet another TACO trade*,* which in turn mechanically boosted equity markets.

But as the U.S. administration likes to blow hot and cold, the Treasury Secretary later gave an interview to the Financial Times, in which he explained that China’s recent initiatives reflect its domestic economic difficulties. That hasn’t discouraged market participants, if we are to believe the online prediction market Polymarket, which assigns a 92% probability to the meeting between the two leaders still taking place.

Beyond the rhetoric, the United States has already acknowledged its strategic weakness and launched industrial countermeasures. For instance, one can cite the recently signed strategic agreement with Australia to develop $8.5 billion worth of critical metals projects, or the intention of mining company Teck Resources to become the North American leader in germanium and gallium (both essential to the defense industry). This situation has, of course, benefited local players such as Lynas and MP Materials, whose stock prices have tripled this year.

The posture of both protagonists unsurprisingly resembles a pre-negotiation positioning strategy. It is increasingly evident that, in the short term, neither side holds an absolute advantage, which should lead to the search for the lowest common denominator — as negotiation manuals teach us. But in the longer run, it seems that both countries are on a trajectory of financial and technological decoupling, which will have ripple effects on the rest of the world — effects investors will need to factor into their analyses…

APEC: Asia-Pacific Economic Cooperation
A concept theorized by Robert Armstrong, based on a psychological dynamic: the president threatens, confidence falls, and the withdrawal of the threat reassures markets.

Pierre Pincemaille, General Secretary of Investment at DNCA. This article was finalised in October 24th, 2025.

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