The current standoff between Washington and Beijing extends beyond headline tariff figures. China’s rare earth export controls and the United States’ (US’s) threatened software restrictions target different pressure points in global supply chains, with consequences that reach well beyond the two economies directly involved.
China’s rare earth gambit
China controls roughly 70% of rare earth mining and over 90% of the refining that turns raw materials into usable industrial inputs. The market itself is small – about $6 billion annually – but the materials are irreplaceable in modern manufacturing. China’s latest restrictions on the supply of rare earths have changed the rules. Any product containing Chinese rare earths, or made using Chinese processing technology, now requires an export license from Beijing. Companies with foreign military ties face automatic rejection as of 1 December.
The impact of this move hits manufacturing equipment first. Precision tools used to make computer chips rely on rare earths for their lasers and magnets. Dutch multinational, ASML, which supplies the machinery for advanced chip production, and is the world’s largest supplier to the semiconductor industry, expects shipment delays. The controls specifically target cutting-edge semiconductors – the type used in AI processors and advanced memory chips – key industries in the US. Production schedules for high-end products from Apple, Nvidia, and Samsung could be delayed by several months if China goes ahead with this restriction.
Global defence manufacturing, including the US defence industry, faces its own problem. Specialised magnets used in military equipment depend on materials that come almost exclusively from China. The restrictions effectively give Beijing a switch it can flip on Western defence supply chains.
The US’s software countermove
The US response will target a different chokepoint. Reports suggest that the US is retaliating with planned export controls on products made with – or containing – US software. This measure would see the US restrict its trading partners from exporting goods made with US software to China. The impact would span enterprise resource planning systems, computer-aided design tools, and operating systems embedded in everything from laptops to jet engines.
The scope of this move mirrors restrictions Washington imposed on Russia after its 2022 invasion of Ukraine, where the US applied restrictions extraterritorially to goods made globally using US technology. If implemented similarly against China, the measure would not just affect direct exports between China and the US but also global supply chains reliant on American code, which is almost universal.
The economic logic of this move differs from the US’s decision to restrict US chip exports. US software companies depend on China for growth and scale, and broad restrictions, like those that have been suggested, would fragment global software ecosystems, forcing global manufacturers to restructure operations for compliance. Unlike semiconductors – where Taiwan and South Korea provided the world with alternative production capacity – substituting foundational US software requires rebuilding entire digital infrastructures.
For multinational corporations, the challenge is immediate. Any product passing through design automation tools built with American code potentially falls under these controls. This affects automotive systems, turbines, network routers, and manufacturing equipment, to list a few. Manufacturers now face the task of identifying which products contain US software elements – a process complicated by layers of licensing and integration spanning decades.
Second-order consequences
Several less obvious impacts merit attention. First, the restrictions from both China and the US accelerate technological decoupling but in opposite directions. China’s rare earth controls push Western manufacturers toward alternative supply chains that will take years to build. Known reserves of heavy rare earths exist primarily in Myanmar and China, and establishing new mines requires eight to 10 years. Building refining capacity – a technically complex exercise which requires specialised expertise – typically takes five years.
US software restrictions, conversely, could accelerate China’s push toward complete technological independence. If Chinese firms lose access to foundational software, they face an existential threat that justifies massive investment in parallel ecosystems. This occurred with semiconductors: export controls disrupted China’s chip industry initially but also spurred efforts that produced achievements like DeepSeek’s R1 model, which matched advanced AI capabilities using fewer resources than Western competitors.
Second, both measures affect US companies’ revenue and scale. Semiconductor equipment manufacturers initially feared a “death spiral” from chip export controls. However, the first two years of the restriction proved commercially successful. Software firms face different maths – they depend on global customer bases for the investment needed to develop next-generation technologies. Cutting off China could reduce the scale required to maintain technological leadership.
Third, allies face difficult choices. The Netherlands derives 29% of ASML’s sales from China. Japan and South Korea supply critical inputs to Chinese manufacturing. Germany has already moved to diversify raw material sources, calling China’s restrictions a “great concern.” But unilateral US actions create arbitrage opportunities (where traders can profit off price differentials of a product in two different regions) – which means China can procure restricted technologies through third parties if international policies don’t align.
Fourth, the defence implications cut both ways. US military supply chains face immediate constraints from rare earth restrictions, widening the capability gap with China. Yet software controls could limit China’s ability to deploy advanced AI at scale, particularly for military applications – assuming AI advancement occurs within the two-to-three-year window before China achieves semiconductor self-sufficiency.
