Trade Deficits, Tariffs, and Rare Earths

Having read the part of processing rare earths in China when the United States has a sufficent supply of rare earths to sustain US Processing. It may make sense to process rare earths in the US. The possesses significant rare earth element (REE) deposits estimated to be > than 3.6 million tons. There are major reserves in California, Wyoming, and Texas. The rare earths are shipped to China even though the U.S. holds substantial resources. We rely heavily on foreign processing, importing 70% of its supply from China.

In 2025, Angry Bear did write “Problematic Rare Earths.” The post did discuss problems with China at the time. With a tough-guy president whose actions hare threating oil supply with attacks on a major source of oil, the United States does need a source for processing rare earths domestically. It will alleviate being held captive by a foreign country and a blundering president.

“Tariffs and the U.S. Trade Deficit”

Econcofact’s Weekend Reading

Last week President Trump stated that tariffs had reduced the U.S. trade deficit by 78 percent and predicted that the trade balance would turn positive this year for the first time in decades. However, newly released data from the Census Bureau and Bureau of Economic Analysis indicate that while the overall trade deficit narrowed slightly in 2025 as compared to the previous year, this was largely due to an increase in net exports of services. The trade deficit in goods reached a record high despite the imposition of tariffs on goods from many countries. While tariffs may have contributed to the decline in imports from China, imports from other Asian economies increased. This Weekend Reading highlights memos that examine the drivers of trade deficits and the economic effects of tariffs. 

There is broad consensus among economists, tariffs do little to affect trade deficits. By definition, a country’s trade balance equals national savings minus national investment. Christopher Towe explains how ongoing U.S. trade deficits, shown in the chart above, reflect these macro-economic factors and are a consequence of persistently low household saving and sizable federal budget deficits in the EconoFact memo “Tariff Wars and the United States Trade Deficit”.

Christopher discusses why tariffs will have little effect on the overall trade account but can weaken export competitiveness by raising the prices of key imported inputs, make goods more expensive for consumers, dampen investment, and reduce U.S. output and incomes.  

The record-high trade deficit in goods raises the broader question of whether international trade is inherently harmful to the U.S. economy. In the EconoFact memo “Does International Trade Hurt the United States?”, Michael Klein points out that there is no systematic relationship between larger trade deficits and slower economic growth, despite claims of a “trade deficit drag” by some in the current Administration. Rising trade deficits often accompany periods of strong domestic demand and investment, such as in the early 1980s during President Reagan’s first term. Michael also points out that both exports and imports have more than doubled as a share of GDP since the mid-1970s, as shown in the chart. This means that disruptions to trade will have larger consequences for the broader economy now than was the case a half-century ago.  

Much of the President’s motivation for tariffs is what he characterizes as unfair trade practices. He cites bilateral trade deficits as evidence of this.  But in a world with integrated international supply chains, bilateral trade statistics can be very misleading as to the actual amount of trade between two countries. In What Do We Learn from Bilateral Trade Deficits, Klein and Marc Melitz cite the example of the iPhone 7. The delivery of this iPhone in the United States was recorded as a $225 import from China. But the value added in China, through the assembly and testing of the devices, was only $5 – the other $220 represented the costs of components from other countries in Asia, Europe, and the Americas.  More broadly, because of the use of imported inputs, the bilateral trade deficit with China is overstated, while those with other countries are understated.   

Some of the tariffs imposed by President Trump have invited retaliation, notably American agricultural exports. Menzie Chinn discusses foreign responses to U.S. trade measures in “The U.S. Agricultural Sector Under Stress.” Agricultural exports account for more than 20 percent of the value of U.S. agricultural production, with bulk commodities such as soybeans, corn, and wheat representing the largest export categories by value. China, historically the top buyer of U.S. soybeans and typically purchasing more than half of U.S. soybean exports, bought no U.S. soybeans in September 2025, compared to more than 3.5 million metric tons in the same month in 2023 and 2024. There are no current commitments for purchases for the remainder of the marketing year, an unprecedented development in two decades. Meanwhile, Brazil has expanded soybean production by 40 percent since the first trade war and has set record shipment levels to China, with Argentina also increasing its share.  

There are also concerns about exports of rare earth elements from China being curtailed in response to American tariffs. Crescencia Maurer and Sharon Squassoni discuss the vital role of these elements for electric vehicles, wind turbines, semiconductors, and defense systems in: “Can the U.S. Reduce Its Reliance on Imported Rare Earth Elements?” 

The United States relies heavily on China for processing and refining rare earth elements. It accounts for roughly 69 percent of global rare earth mining and close to 90 percent of refining capacity. More than 95 percent of U.S.-mined rare earths are exported abroad for processing before being reimported in finished or intermediate form. Because building domestic refining capacity is estimated to take a decade or more, these supply chain realities illustrate how reliance on imported industrial inputs continues to contribute to the goods trade deficit, even amid higher tariffs. 

EconoFact Weekend Reading: “Tariffs and the U.S. Trade Deficit“