China's Rare Earths Grip Gives Xi Leverage in US Trade Duel

Yahoo

2 days ago

(Bloomberg) -- After the US and China agreed in Geneva to lower tariffs from astronomical heights, tensions are now surging over access to chips and rare earths. And Beijing increasingly appears to have an edge.
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President Donald Trump on Friday accused China of violating the agreement struck last month, and sought a call with Xi Jinping to sort things out.
The main sticking point appears to be critical minerals, with US officials complaining Beijing hadn't sped up exports needed for cutting-edge electronics. The US has said the decision to reduce tariffs hinged on a Chinese agreement to lift controls on some rare earths.
'It's going to require a discussion between the presidents of the two countries,' Deputy US Treasury Secretary Michael Faulkender said Monday in a brief interview with Bloomberg Television.
As China keeps constraints on metals critical to America's national security, Washington is ramping up its own tech restrictions. Over the past three weeks, the US has barred the shipping of critical jet engine parts to China, throttled Beijing's access to chip-design software and slapped fresh curbs on Huawei Technologies Co. chips.
That's sparked anger in world's second-largest economy. Chinese officials on Monday vowed to respond and accused the US of undermining the Geneva consensus, dimming the chance of a leaders call.
For years, Washington was believed to have the advantage over China in the fight for technological dominance thanks to its grip on semiconductor supply chains. Xi has shown he's ready to fight back, in part by tightening controls over critical minerals in a bid to force the US into easing its restrictions.
While the Trump administration has shown little sign of relenting on chip curbs, it has discovered replacing China as a supplier of rare earths could take years and cause pain for key industries. The Asian nation produces almost 70% of the world's metals crucial for making fighter jets, nuclear reactor control rods and other critical technology.
China is gaining ground in the standoff, according to Cory Combs, associate director at consultancy Trivium China who specializes in supply chains. Washington is still a decade away from securing rare earths independently from Beijing, while Chinese firms have developed capable alternatives to most US chips, he said.
'China's leverage is more durable than a lot of the US leverage at this stage,' he added. 'I'm not sure if this works out well for the US.'
The dispute has the potential to endanger the fragile trade truce between Washington and Beijing. In theory, tariffs could snap back to more than 100% after the 90-day negotiating period. Trump has incentive to avoid that, after the US economy shrank at the start of the year and markets panicked under the weight of huge tariffs.
Supply-Chain Warfare
As part of the agreement struck in Switzerland, China promised to remove or suspend 'non-tariff countermeasures taken against the United States' after Trump announced punitive duties in April. The Chinese government did not elaborate on what that entailed.
Rare-earth exporters must apply for permits from the Ministry of Commerce. That process is opaque and difficult to verify, allowing officials to turn it on and off again with little visibility from the outside world.
The paperwork involved has caused hold-ups, which are only now showing signs of easing. 'We are seeing some approvals come through — certainly slower than industry would like,' said Michael Hart, president of the American Chamber of Commerce in China. 'Some of the delay is related to China working through their new system.'
For some US firms, the metals can't flow fast enough. Ford Motor Co. temporarily shuttered a factory in Chicago last month because it ran short of rare earth components. At a long-running US defense aviation conference Combs recently attended, rare earths were a top talking point. Attendees took the threat 'very seriously,' he said.
Such concerns show why export controls have become a central pillar of China's supply-chain warfare: They can hurt US industries while causing little harm at home. Tariffs, in comparison, can be costly both for Chinese manufacturers and consumers.
Giving Xi even greater leverage, the impact of China's rare earths controls aren't limited to American importers.
India's largest electric scooter maker, Bajaj Auto Ltd., warned last week that the country's vehicle production will take a hit as early as July if China doesn't resume shipments. 'Supplies and stocks are getting depleted as we speak,' said the firm's executive director Rakesh Sharma.
Over 30 such applications have been made for shipping to Indian companies — and none have been approved so far, Sharma added. Companies from another large Asian importer only started getting permits last week, according to an official from the country who asked not to be named.
China's squeeze on all countries highlights another risk for Trump: Strategic US sectors, such as batteries and semiconductors, depend on South Korea and Japan for components. If Beijing cuts off those US allies from rare earths, American firms could face even more pain.
Japan's top trade negotiator Ryosei Akazawa called rare earths 'undoubtedly a critical theme for economic security,' after emerging Friday from his latest round of trade negotiations with US counterparts.
Next Battleground
Critical minerals were flagged as the next battleground in US-China ties at the height of Trump's first trade war, when Xi visited one of his country's biggest permanent magnet producers — a trip widely seen as an implied threat.
In July 2023, Beijing followed through by slapping export curbs on gallium and germanium — minerals used to make semiconductors — after the US sought to restrict China's access to artificial intelligence chips.
Recognizing the danger, the US Department of Defense has pledged to develop a complete mine-to-magnet rare earth supply chain for all domestic defense needs by 2027.
A lack of commercially viable natural reserves, few engineers trained in the extraction process and limited numbers of companies able to compete at the industry's thin price margins are just some of the challenges the department faces.
The US national security establishment has known about its dependency on China for years yet hasn't come up with a solution at scale, according to Liza Tobin, managing director of risk advisory firm Garnaut Global. Despite that, she said, the Trump adminstration isn't making concessions.
'Over the last couple of weeks, you've seen them doubling down with this empowered Commerce Department strengthening and broadening the export controls,' she told Bloomberg Television.
Catching up will depend on how deeply Washington is willing to spend. Trump is already tapping foreign capital. During the president's trip last month to the Middle East, MP Materials Corp. — the sole US producer of rare earths — signed a deal with Saudi Arabia's top mining firm to develop a supply chain.
The US could also intensify cooperation with Australia's Lynas Rare Earths Ltd. — the largest producer of separated rare earths outside of China, although that operation still sends some of its oxides to the Asian nation for refining. While capacity is building in Brazil, South Africa, Japan and Vietnam, they can't offer an immediate fix for US firms.
Beijing hasn't exhausted its leverage. Restrictions so far have targeted medium- and heavy-rare earths, which are concentrated in defense applications. Weaponizing light rare earths — such as neodymium and praseodymium — could deal an even bigger blow to the US economy, as they're more widespread in consumer goods.
For now, Xi is unlikely to pursue the most extreme options as it could invite blowback from vulnerable industries, said Neil Thomas, a fellow for Chinese politics at the Asia Society Policy Institute's Center for China Analysis.
'Beijing's controls on rare earths are a warning against further escalation,' he added. 'But if US-China tensions worsen again, then Beijing may start to inflict real pain on US defense supply chains.'
--With assistance from Lucille Liu, James Mayger, Mackenzie Hawkins, Yoshiaki Nohara, Keith Naughton and Caroline Hyde.
(Updates with analyst quote.)
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