BEIJING: Have the gloves come off?
Chinese President Xi Jinping visited a rare earths facility last Monday (May 20), a sign that many observers said was a signal the country was sending that it too had leverage in the brewing US-China trade war that it was willing to use.
But it was only this Wednesday (May 28) that the signal got stronger, after a People’s Daily fiercely worded commentary headlined United States, Don’t Underestimate China’s Ability to Strike Back was published and picked up by scores more news outlets around the world.
The stage for escalating tensions between Beijing and Washington has been set, as both sides are tempted to exercise one-upmanship in a bid to score a stronger position in the lead-up to Xi and Trump’s eventual meeting at the G20 and avoid looking like the weaker party.
It's perfectly understandable why China may wish to retaliate, after the US placed Huawei, the crown jewel of the burgeoning Chinese tech industry, on an entity list.
Yet any efforts to blast away at the White House may cause long-term and unrecoverable damage not only to China’s domestic economy but to the world’s.
CLOSE CONTROL OVER THE WORLD’S RARE EARTHS
China holds the world’s largest reserves of rare earth minerals, cornering estimates of 80 to 95 per cent of global supply. These minerals are essential in the manufacturing of many high-tech products, including mobile devices, electric vehicles, and even advanced military weaponry like the F-35 guided missiles.
At the moment, China produces about 80 per cent of the global rare earths supply that the US imports. Australia is ranked second, producing nearly all the rest. China produces rare earths at 120,000 metric-tonnes per year.
Given the circumstances, Beijing could well deliver a significant blow to US market sentiments alone by threatening to stop the sale of rare earths to the American manufacturing sector.
Concrete action could also be effected quickly in a matter of months if the wheels are set in motion.
In fact, China has already fired a second salvo. Earlier this week, an unnamed senior official from the China’s National Development and Reform Commission (NDRC), one of the country’s most powerful government agencies, had said that the people of China would not be happy if China continued to supply countries that would use products made from rare earth to “suppress and dampen China’s development”.
An NDRC spokesperson, however, subsequently pointed out that US defence contractors have placed large orders for rare earths and noted that Beijing would maintain the principles of “open, coordinated and sharing” in developing its rare earth industry, though it would have to prioritise meeting domestic demand.
JAPAN’S NEWFOUND RARE EARTH DEPOSITS A GAME CHANGER
Nevertheless, China halting the sale of rare earths will only inflict temporary pain on the US and incentivise American manufacturers to get more aggressive about finding alternative supplies.
Apart from Australia, Brazil, Vietnam and India are potential alternative sources.
Estonia and France already supply the US with processed rare earth minerals, and the US used to be one of the largest producers of rare earth until the 1980s. Still, diversification will take time, adversely impacting sectors that depend on rare earths.
Japan too may score a crucial victory. Japan had discovered in 2018 a “semi-infinite” deposit of rare earth minerals some 1,200km southeast of Tokyo at Minamitori Island, meaning Japan has sole rights to the resources.
A study of the mineral deposits suggest the country had enough supply to last the world “centuries”. It’s believed that there is enough yttrium to meet global demand for 780 years; dysprosium for 730 years; europium for 620 years; and terbium for 420 years.
“This is a game changer for Japan,” Business Insider quotes Jack Lifton, founding principal of Technology Metals Research, as saying.
The race to develop these resources is well underway.
REPOSITIONING AND REALIGNMENT
In this context, US President Donald Trump’s four-day state visit to Tokyo a few days ago may have been more pivotal than was previously understood.
It was a most auspicious timing. Japanese Prime Minister Abe Shinzo had welcomed the US President, and Trump was the first foreign leader to meet the new Japanese Emperor Naruhito at the Imperial Palace.
The Japanese public embraced Trump’s presence when he attended a Sumo wrestling match with Abe and handed the President’s Trophy, which the Japanese dubbed, the Trump Cup to the champion.
While the cordial overtones of the visit no doubt might have been pleasing to any world leader, what was noticeable was Trump’s dialing back of his tough stance on Japan and agreement to delay US-Japan trade talks.
The speculation is that US allies like Tokyo may be repositioning itself to move out of Washington’s trade crosshairs, and aligning better with the US to aid its case against China, since getting tough on China is a position most of the American public and US government establishment support.
No doubt Japanese companies could reap a whirlwind of deal-making with US companies.
It is this context that makes Trump’s meeting with Japanese business executives, which include those from the tech and automobile companies, at the residency of US Ambassador to Japan William Hagerty last Saturday even more significant.
Meanwhile, China-Japan ties have warmed over recent months as high-level government officials from both countries are meeting each other face-to-face more frequently, especially in preparation for Xi’s visit to Osaka for the G20.
Their blossoming relations is also strategic for China. As China attempts to limit the containment of damage that the US can inflict on its economy, strengthening cooperation with its other major trading partners can help provide it needed buffer.
As the US and China continue to tussle over trade issues, other Asia-Pacific countries like Japan must chart a careful path, balancing between the two major powers, playing useful roles and be careful not to be seen taking sides. Japan’s jump into the rare earth’s sector could generate huge revenues and profits for Japanese companies.
And as much as the international media plays up China’s potential leverage in rare earths, it’s useful to keep in mind that the US has alternative markets it could turn to.
Curtailing the supply of rare earths to US might seem like a strong move from China, but it could turn out to be a Pyrrhic victory as Japan emerges a bigger player in the global rare earths market.
Tom McGregor is a commentator on Asia-Pacific affairs based in Beijing.