The latest escalation in US-China trade disputes, fueled by China’s rare earth export controls and President Trump’s tariff threats, has prompted Federal Reserve Governor Stephen Miran to advocate for immediate and decisive interest rate reductions to mitigate growing downside risks to the economy.
A new chapter in the complex US-China trade relationship is unfolding, with significant implications for global economic stability and monetary policy. Federal Reserve Governor Stephen Miran recently delivered a stark warning, asserting that renewed trade tensions between the world’s two largest economies pose fresh downside risks to the economic outlook. His remarks, made at the CNBC “Invest in America Forum” in Washington, underscore a growing urgency for the US central bank to adjust its benchmark interest rate, moving swiftly to a more neutral policy stance.
The Catalyst: Rare Earths and Retaliatory Tariffs
The immediate trigger for Miran’s concern was China’s announcement of new restrictions on the export of rare earth minerals. These critical minerals are indispensable for high-end manufacturing, playing a vital role in everything from advanced consumer electronics to sophisticated defense products. Miran highlighted the sudden shift in the risk landscape, stating, “We have to recognize that there is some difference now versus where we thought things were a week ago.” He emphasized that these new restrictions introduce “risks that didn’t exist a year ago.”
The US response was swift and potentially escalatory. President Donald Trump countered China’s move with threats to raise tariffs on Chinese imports to 100%. This re-ignites a trade war dynamic that has historically caused significant disruption to global trade. While previous threats in the spring were averted through dialed-back tariffs and ongoing negotiations, the current exchange suggests a renewed period of economic friction, making swift policy action from the Fed even more critical. As Miran articulated, “There’s now more downside risk than there was a week ago, and it is incumbent upon us as policymakers to recognize that should get reflected in policy … It becomes even more urgent that we get to a more neutral place in policy quickly.”
Fed’s Stance and Miran’s Urgent Call for Rate Cuts
The Federal Reserve recently cut its benchmark interest rate by a quarter of a percentage point last month and is widely anticipated to do so again at its upcoming October 28-29 meeting, aiming to bring its policy rate into the 3.75%-4.00% range. However, Stephen Miran, who is on leave as the head of the White House’s Council of Economic Advisers, has publicly advocated for a more aggressive approach. He argued for a larger half-percentage-point cut at the previous Fed meeting.
Miran’s conviction stems from his outlook for lower inflation in the coming months, which he believes provides the central bank with “flexibility and the freedom” to cut rates faster. He maintains that current US monetary policy remains too restrictive, posing an unnecessary drag on an economy now facing exacerbated trade-related risks. Treasury Secretary Scott Bessent, also speaking at the same forum, confirmed that dialogue between the US and China is continuing, a glimmer of hope amidst the escalating rhetoric.
The Broader Evolution of US-China Trade Conflict
The current tensions are not isolated but rather a continuation of a multifaceted economic rivalry that has been reshaping global trade since 2018. Beginning with the Trump administration’s aggressive tariff policies on Chinese goods, the conflict escalated to include concerns over intellectual property theft and trade deficits. While a “Phase One” trade agreement was signed in January 2020, China only fulfilled approximately 58 percent of its commitments, and the COVID-19 pandemic further disrupted global supply chains. The Biden administration largely maintained Trump-era tariffs while intensifying efforts toward economic and technological decoupling, particularly enforcing export controls on advanced semiconductors, artificial intelligence (AI), and quantum computing.
In response, China has focused on bolstering its domestic chip production and has strategically restricted exports of key minerals like gallium and germanium, which are vital for US and European technology firms. This tit-for-tat dynamic has driven companies to reassess and diversify their supply chains, with many shifting operations out of China to countries like India, Vietnam, and Malaysia. This trend of declining trade interdependence is evident in official data, where the US’s share in China’s total exports fell from 29% in 2018 to 21% in 2023, and China’s share in US total imports dropped from 22% in 2018 to 14% in 2023, according to FTSE Russell Insights. If tariffs escalate further under a potential Trump administration in 2025, reaching up to 60%, this “derisking” trend could accelerate significantly.
Global Ripple Effects and Industry Vulnerabilities
The geopolitical contest between the US and China has far-reaching consequences, influencing global alliances and exposing specific industry vulnerabilities:
- Europe’s Balancing Act: European nations are grappling with the need to diversify trade dependencies. Despite China remaining the EU’s second-largest trading partner, bilateral trade declined by 14% in 2023 compared to 2022. The EU has implemented anti-dumping measures and tighter controls on high-tech investments, often aligning with US efforts to curb China’s economic influence.
- Indo-Pacific Realignment: Countries like India and Vietnam have seen substantial benefits, attracting foreign investment as companies seek alternatives to China. Taiwan and South Korea have become critical partners for the US in technology and electronics, underscoring their strategic importance in the semiconductor sector.
- North American Dynamics: While the US, Canada, and Mexico remain integrated under the USMCA, supply chain shifts have accelerated production relocation to Mexico. However, concerns persist about Chinese firms using Mexico to circumvent US tariffs, and further tariff threats from the US on Canadian and Mexican imports could introduce new disruptions.
Industry-Specific Exposure
Certain sectors are particularly vulnerable to the current trade tensions. Products with high mutual trade reliance between the US and China, such as furniture, toys, sports requisites, footwear, and headwear, face significant downside risks. Tariffs on these goods could hurt China’s exports while potentially leading to reinflation in the US as alternative sourcing or domestic production becomes more costly.
For industries where China’s exports to the US are high but US dependency on China is relatively low, such as optical and medical instruments and certain food and beverages, the impact of new tariffs could be more negatively concentrated on Chinese manufacturers. Investors have historically observed these patterns; during the heightened trade tensions of 2018, sectors like basic materials, consumer discretionary, and technology experienced the largest drawdowns in Chinese equity markets, while utilities, energy, real estate, and financials were least impacted. Today, China’s equity markets show lower valuations and improved profitability compared to 2018, suggesting a potentially lower downside risk, but the industry-specific vulnerabilities remain a key concern for investors, particularly in sectors like healthcare where China’s exports were heavily reliant on the US market.
The convergence of China’s strategic rare earth mineral restrictions and the potential for increased US tariffs creates a volatile environment. Federal Reserve Governor Stephen Miran’s call for urgent interest rate cuts highlights the pressing need for policymakers to act decisively to mitigate these escalating economic risks, ensuring stability in an increasingly unpredictable global trade landscape. For more details on Miran’s statements and the Fed’s policy considerations, you can refer to the Reuters report on his CNBC appearance.
