China has played a new card in its trade dispute with the United States. It has threatened to limit the flow of rare earth elements. Essential in all sorts of products from mobile phones to satellites, oil-drilling equipment to defense hardware, rare earth materials are important, and Beijing’s threat is not an idle one. China controls some 80% of the world’s rare earth production. The United States imports some $160 billion of these materials from China each year. But credible as Beijing’s threat is, efforts to choke off rare earth supplies carry a considerable danger for China as well as others, especially over the longer run. Beijing’s willingness to play the rare earth card speaks less to strength in this dispute than to its desperation.
Despite their name, rare earth elements are not that rare. They are, however, difficult and environmentally dangerous to mine and process. Up to the 1980s, the United States led in mining and production. But in the 1990s, Chinese planning set out to lead in both the mining and processing of these elements. At the time, Chinese Premier Deng Xiaoping pointed to Beijing’s objectives saying: “The Middle East has its oil; China has its rare earths.” That plan has succeeded. Though China can claim only about 30% of global deposits of these elements, it controls much more of the production, as already indicated, about 80%. Even the sole U.S. producer, MP Materials, sends the output of its mine in Mountain Pass, California to China for processing. Beijing has used its control of these elements for diplomatic purposes already. In 2010 to retaliate against Japan for holding the captain of a Chinese fishing vessel that attacked a Japanese Coast Guard ship, Beijing put limits on the flow of rare earth elements into the global supply chain, something for which the World Trade Organization sanctioned it in 2014.
There can be no denying that Chinese action to limit the supply of these materials would have adverse economic consequences. Rare earth elements are necessary for just about all batteries and are also used in much high-tech equipment in a broad array of industries. To be sure, each application only needs a small amount of this material, but what little they need is essential. The White House has acknowledged the importance of these elements. Both waves of Trump tariffs — the 10% levied late last year and the more recent 25% levies — exclude imports of rare earth elements.
Chinese President Xi Jinping made clear that his government is contemplating just such a supply shutdown when not too long ago he went out of his way to tour the region of China that produces these elements. If that were not clear enough, Hu Xijin, the editor of the Communist Party newspaper The Global Times, talked about China’s need to “seriously evaluate” the its policy on rare earth exports. In late May, the People’s Daily, when talking about rare earth elements, told the United States, that it is “overestimating its ability to manipulate the global supply chain,” adding “don’t say I did not warn you.” Beijing has already raised tariffs from 10% to 25% on the ore that MP Materials sends to China for processing.
It is, however, not this simple. If there is no denying that a Chinese embargo of rare earth elements – to the United States or generally – could cause economic disruptions, it would also hurt China, severely, too. It would, for one, spur global diversification out of China. Unlike oil, which seemed in Deng’s day to lie in abundance only in the Middle East these elements are available elsewhere. It is a matter of developing them, which, if not easy or cheap, would certainly occur if China were to suppress exports. (Indeed, what happened to the Middle East’s oil monopoly should serve as a lesson for China.) Even if China were to come back to the global supply chain quickly, a short-lived cutoff would still convince many users world wide that China is an unreliable source and so spur diversification anyway. Its decades-old striving for dominance would then have gone for little. A Chinese cutoff might also prompt the United States to go beyond tariffs and limit exports of semiconductors and other critical technology components that China needs for its exports of iPhones and computer assemblies and that is cannot produce for itself. Rising prices for rare earth elements would also encourage smuggling, which would be easy, since rare earth elements, as essential as they are, are only used in small amounts.
Since Beijing must also know these facts of life, the decision to take such extreme steps speaks less to Chinese leverage than to Beijing’s difficult position in this trade dispute. China was always at a disadvantage to the United States in this matter. Some 25% of China’s all-important export effort goes to the United States, fully 5% of its economy. That is a considerable dependence. In contrast, less than 10% of America’s relatively less important export sector goes to China, less than 2% of the U.S. economy. Even just the 10% tariffs the White House put in place late in 2018 have cut into Chinese exports. China’s economy has slowed. Factories have left China for other spots in Asia, to find lower wages than they can in China to be sure but also to escape the U.S. tariffs. Small wonder that Beijing has turned to one spot where is seems to have leverage. It does, but as should be clear, it is a potentially costly way for Beijing to proceed.
Xi has a lot of prestige at stake. It may impel him and China’s leadership to risk the long-term to maneuver around the White House in the current trade dispute. Most likely, however, China will try to protect its export-driven economy and keep all the rare earth dominance it has established during the last thirty-plus years by finding ways to end this dispute with the United States so that both leaders can claim victory in front of a domestic audience. That may take months yet. The effort will no doubt get a boost when Trump and Xi meet at the G-20 meetings later this month in Osaka, Japan. A settlement would offer a win for both sides. The alternative – a fight to the last man standing – would have a lot of losers and few winners, especially on the Chinese side.