Market and policy realities
Analysts estimate that several critical minerals carry high disruption risk but note that rare earth commodity prices don’t spike when China restricts exports – suggesting the market itself provides poor signals of supply stress. The most direct exposure comes through equities of non-Chinese rare earth miners and refiners, rather than commodities themselves.
For investors, the key question is timeline. If China’s transformative AI capabilities emerge within two to three years, current controls may provide strategic advantage. If advancement takes a decade, China will likely achieve sufficient self-sufficiency to render the restrictions ineffective while having damaged US commercial interests and potentially reduced Chinese dependence on Taiwanese chip production.
The US has begun addressing rare earth vulnerability. The Department of Defence invested $400 million in North American rare earth materials supplier, MP Materials, becoming its largest shareholder, and committed to a 10-year price floor of $110 per kilogram for neodymium-praseodymium products. A 10-year offtake agreement covers 100% of output from MP’s planned second magnet facility. Yet even with these investments, ramping domestic capacity to commercially viable scale will take years – during which time China retains significant leverage.
Where this leaves markets
Both countries are accelerating fragmentation, but China’s rare earth dominance, while real, is not permanent and the US’s software ecosystem is entrenched but not irreplaceable, given sufficient investment and time. However, the restrictions operate on different timescales. Rare earth controls create immediate supply chain friction. Software controls – if implemented – restructure how global manufacturing operates over the medium term.
The question is whether either country can sustain pressure long enough for their strategy to succeed, or whether mutual economic damage forces a negotiated resolution that leaves the underlying competition unresolved. Neither side holds a decisive advantage.
TURNING TO THE MARKETS
Week’s key themes:
- South African bonds eye FATF grey list removal announcement
- Wall Street calm as it sets its sights on inflation data and the US-China trade meeting
- Gold suffers 5% selloff, halting its seemingly unending rally
- US Dollar Index gains just short of 1% for the weeK
Bonds
On Thursday, US 10-year bond rates remained near 4% following a modest uptick the day before. Market participants are awaiting key US inflation numbers – postponed due to federal operations being suspended – that analysts predict will demonstrate continuing cost pressures without preventing next week’s anticipated US Federal Reserve (Fed) rate cut. Yet, if the figures exceed projections, they might influence the Fed’s December policy choice by dampening prospects for further monetary loosening. Meanwhile, attention turned to diplomatic developments, with Washington confirming a presidential summit between US President, Donald Trump, and Chinese President, Xi Jinping, in South Korea, preceded by weekend preparatory discussions in Malaysia between American and Chinese representatives.
British 10-year debt instruments dropped to roughly 4.4% – their weakest level since December’s midpoint – after consumer price statistics came in below predictions. September’s main inflation metric remained at 3.8% versus anticipated 4%, while the core measure declined from 3.6% to 3.5%, also undershooting the 3.7% forecast. Despite prices still running approximately twice the Bank of England’s (BoE’s) 2% objective, markets anticipate February will mark the beginning of borrowing cost reductions through rate cuts. United Kingdom (UK) government spending exceeded projections by £7.2 billion during the fiscal year’s initial six months.
German benchmark bonds linger around 2.57%, approaching late June lows, as investors monitored pending American data.
South African yields touched 8.9%, boosted by fiscal improvements, governmental stability, infrastructure developments, and the country’s imminent removal from the Financial Action Task Force’s (FATF’s) monitoring list after addressing anti-money laundering deficiencies.
Equities
On Thursday, US equity futures showed minimal movement ahead of today’s postponed Consumer Price Index (CPI) data – held up by the ongoing federal closure – which is expected to reveal persistent cost pressures. Multinational technology company, Intel’s stock jumped roughly 8% after surpassing revenue expectations, while retailer, Target, and electric vehicle manufacturer, Rivian, gained following workforce reduction announcements. Thursday’s trading saw the Dow climb 0.31%, with the S&P 500 and Nasdaq advancing 0.58% and 0.89%, respectively. Tensions between Washington and Beijing eased after confirmation of a Trump-Xi presidential summit scheduled for South Korea on 30 October.
