Supply chains become new battleground in the global trade war

Mint

a day ago

SINGAPORE
:
A key lesson from the latest skirmish in the U.S.-China trade war: The era of weaponized supply chains has arrived.
Earlier this week, Washington and Beijing ended a standoff involving the most potent new tool in superpower statecraft—export controls. As part of a monthslong trade fight, the two sides choked off the supply of such exports as rare earths or semiconductor technology in bid to gain an edge.
So when Chinese and American negotiators finally met in London to discuss a truce, the talk focused far more on dialing back supply-chain curbs than they did on tariffs, market access and other standard trade-negotiation topics.
That shift highlights how the rivalry between the U.S. and China is increasingly about who controls the levers of global economic power. For businesses and investors, the potential for these tools to be used more broadly in the pursuit of geopolitical goals by Washington and Beijing adds another layer of complexity to an economic backdrop already clouded by tariffs.
'The amount of uncertainty generated by this is significant," said Alfredo Montufar-Helu, senior adviser at the Conference Board in Beijing. 'It is something new."
To some analysts, the use of export controls means future trade talks between the U.S. and China will increasingly resemble the arms-control dialogues of the Cold War, when the U.S. and the Soviet Union worked to limit the buildup of nuclear weapons, without giving up the deterrent effect their possession conferred.
Today, instead of warheads, the U.S. and China are wielding a range of new economic weapons that have the potential to cause widespread economic pain. Following the latest skirmish, China agreed to resume exports of rare-earth magnets and critical minerals needed by U.S. companies—but only for six months, The Wall Street Journal reported.
'If you look at traditional arms-control treaties, the primary goal was to prevent a catastrophic, worst-case scenario from materializing," said Emily Benson, head of strategy at the advisory firm Minerva Technology Futures and a former Commerce Department official. 'And that's certainly what we see here in the economic domain."
In many essential sectors of the modern economy, China has the upper hand. The world's second-largest economy accounts for around a third of global manufacturing output, giving it a potential chokehold on auto parts, basic ingredients for drugs, key parts of the electronics supply chain and a host of other industrial sectors. It is the world's No. 1 exporter of machinery, ships, steel, ceramics, textiles and dozens of other goods, according to data from the International Trade Center, a U.N.-backed agency that promotes open trade.
The U.S. dominates fewer sectors—but its clout in advanced technology gives it an outsize advantage.
Supply-chain resilience became a hot topic in government buildings and corporate boardrooms during the Covid-19 pandemic, when the virus and the lockdowns aimed at containing it revealed the global economy's vulnerability to major disruptions, especially in China, the world's largest factory floor.
Auto factories in Missouri shut down in 2021 over a shortage of Chinese-made chips. European Union solidarity crumbled as individual countries raced to secure their own domestic supplies of ventilators, masks and other equipment.
Companies examined their supply chains to check for weak spots and in many cases opted to build up inventory, find additional manufacturing bases and take other steps to build greater resilience in their supply chains in the event of fresh disruption. These efforts did little to weaken China's grip on key supply chains.
The pandemic also underlined the potential for governments to turn their economic dominance against their rivals and adversaries.
Under the Biden administration, the U.S., which for years made abundant use of its dominant position in global finance to impose sanctions on countries including Iran and Russia, wielded one of the most powerful economic tools America possesses: its tech prowess. Washington tightened controls on exports of high-end semiconductors to China, and persuaded allies including Japan and the Netherlands to limit supplies to China of lithography machines and other essential chipmaking tools. The goal was to thwart China's ambition to supplant the U.S. as the world's foremost technological power.
In response, China has begun flexing its own economic muscle by tightly controlling the export of rare earths and other critical minerals that are essential for the manufacture of car engines, chips, smartphones and a host of other advanced technologies. It upped the ante this year by extending those controls to the export of rare-earth magnets, indispensable components in everything from air-conditioning units to jet fighters.
The U.S. said China agreed to speed approvals of magnet exports as part of a trade truce agreed in Geneva in May, which lowered substantially tariffs imposed by both countries on the other's imports.
Yet Washington soon grew frustrated at the slow pace of approvals, which automakers complained was hurting production. Officials again reached for export controls to raise the pressure on Beijing, notifying companies that exports to China of jet engines and related parts, chipmaking software, and ethane, a component of natural gas used in manufacturing plastics, were suspended, The Wall Street Journal reported.
This week's talks in London were aimed at easing this standoff. The two sides said they agreed to 'a framework" to restore the May truce, without providing many details. President Trump in a post on his Truth Social network said Wednesday that a deal is done and that the supply of magnets and rare earths from China to the U.S. economy will resume.
But China's move to put a six-month limit on rare-earth export licenses for American manufacturers signals that Beijing could use this weapon against the U.S. again if trade tensions erupt again.
The potential for export controls to disrupt trade adds to the pressure on companies already struggling to navigate tariffs and mushrooming trade conflicts. Companies operating in the U.S. and China will increasingly need to split their supply chains into two, said Eric Zheng, president of the American Chamber of Commerce in Shanghai.
'Companies will, generally speaking, continue to derisk, however you define this, essentially by treating the U.S. and China as two separate markets," he said.
Write to Jason Douglas at [e-mail]