The US and China are acting more belligerent against each other as time progresses.
Both Donald Trump and Xi Jinping would do well to realise that we live in an interdependent world and cannot afford to display exclusionist tendencies.
Last week, when Chinese President Xi Jinping visited a rare earth mining and processing facility during a domestic tour, the message was unmistakable. The loud message sent to the Donald Trump administration in the US was that China could starve the US of rare earth materials as a retaliation to Washington waging a trade war with it.
This was a message that the current trade dispute between the US and China could be scaled up, big time. Since 2017-end, both nations have been locked in dispute, imposing tariffs on goods worth billion of dollars on each other.
While nearly $250 billion worth of Chinese goods have attracted US tariffs, Beijing has hit back with tariffs on $110 billion worth US goods. The dispute is over US complaining against China’s trade policies and Beijing denying any wrongdoing on its part. Things have come to such a state where the US now threatens to impose tariffs on Chinese goods worth $325 billion.
Earlier this week, an unnamed Chinese official was quoted by China’s People’s Daily as saying that products made from rare earths and exported from China cannot be used to suppress and contain its development. The official, from the National Development and Reform Commission, was responding to a media question soon after Xi’s visit to the facility if China would use rare earths as a countermeasure against US efforts to contain Beijing.
Chinese official wire agency Xinhua warned in a commentary that the US risks losing supply of rare earth materials that are “vital to sustaining its technological strength”. China is able to wag its finger at the US because it produces most of the world’s rare earths.
According to the US Geological Survey, rare earth production totalled 120,000 tonnes in China during 2018. It was the top producer followed by Australia at a distant second producing 20,000 tonnes. The US was the third, producing 15,000 tonnes and India six, producing 1,800 tonnes. In addition, China owns 35 per cent of rare earth mineral reserves globally.
The US production comes from a single mining firm, Mountain Pass, which lacks refining facilities. It, therefore, ships 50,000 tonnes of rare earth concentrate to China every year for processing. Mountain Pass co-chairman James Litinsky told CNBC that globally, all countries barring China lack refining facilities.
An additional problem for Mountain Pass is that the 25 per cent retaliatory tariff imposed by China affects its export of rare earth concentrate too. Why is there so much concern over the threat of China stopping exports of rare earth to the US?
Rare earth comprises 17 elements that have magnetic and luminescent properties which help in lighting smartphones, making X-rays possible and safe use of nuclear reactors. Besides, they are used in automobile motors and electronics, oil refining particularly clean diesel, and many major weapon systems, including lasers, sonars, night visions and radars.
The problem for the US is that it imports 80 per cent of its rare earth compounds and metals from China, which insists that its products cannot be used against it. What the Xi administration is reminding Washington is that it cannot take any unilateral move to contain the technological development of other countries. The Trump administration has overlooked the fact that the global supply chain is intertwined that no economy can thrive on its own, Xinhua warned.
Ray Dalio, Co-Chief Investment Officer and Co-Chairman of Bridgewater Associates, in a write-up Beyond China-US Trade War on LinkedIn said that Washington’s standoff with Beijing was turning out to be more than a “trade war”.
Dalio warned that the conflict could turn out to be a terrible one and Trump was pushing his limits (threatening to escalate the standoff). Export controls, intended to shut down key areas, are definite signs of more escalation of the trade dispute.
Commodities analysts feel that the US could be much more dependent on China for rare earth metals that what data shows. Any curbs by China on rare earth exports will hit high tech, automobiles, defence and clean energy sectors in the US.
The problem for the US is that China has flooded the global market with its products at a very competitive price that has made competitors bankrupt and new entrants reluctant. This will result in key sectors in the US such as defence being affected if the Xi administration goes ahead with its threat. And will the US counter that too? In that case, we are in for a long-haul, full-blown trade war.
US industry leaders and businessmen are trying to impress upon Trump to go slow and cool down things. The US President hasn’t revealed his hand yet.
In another sign of escalation of the dispute, China on 31 May (Friday) said it was preparing a “list of unreliable entities” of foreign companies and people. This is seen as a reaction to the US denying its technology to Chinese companies. Many US technology firms that have a huge presence in China could now be hit if Beijing goes ahead with its threat.
Meanwhile, the US had ended benefits to India under the General System of Preferences in Trade, thus affecting duty-free benefits to Indian products. The US will need to realise that it needs partners globally. It would need India and China to back it in its efforts for a better world.
The Trump administration would do well to tone down its stance and look for a way out through negotiations. China, on its part, should also engage in talks than scale up the trade dispute into a full blown war.