Chips won the cold war. Rare earths may win the next

By David Fickling

In retrospect, the symbolism of the moment was foreboding.

On May 15, 2019, President Donald Trump signed an executive order banning US firms from doing business with Chinese telecommunications companies, including Huawei Technologies Co. Five days after that first broadside in a brewing trade-and-technology war, President Xi Jinping was photographed touring a factory producing rare-earth magnets. Such devices, his visit seemed to imply, could be a geopolitical weapon for China quite as potent as advanced semiconductors are for the US.

Six years later, those battle lines are hardening. In the first major US-China trade dispute of Trump’s second term, Beijing was able to use its control of rare earths to force Washington to a deal last week. The magnets produced from them are essential for the lightweight, powerful motors driving everything from automated car seats to guided missiles. After the US imposed its first round of tariffs in April, China started limiting export permits, causing US manufacturers to warn of imminent shutdowns.

“FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA,” Trump said in a social media post Wednesday, announcing the trade deal had been finalised.

Beneath the all-caps boastfulness there’s a worrying note of desperation. America has been caught napping.

Beijing’s response to being frozen out of the microprocessor ecosystem was an all-out drive to bridge the technological gap. State-owned chip foundry Semiconductor Manufacturing International Corp. has deployed $33.5 billion on capital expenditures, and $4 billion on research and development, since the middle of 2019. Huawei spends 180 billion yuan ($25 billion) on R&D every year, founder Ren Zhengfei said in a recent interview. Just 12 months ago, the government created a separate $47.5 billion semiconductor investment fund.

The US chip fortress still looks pretty impregnable, barring an unexpected DeepSeek moment. Although Huawei is reported to be developing a 3-nanometer chip to match the most advanced non-Chinese processors as soon as next year, Ren said its best designs still “lag behind the US by a generation.”

A lesson of asymmetric warfare, though, is to exploit your enemy’s weaknesses, rather than attempt to match their strengths. That’s where rare earths come in.

A technological conflict is simply a disguised version of a real flesh-and-blood battle. As Chris Miller’s 2022 book Chip War explains, the US advantage in semiconductors was a crucial factor in winning the Cold War. By making processing power incredibly lightweight and error-free, it enabled America to build a far more fearsome military machine. Cruise missiles guided by tiny onboard computers could destroy targets with pinpoint accuracy, rendering them more deadly than Soviet missiles that perennially veered off course.

Rare-earth magnets promise to replicate that processing-power revolution in mechanical power — making motors smaller, stronger, cheaper, and more efficient. It’s an innovative leap perceptible to anyone who’s used a $25 drone: The tiny devices only exist today because of the way this new technology (along with the parallel revolution of lithium-ion batteries) allows us to move objects in undreamt-of ways.

As with cruise missiles in the 1970s, this innovation promises to change the way future wars will be fought. Consider Ukraine’s bold drone strike on Russia’s long-range bomber fleet earlier this month.

Blinded by culture wars over the energy transition, America is doing far too little to close this technological gap. Its military needs for rare-earth magnets, as we’ve written, have been pretty much met at minimal cost. Compared to the hundreds of billions that China is pouring into chips, the Pentagon has built a rare-earth supply chain since the start of 2020 with $439 million in grants and loans.

Worse is the way lithium-ion batteries are falling victim to politics. The looming repeal of Biden era clean-energy subsidies and the resultant collapse of the electric-vehicle supply chain may reduce the output capacity of US battery manufacturers in 2030 by about 75%. That would halt almost every plant not already under construction, and ensure the country can only produce enough cells to power about a fifth of annual car sales. America will be left more dependent on China, both for auto batteries and the host of more crucial niche applications for lithium-ion technology.

In the golden age of semiconductors, the US instinctively knew that its strength as a great power lay in its determination to remain at the bleeding edge of innovation. When the might of the state forces technology to submit to ideology, though, the consequences can be disastrous. That’s the road the US is heading down, however, in letting China take the lead in rare earths, solar panels, lithium-ion batteries and the other clean electrical technologies of the future.

Should American troops find themselves on some future battlefield without the critical minerals and batteries to match the swarms of drones deployed against them, they’ll rue the day Washington turned its back on the future.