China-US trade deal kicks the rare earths can down the road: Russell

Zawya

20 hours ago

LAUNCESTON, Australia: The tentative deal between the United States and China may represent a retreat from the worst-case scenario of a total collapse of trade between the world's two biggest economies, but it creates more problems than it solves.
President Donald Trump touted the agreement, which is still subject to final approvals on both sides, as a "great deal" that will be good for both countries.
"We have everything we need, and we're going to do very well with it. And hopefully they are too," Trump told reporters prior to attending a performance on Wednesday evening at Washington's Kennedy Center.
While not all the details are known, what has been revealed shows a deal that will probably hurt both economies, and not solve some of the pressing issues, such as China's dominance of the rare earths supply chain.
The United States will impose tariffs of 55% on imports from China, while China can levy 10% on its purchases from the United States.
This still represents a sharp increase in tariffs from the 25% on imports from China that was in place when Trump returned to the White House in late January.
Tariffs at such a level are likely high enough to cause trade to shrink while boosting inflation in the United States, and lowering economic growth in both countries.
If Beijing does keep 10% tariffs on imports of U.S. energy commodities, these will be high enough to ensure that virtually no U.S. crude oil, coal or liquefied natural gas enters China, eliminating one of the few products that China is able to buy in large quantities from the United States.
It's also questionable whether the tariffs will be enough to prompt more manufacturing in the United States, or whether they will simply cause some production to shift from China to countries with lower import duties.
Trump did single out rare earths when talking up the trade deal, saying China will provide the metals that are found in a wide range of electronics and vehicles "up front".
But the deal does little to solve the underlying problem with rare earths, magnets and other refined metals such as lithium and cobalt, which are dominated by Chinese supply chains.
At best, the agreement this week is a kick the can down the road type of deal, insofar as it prevents an immediate crisis in manufacturing in the United States, but leaves open the possibility that Beijing will once again threaten supplies if there are problems between the two sides in the future.
China controls 85% of global rare earths refining, a situation that has hitherto largely benefited Western companies as they have been able to source the metals at prices far lower than what they would have had to pay had they tried to mine and process the elements by themselves.
CRITICAL MINERALS
Rare earths are an example of the wider problem with so-called critical minerals.
It's all very well to designate a mineral as critical, but if you don't actually do anything to secure a supply chain, then you really have to question just how critical the mineral is.
Rare earths aren't really that rare, although finding economic deposits is challenging.
It's the same for lithium, copper, cobalt, tungsten and a range of other metals that many governments designate as critical.
But developing supply chains for these minerals and refined metals outside of China is costly, and so far Western countries and companies have been unwilling to commit funds.
Companies won't develop new mines and processing plants if they have to compete with China at market prices, as very few projects would be economic.
Governments have been sluggish in developing policies that would support new supply chains, such as guaranteeing offtake at prices high enough to justify investment, or by providing loans or other incentives.
This means that the world remains beholden to China for these metals, and is likely to remain so until governments start to act rather than just talk.
It's also worth noting that China will have learned from its latest talks with the Trump administration.
As Trump himself may have put it, the United States doesn't hold all the cards, with Beijing having a few aces up its sleeve as well.
The danger is always in overplaying one's hand. If Beijing keeps using rare earths as a trump card, it runs the risk that the West will cough up the cash to build its own supply chain.
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The views expressed here are those of the author, a columnist for Reuters.