Rare earths: A trump card over Trump for China?

Imports and Exports | | MIC Customs Solutions |

The trade war has become hotter after China threatened to restrict the movement of significant minerals.

In an unexpected new twist in the trade war between China and the US, China's planning body has threatened to use rare earths as a form of leverage to prevent US president Donald Trump from repeatedly applying tariffs to Chinese products.

It had appeared as though America had the upper hand in the protracted struggle and in talks aimed at creating some kind of trade agreement between the two nations.

Now, though, analysts are predicting trouble for the North American behemoth that could have it needing to back down - and may affect global trade.

What are rare earths?

Rare earths are a group of 17 elements commonly used in the production of a huge number of products in a variety of sectors, including oil refineries, renewable energy, electronics and glass.

Although the US Geological Survey states they are actually relatively abundant in the earth's crust, there are few locations in the world that currently mine or produce them because extraction is difficult and environmentally damaging.

China now accounts for around 70 per cent of global output, plus it is dominant in the refining of rare earth ores, too. In 2018, some 90 per cent of all the processing of rare earths into usable oxides was carried out in China, and China's exports of them have doubled over the past five years.

Significantly, around 80 per cent of the US's rare earth imports come from China, data from the government states.

Consequently, China may have found its vital bargaining chip - because restricting exports could have a major impact on US industry that could cost it trillions of dollars. Even the US Geological Survey has deemed rare earths to be critical for defence and the economy.

Retaliation from China

The relationship between China and the US has been deteriorating since early May, when China refused to agree to what it dubbed a one-sided treaty on free trade with America.

After talks in Washington - which had been expected to result in the inking of a deal - collapsed, vice-premier Liu He said: "China needs a cooperative agreement with equality and dignity."

Next, and after Mr Trump revealed he wanted to cut ties with Chinese tech brand Huawei, Chinese president Xi Jinping visited a rare earths magnets firm in Ganzhou.

The move was widely interpreted as the start of retaliation - and then the editor of Chinese state-run Global Times tweeted: "China is seriously considering restricting rare earth exports to the US."

Even more significantly and perhaps worryingly for trade, the newspaper included a rarely-used phrase that roughly translates as 'don't say I didn't warn you', something it has previously stated prior to conflicts with both India and Vietnam.

Effects of rare earths restrictions

As a result of this activity, shares in Chinese companies that mine rare earths soared this week and analysts began to look seriously at whether or not restrictions are something China would do.

In fact, the nation has imposed export quotas on rare earths before, including for Japan over a maritime dispute in 2010. China had also effectively imposed limits for 15 years until 2015 - having cited a desire to cut pollution - until the World Trade Organisation stepped in to determine they violated trade regulations.

Additionally, rare earths have already featured in the current trade war, with China having applied levies of 25 per cent on imports from the US's only producer and the US excluding them from its own list of prospective tariffs on Chinese goods.

It's not currently clear how any limits on rare earths would immediately affect global trade or products further along the supply chain. Furthermore, China may be reluctant to make good on its threat in case it damages its relationships with other industrial nations that process its rare earths.

However, the move certainly means there is likely to be a lot more tension when China and the US come face-to-face at the G20 meeting soon - and it probably means a free trade deal is not going to be imminent.

In December 2017, Mr Trump signed an executive order aimed at reducing American reliance on external sources of minerals. He is perhaps now hoping he had acted to implement this much more quickly.