How scared should you be of ‘the China squeeze'?

Business Times

2 days ago

'CHINA beats you with trade, Russia beats you with war,' mused US President Donald Trump on Aug 11. His reflection came mere hours before he extended a fragile trade truce with China for another 90 days.
After months of tit-for-tat tariffs, the Sino-American trade war has settled into uneasy stasis. But China is using the time to hone a sophisticated arsenal of devastating economic weaponry. Even as the sides contemplate a broader deal to stabilise the planet's most important trading relationship – worth US$659 billion (S$843.7 billion) each year – China knows that its power is not in what it buys, but in what it sells.
That is a far cry from the last time Chinese President Xi Jinping and Trump went head-to-head on trade in 2019. Xi agreed to buy more American goods in a deal much criticised in China. It fitted a clumsy pattern.
Back then, China tended to punish transgressions by cutting access to its consumer market, such as for Australian wine or Lithuanian beef. No longer. Now Xi's economic weaponry squeezes supply chains and the foreign industries which depend on them.
Victories piling up
Chinese victories have piled up in recent months. First came Xi's masterstroke in April: retaliating against US tariffs by choking off supplies of Chinese-refined rare earth minerals and magnets critical to American industry. Within weeks, the US' US$1.5 trillion carmaking industry, among others, panicked and Trump sought peace.
In July, the European Union squealed in the lead-up to an EU-Chinese summit after flows of rare earth minerals and battery technology to Europe slowed without explanation. Speeding them up then became a subject of negotiation.
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It all appears in line with Xi's very careful plan. In 2020, he called for China to create asymmetric dependencies, by ridding its own supply chains of foreign inputs, while seeking to 'tighten international production chains' dependence on China'.
At a meeting held in secret in April that year, Xi told a powerful Communist Party body that such dependencies are 'a powerful countermeasure and deterrent capability against foreigners who would artificially cut off supply (to China).' It wants other countries to depend on it without it depending on them.
China's use of economic sanctions of all sorts has reached an all-time high in 2025, according to data collected by Viking Bohman of Tufts University and co-authors. Like US export controls on which China's new regime is modelled, Xi's weapons are hard to resist using, even at the risk of blowback.
'Beijing was not surprised to find it has leverage, but it must be used discreetly,' says Xiang Lanxin of the National University of Singapore.
So how does China's economic weaponry work? In recent years, Xi's officials have been drawing up a list of goods that China makes and the world needs.
After Trump's election last year, China's government steeled itself. It implemented a long-expected export-licensing scheme for more than 700 products, many of which are relied upon by Western armed forces, including advanced manufacturing machines, battery inputs, biotechnology, sensors and critical minerals. The listed items are not limited to inputs for weaponry, however.
Many are also critical to industries that officials view as strategic, such as electric vehicles and solar technology. For some of the items, such as minerals and chemical precursors for medicines, Chinese producers hold a near-monopoly over global supply.
That is partly a result of market forces concentrating production in China, where it is cheap, scalable and often subsidised, and partly a deliberate strategy to control industrial inputs.
Crucially, the rules formalise officials' ability to switch off exports by revoking licences. Chinese producers applying for them must know who is the end user of their goods and report as much. This has allowed China to continue choking supplies of rare earths to specific Western defence firms, even as it has resumed the flow into America as part of the trade truce.
A shortage of heat-resistant magnets, for example, is pushing up costs for such things as jet-fighter engines. The legislation also includes so-called long-arm jurisdiction. It gives officials the ability to mandate that goods manufactured in third countries using Chinese-made inputs cannot be sold to specific end users.
When China's policymakers consider which industries to target through such rules, they do not appear to focus on what will cause the most pain, but rather on what will be good for their own firms. Export controls follow a pattern of keeping high-value-added supply chains inside China, says Rebecca Arcesati of Merics, a Berlin-based think tank.
If officials were to ban exports of finished goods, such as batteries or drones, it could hurt the strength of domestic producers. But by restricting the flow of industrial inputs needed to make those goods, policymakers in fact lower prices on domestic markets, and give their exporters a cost advantage against foreign competition in important sectors.
This playbook appears to be in use in India today to prevent it from helping others break free of China's grip. Licences have stopped being approved for advanced manufacturing machines for India, where Apple is creating alternative supply chains.
The restricted flow of machine tools and dysprosium, a rare earth element, have apparently slowed production of iPhones and AirPods respectively. And in June, Apple's in-country manufacturer, Foxconn, withdrew more than 300 Chinese engineers from India, suggesting that the recent moves were coordinated.
Giving the game away
China's use of its economic weapons this year has mainly been defensive – in response to American trade policies. But it all comes at a cost. Foreign officials and firms now fret about being suddenly cut off from Chinese suppliers, say, in a conflict over Taiwan.
Chinese policymakers have done themselves 'enormous reputational damage', laments a foreign business leader in Beijing. Officials in Brussels, Tokyo and Washington are spooked and a flurry of deal-making is under way.
That means Xi is likely to confront a drawback that America knows well: the more sanctions are used, the less effective they risk becoming. For a chokehold to be effective, a country must have a near-monopoly on supplying a particular good or service, says Matteo Maggiori of Stanford University.
'Sanctioning power is non-linear, which means that the difference between controlling 95 per cent and 85 per cent of a market is the difference between whether the targets of sanctions can find alternative suppliers or not,' says Maggiori. He notes that whereas tariffs cause firms to increase prices, export controls tend to spur them to invest in alternatives.
Some Chinese officials quietly understand. Certain senior ones have even indicated to European businesses that urgent cases of rare earth shortages, such as those that would cause a plant to shutter, should be raised with the Ministry of Commerce to find informal work-arounds to keep supplies flowing.
Such deft management of the controls by officials may help dull the desire of foreign firms focused on short-term profits to invest in alternatives. Wu Xinbo of the Centre for American Studies at Fudan University told CNN in June that the flow of exports could be dynamically managed. 'If the bilateral relationship is good, then I'll go a bit faster; if not, I'll slow down.'
Ultimately, China finds itself in a delicate position. It is simultaneously assuring foreigners that its supply chains are reliable while warning them off seeking alternatives. And its diplomats badger trade partners not to give in to American demands that would isolate China from global trade.
'Attempting to decouple and disrupt supply chains,' Xi told foreign bosses in March, 'will only harm others and not benefit oneself.' Wise advice indeed.
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