Britain’s FTSE 100 climbed 0.7% to reach 9,582 – a new peak – powered by energy companies. BP and Shell rose over 3% each as oil prices spiked following American sanctions on major Russian petroleum firms Rosneft and Lukoil. Gold miners Fresnillo and Endeavour gained approximately 6% and 4% as precious metal prices rebounded. Global pest control company, Rentokil surged nearly 10% after maintaining annual projections, while the London Stock Exchange jumped 6.7% on improved margin forecasts, a £1 billion share repurchase programme, and a £1.15 billion banking partnership.
Germany’s DAX recovered early losses to finish marginally higher at 24,208. Software company SAP added 2.2% despite cloud earnings missing targets, while consumer goods company, Beiersdorf, edged up 0.3% despite lowering sales expectations.
South Africa’s JSE FTSE All Share Index gained 1.75% to 110,742.69, with year-to-date returns exceeding 30%, and showing stronger performance due to currency appreciation and commodity tailwinds. Its 52-week trading range is roughly 77,165 to 113,196.77, underscoring the strong upward move over the past year.
Commodities
On Thursday, Brent oil futures hovered around $66/barrel, marking a two-week peak and heading toward the sharpest weekly advance since the beginning of June. Market movements followed US restrictions placed on Russian petroleum giants Rosneft and Lukoil, which together represent approximately half of Moscow’s crude shipments and provide crucial revenue for the Kremlin. In response, Chinese government-backed energy companies suspended purchases of Russian seaborne oil, while refineries in India announced plans for substantial import reductions to comply with the restrictions. The European Union (EU) simultaneously introduced additional measures targeting Russian energy facilities, as Ukrainian forces persisted in attacking refineries, pipelines, and shipping terminals – including a Thursday strike on a Rosneft facility.
Gold retreated to roughly $4,115/ounce this morning, poised to snap a nine-session rally after substantial profit-taking following repeated all-time highs. The precious metal tumbled more than 5% on Monday, its steepest single-session decline in half a decade. The selloff coincided with major outflows from bullion-backed investment funds, recording their heaviest tonnage reduction in five months. Despite this, the metal maintains approximately 55% gains for the year, bolstered by commercial friction between nations. Upcoming discussions between Trump and Xi, Russian sanction developments, and expectations of Fed rate cuts – potentially two additional reductions before year’s close – continue to support gold prices. Market participants now await today’s US CPI data for US monetary policy direction.
Currencies
Last night, the US Dollar Index benchmark steadied near 99, positioned for weekly gains as market participants awaited today’s CPI statistics – that might influence economic and monetary policy trajectories. While analysts anticipate the figures will demonstrate continuing cost pressures, they’re unlikely to derail next week’s expected rate cut. Currency traders also tracked diplomatic progress after Washington confirmed a Trump-Xi summit in South Korea, with preparatory discussions between American and Chinese officials planned for Malaysia. The greenback headed for its strongest weekly performance against the Japanese yen amid growing expectations of fiscal spending measures in Japan.
The euro dipped marginally beneath $1.16/€ as investors monitored pending US inflation figures and initial manufacturing data from key continental economies. Trump’s optimistic remarks about securing favourable trade terms with China provided modest dollar support. British price data, falling short of projections, reinforced expectations the BoE might begin reducing rates soon, while October’s anticipated 25-basis point Fed reduction appears virtually guaranteed. Meanwhile, the European Central Bank isn’t projected to ease until mid-2026.
Britain’s currency extended declines toward $1.33/£ – a weekly low – after September’s headline price measure remained at 3.8% versus anticipated 4%, with the core reading slipping to 3.5% from 3.6%, both undershooting expectations, giving Chancellor of the Exchequer, Rachel Reeves, who outlined forthcoming budget measures for 26 November, some respite despite government spending running £7.2 billion above projections. Markets now anticipate UK rate cuts in early 2026.
The rand is trading around R17.30/$, showing strength attributed primarily to global currency and commodity movements, driven by central bank policy and geopolitics, rather than domestic economic improvements. Sustainability of the rand’s strength, as such, remains questionable. In the immediate term, we will keep a close eye on the FATF’s grey-list announcement, and South Africa’s potential removal off it.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 17.30
EUR/ZAR: 20.11
GBP/ZAR: 23.06
BRENT CRUDE: $66
GOLD: $4,089
Written by Citadel: Advisory Partner and Citadel Global Director, Bianca Botes.
References: Bloomberg, China Briefing, Computerworld, CNBC, CSIS, Goldman Sachs Research, International Center for Law and Economics, Mining.com, Reuters, Trading Economics, TradingView and Yahoo Finance.