China’s latest trade war card isn’t as strong as Beijing thinks James Griffiths
https://www.cnn.com/2019/05/21/politics/china-us-trade-war-rare-earths-intl/index.html
Hong Kong (CNN)Chinese President Xi Jinping’s actions this week have been rich with symbolism.
On Monday, he laid a wreath at a monument dedicated to the Long March, a fabled retreat during the Chinese civil war which helped cement Mao Zedong’s rise to power. Could this be a sign that a similar protracted struggle will be needed in the expanding trade war with the the US?
Perhaps not. But the correct interpretation of another of Xi’s actions was much clearer, spelled out for all by state media.
In Jiangxi province, in southeastern China, Xi visited a company which specializes in rare earth minerals. Such elements are vital to the production of high-tech devices including smartphones, lasers, missile systems, superconductors and a whole host of others.
China accounted for 80% of all rare earth minerals imported by the US between 2014 and 2017, according to the United States Geological Survey, and they were among the few items not hit by US tariffs in Washington’s most recent trade war escalation.
Xi was accompanied in his visit to Jiangxi by Liu He, the vice premier who has led trade negotiations. And while China’s Ministry of Foreign Affairs has tried to downplay the symbolism of the pair’s visit, analysts and state media were in little doubt what message was being conveyed.
Global Times, a nationalist tabloid, said Xi’s visit had “offered huge support to the critical industry that has been widely viewed as a form of leverage for China in the trade war with the US.”
In a piece last week, the paper went further, saying US demands for rare earth minerals were “an ace in Beijing’s hand.”
“It will take many years if the US wants to rebuild its rare-earth industry and increase its domestic supply to reduce its dependence on China’s minerals,” Global Times said. “That’s long enough for China to win a trade war against the US, during which time China’s monopoly on the production of rare earths will help Beijing control the lifeblood of the US high-technology sector.”
But while rare earths could prove a potential pain point for Washington, they may not be the advantage some in China think.
Phantasmal weapon?
We’ve been down this road before.
In 2010, following a dispute with Japan over contested islands during which a Chinese fishing boat captain was detained by Tokyo, China cut off rare earth exports to that country. Japan quickly released the captain in what was described as a “humiliating retreat.”
China’s apparent ability to force concessions through its rare earths monopoly was greeted with widespread alarm, including in Washington, where a Congressional hearing was held to discuss “China’s monopoly on rare earths: Implications for US foreign and security policy.”
In the decade since, however, experts have questioned whether this alarm was misplaced. China secured the release of its citizen but the disputed Senkaku islands (known as the Diaoyu islands in Chinese) remain in Japanese control.
As Eugene Gholz, who has advised the US government on rare earths, wrote in a report for the Council on Foreign Relations, at no point was China’s leverage over the rare earths market greater than in 2010, “but even with such apparently favorable circumstances, market power and political leverage proved fleeting and difficult to exploit.”
“The broad lesson is that policymakers should not succumb to pressure to act too quickly or too expansively in the face of raw materials threats. Not all such threats are like that posed by the historical precedent that is typically invoked: the 1973 oil crisis,” Gholz wrote, referencing the oil embargo imposed by Arab members of the Organization of Petroleum Exporting Countries (OPEC) in retaliation for Washington’s decision to help supply the Israeli military during the 1973 Arab-Israeli War.
“Caution about overstating raw materials threats is particularly advisable because where foreign policy or intelligence analysts see a potential for dangerous market concentration and economic coercion, some businesses are also likely to see an opportunity to introduce competition and make a profit, ameliorating risks,” added Gholz.
Weakness in strength
Despite their name, rare earths are not that rare. They are difficult and often environmentally devastating to extract and refine, but some so-called rare earth elements are actually among the most abundant on Earth.
Unlike oil and other raw materials, the need for a large and constant supply of many rare earth materials is also less important. Many products which use rare earths only require tiny amounts — they have been described as “the vitamins of modern technology” — and therefore it will take time for them to be impacted by tariffs. The US also maintains stockpiles of many key rare earth materials, not least those used in the defense industry.
China’s monopoly on rare earths is also not what it seems. While it plays a major role in current global trade, this is largely due to relatively lax environmental regulations in the past which made extraction and refinement in China cheaper and easier than other countries. That advantage, if it could be described as such, has shrunk in recent years as Beijing has cracked down on domestic companies and illegal extractors.
China holds around one-third of remaining reserves, roughly equivalent to those of Brazil and Vietnam combined, but is also one of the leading consumers of rare earths in order to fuel its own technology industry. By 2025, China is expected to be net importer of rare earths, a factor that may lead Beijing to hesitate to drive up global prices or set a precedent of using rare earths as a political tool.
Major rare earth reserves have been found in Japan, southeast Asia, Australia, and parts of southern and eastern Africa. Companies have also begun to innovate how they use rare earths: Apple said in a recent environmental responsibility report that it has begun recycling rare earth materials from old iPhones and other products.
Beijing has already majorly misjudged Washington once during the trade war, expecting US President Donald Trump to blink in the face of potential economic hardship for his base. That misstep resulted in a major escalation of tariffs and a new crackdown on Chinese tech giant Huawei.
With few friends in Washington, and signs that its own economy is hurting, China could find that a rare earths play could be another gamble that doesn’t pay off.
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