President Trump’s trade war with China has now dragged on for many months. Talks between the two nations are at an impasse with no obvious way forward. Apparently frustrated by this lack of progress in the trade talks, in May, Trump dramatically raised the stakes by cutting off Huawei—a star in the Chinese tech industry—from U.S. suppliers. At the recently concluded G20 meeting in Osaka, Trump stunned observers on both sides of the Pacific by agreeing to grant Huawei a temporary reprieve. This notwithstanding, the fact that Trump could unilaterally hobble the Chinese darling that is Huawei has led to great consternation in Beijing.
How might Beijing respond to what it believes are U.S. provocations? Some observers such as the Global Times, a nationalist tabloid, have suggested that China could use its virtual monopoly in rare earth elements and the fact that the U.S. depends greatly on rare earth imports from China to effectively respond to Trump’s trade war and particularly to his action against Huawei.
Rare earths are 17 elements with similar electrochemical and magnetic properties that are important in the production of a range of high tech and defense goods such as magnets, lasers, and night vision goggles. A key problem with the use of rare earths is that even though they are relatively abundant in the Earth’s crust, the process of extracting them from common earth is complex, environmentally intensive, and produces radioactive waste. Therefore, it is perhaps not surprising that even though the U.S. was the key producer of rare earths from the Mountain Pass mine in California through the 1980s, beginning in the 1990s, China became the leading supplier, in large part because of lower labor costs and weaker environmental regulations.
What would be the outcome of a ban by Beijing on the export of rare earths to the U.S.? One way to answer this question is to look at recent history. Beijing tried this tactic against Japan in 2010, following a dispute over the contested Senkaku islands. Even though Beijing’s export ban resulted in the return of a Chinese fishing boat captain, the ban had virtually no impact on the Japanese economy. In fact, in an attempt to reduce its dependence on an unreliable China, Japan decided to lend money to Lynas, an Australian firm with rare earth processing facilities in Malaysia. The Economist notes that today, Lynas meets approximately a third of Japanese demand for rare earths.
This lesson from history tells us that if faced with a Chinese ban on rare earth exports, the central task for the U.S. will be to adapt efficaciously. A ban will certainly lead to some short-term disruptions in the U.S. economy, but from a longer-term perspective, the economy ought to be able to adapt. Why? First, as noted by James Griffiths of CNN, unlike oil and some other raw materials, it is less important for there to be a large and constant supply of many rare earth materials because even for goods whose production depends on the use of these materials, the actual use occurs in very small quantities. Second, the U.S. already maintains stockpiles of some key rare earth materials, particularly those that are used in the defense industry. Third, U.S. companies such as Apple have begun to use processes that involve recycling rare earth materials from, for instance, old iPhones. Fourth, James Vincent in The Verge points out that alternate supply sources in the U.S. are being proposed by firms such as the American Blue Line Corp. and the Australian rare earth miner Lynus.
In addition to the above four points, rising labor costs and environmental controls in China have combined to diminish the advantage that China had over other nations in the mining and extraction of rare earth materials. In addition, because of rising domestic demand, some analysts believe that by 2025, China itself will be an importer of rare earths. In such a situation, Beijing would be well advised to ponder the sagacious advice of Sun Tzu who noted in the Art of War that “who wishes to fight must first count the cost.” When looked at in this light, a play with rare earths is unlikely to be an ace up Beijing’s sleeve.
Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology but these views are his own.d