At a time when US-China relations are defined by deepening geopolitical tensions, the two powers find themselves in an uneasy embrace over one of the most strategically sensitive resources of the 21st century, rare earth elements (REEs).  These minerals are essential to electric vehicles, wind turbines, smartphones, and missile guidance systems. Given their critical role, one might expect the strategic logic of decoupling to dominate this domain. Instead, what we observe is a more calibrated approach that combines de-risking and sectoral hedging. While Washington is still looking to reduce strategic vulnerabilities by diversifying supply chains and investing in domestic production, there are also examples of selective cooperation with China, particularly where dependencies are mutual and disruption is costly.

Unlike more familiar forms of hedging, which separates strategic competition and rivalry across different sectors, sectoral hedging involves differentiated behavior within a single domain.  In the case of rare earths, the U.S. and China are simultaneously adversaries and collaborators, depending on the end use of the minerals. This emerging phenomenon provides insights into how great powers manage interdependence amid hostility.

In June 2025, China exported approximately 353 metric tons of rare earth permanent magnets to the United States, a staggering 660 percent increase from the previous month. This surge came after Washington and Beijing reached a preliminary trade understanding to ease controls on certain REE exports following Beijing’s April 2025 restrictions requiring licenses for magnet shipments.

China’s total rare earth magnet exports in June hit 3,188 tons globally, a roughly 158 percent increase compared to May.  The U.S. was the second-largest recipient following Germany. This reversal occurred despite earlier friction sparked by the Biden administration’s tech export controls and Beijing’s retaliatory measures.

This rebound is not a return to the status quo; it reflects a strategic calculus on both sides. US firms facing acute shortages lobbied for access, while Beijing used export approvals as bargaining chips to gain relief in other sectors such as AI chips and semiconductors.

Strategic Denial of Rare Earths in the Military Sector

Despite these resumed trade flows, China continues to restrict rare earth exports linked to US military contractors like Lockheed Martin and Raytheon. On April 4, 2025, China imposed restrictions on seven specific rare earth elements (dysprosium, gadolinium, lutetium, samarium, scandium, terbium, and yttrium) and magnets used in the defense, energy, and automotive sectors. Exporters must obtain additional licenses, which may be subject to conditions or denials based on end-use, particularly for defense purposes.

This selective restriction reflects China’s broader strategy of economic statecraft: punish military encirclement while preserving gains from civilian trade. By withholding critical inputs from defense-linked industries while continuing to supply civilian sectors, Beijing demonstrates its abilities to weaponize interdependence without collapsing mutual economic ties. Therefore, while Tesla and Apple may continue to receive what they need to power EVs and smartphones, the Pentagon is increasingly forced to seek alternatives.

The implications for US defense planners are significant. Rare earth elements are essential to missile guidance systems, unmanned aerial vehicles, radar systems, and jet engines. Any disruption, even a selective one, can delay procurement cycles and increase production costs. As a result, the U.S. has accelerated efforts to diversify sources, build strategic reserves, and invest in domestic processing capabilities.

This tactic is not unprecedented. During the 2010 Senkaku Islands dispute (also known as the Diaoyu Islands in China), China temporarily suspended rare earth exports, signaling its readiness to use critical minerals for geopolitical leverage. The current approach is more calibrated. Rather than implementing blanket bans, China now relies on targeted denials to reinforce strategic red lines.

Why Does Sectoral Hedging Fit the Moment?

Sectoral hedging captures this differentiated behavior. Unlike comprehensive decoupling, it allows states to shield vital national security sectors while maintaining cooperative linkages where dependencies are mutual.  It represents calibrated interdependence that reflects geopolitical realism without total economic disengagement.

For the U.S., this means investing in domestic supply and recycling to create buffers rather than an outright break. Apple committed $500 million to MP Materials to build a rare earth magnet plant in Texas, aimed at reducing dependence on Chinese magnets. Similarly, the Pentagon continues to fund MP Materials and became the largest shareholder through a multibillion-dollar investment to ensure some baseline domestic production capacity. In his 2010 article on strategic hedging, Evan S. Medeiros explained how states, particularly in the Asia-Pacific, adopt a dual strategy of engagement and balancing to manage uncertainty in great power relations. While this concept emerged when US-China ties were ambiguous but not openly hostile, it remains relevant today in a more adversarial climate.

