Ray Dalio warns China restricting rare earth metals would be a 'major escalation' of trade war

Ray Dalio

David A.Grogan | CNBC

Ray Dalio, the co-founder of the largest hedge fund in the world, warned Wednesday that a move by the Chinese to restrict the production and export of rare earth metals to the U.S. would constitute a "major escalation" of the protracted trade war between the globe's two largest economies.

In a blog post on LinkedIn, Bridgewater Associates's Dalio said that such metals are essential to many American technologies companies working at the cutting edge of innovation.

"Refined rare metals are a critical import that American companies don't produce and need to get from China to produce many needed products in the U.S. such as mobile phones, magnets, night vision glasses, gyroscopes in jets, LED lights, glass, and ceramics," he wrote.

Dalio's comments came shortly after a Chinese official warned that products made from such materials should not be used against China's development, a statement many on Wall Street viewed as veiled threat. The comment from the official, first reported by CCTV, followed President Xi Jinping's well-telegraphed visit last week to rare earth-mining and process facilities in the southern province of Jiangxi.

That, too, added to speculation that Beijing could flex that industry as a possible trump card if trade tensions worsen. Most recently, President Donald Trump's administration said it would forbid the export of certain U.S. technologies to Chinese telecommunications company Huawei.

Dalio, who founded Bridgewater in 1975, is considered one of the most successful hedge fund managers of the modern era, having grown assets under management to over $160 billion throughout his involvement.

And while rare earths account for a small fraction of the $420 billion U.S. goods deficit with China, their worth to American firms outpaces their nominal value. As Dalio noted, those materials are critical in the creation of goods including iPhones, electric vehicles and precision weapons.

What's "worth keeping in mind is how Chinese and Americans fight wars differently (the Chinese more strategically by gaining relative strength and the Americans more by exchanging blows until one side gives up)," the longtime Bridgewater executive wrote.

"While all of this enters into my thinking, what is now most important at this time of brinksmanship is seeing what actually happens next," he added.

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