China's trade war gambit puts Trump on defense

The big picture: China's control of the global rare earths supply has left the U.S. playing defense in a trade war of its own design.

• China loosening up on rare earths exports was a key part of the trade truce the two countries struck in mid-May. But its slow-walking of those exports is now at the heart of another breakdown in the relationship.

Between the lines: President Trump says he and China's President Xi Jinping spent 90 minutes on the phone Thursday discussing trade.

• "There should no longer be any questions respecting the complexity of Rare Earth products," Trump said — though what that means for exports, as a practical matter, wasn't immediately clear.
• Whatever leverage the Trump administration thought it had going into a spree of "90 deals in 90 days" has thus far not delivered much, and now courts are threatening to stand in the president's way.

State of play: The U.S. economy has been resilient thus far, defying predictions of immediate tariff chaos. But new signs suggest private-sector hiring is weakening, and supply chains are breaking down.

• Consumer prices are starting to rise, manufacturers' profits are being squeezed, and the specter of inflation looms larger by the day.
• Factories are beginning to shut down because they can't get the necessary components, and some companies are reportedly considering the extraordinary step of shipping their unfinished products to China to add the components there.
• None of that was the point of the trade war; most of it is the exact opposite.

Zoom out: Typically, these sorts of fundamental reorderings of an economy don't happen in real time — businesses plan on long-term cycles, governments build out policy infrastructures, and changes happen in something resembling an orderly fashion.

• Not now.
• "The economy is somewhat of a living organism. It does not sit still. It adjusts; it reacts ... it changes over time," Siebert Financial chief investment officer Mark Malek wrote Wednesday.
• "Unfortunately, we are all hoping for a short-term solution to a long-term challenge."

The intrigue: In absolute terms, rare earths imports are small, about $190 million a year, per government data.

• But if you buy any of a list of more than 200 products, from cell phones to lasers, then you're buying something that can't be built without rare earths.

Reality check: China's economy is facing its own challenges, and the trade war isn't exactly helping there either.

• The Chinese government is scrambling to increase domestic consumption, with mixed results.
• The Trump administration's position is that China can't hold out economically and needs access to the American consumer. While China may have its rare earths to use as a cudgel, the U.S. believes it has weapons, too — like choking off China's largest export market.
• Efforts to secure an alternate supply chain of minerals have also gained steam, as the Trump administration and both parties in Congress quietly assemble the pieces of a comprehensive policy, including permitting reform, new global partnerships and trade investigations.
• Those efforts may give the U.S. side some confidence that even if the Chinese can use their minerals as leverage, that won't last forever.

For the record: "The United States and China, as the two largest economies in the world, have a critical economic relationship that has global ramifications," White House spokesperson Kush Desai said in a statement.

• "The Trump administration remains committed to levelling the playing field for American industries and workers by negotiating with China to obtain more reciprocal and balanced bilateral trade relations."

The bottom line: "Trade wars are good, and easy to win," Trump once said — but at the moment, China has the U.S. economy in check, with the clock ticking loudly on the next move.

Joann Muller and Courtenay Brown contributed.

Editor's note: This story has been updated with details of President Trump's phone call with President Xi.