The U.S. is hedging in both directions, with China in narrowly defined rare earths to maintain short-term stability, and against China by building strategic partnerships with middle and small states such as Australia, Canada, Japan, Ukraine, Vietnam, and the European Union to reduce long-term dependency. This dual approach reinforces the idea that hedging is not limited to weak states for risk management, but can also be a grand strategy for great powers navigating multipolar uncertainty. These cooperative arrangements involve joint ventures in rare-earth mining, processing, and recycling, reducing excessive reliance on any single source, particularly China. Such initiatives signal a broader external hedging strategy, where the U.S. creates structural buffers without pursuing open confrontation.

For China, selective restriction allows it to exercise leverage without collapsing its own export markets.  While it does not dominate all rare earth mining, China manufactures approximately 85-90% of rare earth magnets, particularly sintered neodymium-iron-boron (NdFeB) magnets, essential to both civilian and military technologies. This production dominance enables China to benefit from being a reliable supplier in commercial sectors, even as it withholds access until geopolitical red lines are crossed.

Traditional hedging literature focuses on strategic and multi-alignment in foreign policy.  But this case invites us to reconsider how hedging operates within issue-specific domains.  Here the same commodity, rare earths, serves as a site of both confrontation and collaboration.  This goes beyond domain-specific hedging and enters a more granular form. This kind of sectoral hedging could be a defining feature of future geopolitical competition, especially in dual-use technologies, where the lines between civilian and military applications blur.

Inherent Limits and Emerging Vulnerabilities

Still, sectoral hedging has its vulnerabilities. The separation and refining process for rare earth elements is highly complex, and China maintains significant advantages due to decades of investment in technology, infrastructure, and industrial capacity. Alternative sources from Australia, Vietnam, and the United States remain constrained by cost, regulation, and environmental concerns.  Any geopolitical flare-up like a Taiwan Strait crisis could instantly sever even these selective ties.

Moreover, sectoral hedging does not eliminate mistrust in U.S.-China relationship; it merely postpones rupture. For instance, if AI enabled weapons systems become heavily dependent on rare earths, today’s civilian cooperation could come under renewed scrutiny.

Selective Interdependence as Strategy

In the emerging great power competition, complete disengagement is a costly illusion. At the same time, unconditional engagement is strategically naïve. Between these poles, sectoral hedging accepts rivalry but channels cooperation through narrow interest-driven corridors.  China and the U.S., despite mutual suspicion, are learning to manage this balancing act in the rare earth domain. The outcome is a paradox:  strategic competition wrapped in selective interdependence.

Understanding and theorizing this behavior is critical. It not only explains current trends but also offers a blueprint for managing future confrontations and other strategically sensitive sectors, from biotech to quantum computing.

In a world where cooperation is risky but isolation is impossible, sectoral hedging may be the new realism. Hedging is not only vertical (weak versus strong), but also horizontal, between rivals with asymmetric dependencies in key sectors. This interaction between the U.S. and a coalition of middle and smaller states shows that great powers rely on the periphery to secure autonomy in strategic sectors. Middle and smaller states are not just passive actors but play an active role in enabling great-power resilience through resources, geographic access, and political alignment. However, unlike middle and smaller states, great powers pursue hedging in more complex, sector-specific ways. They use their structural advantages to balance competition and cooperation at the same time. Sectoral hedging in areas like rare earths, energy, and maritime logistics reflects a broader systemic strategy rather than a purely bilateral one. From a structural realist perspective, particularly Kenneth Waltz’s neorealism, such behavior is expected in an anarchic system. In this view, great powers compete to maximize their relative position by leveraging the distribution of capabilities. Sectoral hedging is therefore not a break from realism but a form of adaptation that balances competition with selective cooperation.