The trade war could escalate in days.

Days after President Trump doubled down on his threat to slap tariffs on another $300 billion worth of Chinese goods, China isn’t backing down.

Instead, it may be about to escalate the battle.

China’s National Development and Reform Commission (NDRC) and rare earth executives mentioned rolling out the groundwork for limiting rare earth exports.  

China warned of this weeks ago, too.  

“We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!” the People’s Daily said in a commentary titled “United States, don’t underestimate China’s ability to strike back,” as quoted by CNBC.

Should China cut off rare earth supply, it could be disastrous.  

Remember, rare earths are necessary to build and operate hybrid cars, 700 pounds of neodymium are needed to build a three-megawatt windmill, iPhones, medical devices, computers, and cell phones. Scandium is used in batteries. Cerium is used in glass production. Gadolinium is used in X-ray imaging and magnets.  Thulium is used in lasers and microwave equipment.

Also remember that China has the largest rare earth mining capacity in the world, especially after the U.S. pulled back from mining.  That only increased our dependence on China’s supply.

“China, as the dominant producer of rare earths, has shown in the past that it can use rare earths as a bargaining chip when it comes to multilateral negotiations,” said George Bauk, Chief Executive Officer of Northern Minerals Ltd., as quoted by Bloomberg.

In terms of timing, an escalation of the trade war with more tariffs could be the trigger.

Rare Earth Stocks Would Benefit

Should China follow through on its rare earth threat, prices could skyrocket.  

It’s part of the reason rare earth ETFs, such as the VanEck Vectors Rare Earth/Strategic Metals ETF (NYSE:REMX) have drawn considerable interest.  

The REMX targets an obscure part of the mining market — rare earths metals.  The fund is heavily invested in small- and micro-caps, and has significant exposure to emerging-market issuers–the firms you typically find producing cerium, manganese, titanium, and tungsten. REMX’s narrow portfolio holds just a handful of names, selected and weighted by market cap.