When I was little, and thought my parents were being unfair, I sometimes responded by declaring, “I’m going to run …Continue reading →
When I was little, and thought my parents were being unfair, I sometimes responded by declaring, “I’m going to run away from home!” To which they invariably replied, “Is that a threat or a promise?”
I couldn’t help but think of those episodes when I found out that China has decided to impose sweeping curbs on rare earths-related exports.
There’s no doubt that China presently dominates both the mining and processing of rare earths and other minerals critical to producing a wide variety of products vitally important not only to America’s economy and national security, but the manufacture of the tiny magnets made from these elements required by so many civilian and defense-related electronics (as described in this link). So this situation obviously appears to give Beijing lots of leverage over the United States in the two powers’ intensifying economic struggle.
As I and many others have noted (e.g., here), however, even though Washington has been inexcusably slow in recognizing a Chinese rare earths trade weaponization threat that’s been clear for more than a decade, the United States (along in some cases with key allies) just might have the wherewithal to withstand this essential Chinese embargo until its own rare earths mines and magnet factories come on line.
But upon close inspection, this major escalation of the economic and tech war could well backfire on Beijing. And more important, it could signal that its dictator Xi Jinping recognizes that despite much U.S. globalist lamentation to the contrary, he’s steadily losing his non-violent conflict with America, not winning it — and in particular, that China’s economic struggles may deepen if U.S. tariffs and tech export controls aren’t relaxed significantly. As a result, Beijing’s new policies may actually be a gigantic bluff.
The key is the potentially jaw-dropping breadth of the new Chinese curbs. They cover not only the rare earths and magnets, as well as other critical minerals themselves. They also could cover any products made with any of these minerals anywhere in the world – even if quantitatively, the materials in question make up only an itty-bitty amount (0.1 percent) of the final value of such goods. (See the Center for Strategic and International Studies analysis linked above.)
In other words, they’re what specialists in the export control field call “extra-territorial.” In this vein, they mirror some U.S. restrictions on high tech exports to China. But since international relations – particularly high stakes rivalries like that between the United States and China – must be judged by the standards of winning rather than those of “fighting fair,” we can immediately dispense with the argument that Washington has no reasonable grounds for complaint.
At first glance, these Chinese actions do indeed seem capable of “holding the World ‘captive,’” when it comes to high tech industries, as President Trump posted on TruthSocial.com yesterday. Investors worldwide certainly seemed to think so, as they sold stocks off massively. And then there’s the analyst who posted yesterday that its rare earths policy has given China “the power to forbid any country on Earth from participating in the modern economy.”
But Mr. Trump’s post made another point greatly worth considering: Because China’s moves “would ‘clog’ the Markets,” they would “make life difficult for virtually every Country in the World, especially for China.”
Just bluster? Not when you realize that electronics and electrical equipment (like the motors dependent on rare earths magnets) accounted for more than a fourth of China’s own total exports last year, and that exports have represented a high (30.3 percent last year) and rapidly rising share of growth for a Chinese economy that’s badly sputtering on other fronts due to the ongoing aftermath of its epic real estate bubble collapse.
And not when you realize that the new regulations could also crimp another major goods category for which the Chinese have stratospheric export hopes (and needs): autos and especially electronic vehicles.
Also interesting: Any Chinese success in imposing these restrictions internationally would sandbag its strategy of dodging stiff U.S. tariffs by sending many of its exports to an American market it desperately needs through third countries (like Vietnam).
In other words, China’s new rare earths-related rules could wind up knee-capping some of its strongest remaining growth engines precisely when it needs all the growth engines it can get. Maybe that’s why the new restrictions don’t add up to a total export ban; instead, they require the exports in question to get a license from the Chinese government. Maybe that’s why they’re not scheduled to go into effect until December 1. (See here.) Maybe that’s why they’ve struck many observers as being pretty vague, and therefore possibly subject to many exemptions. Maybe that’s why no penalties for non-compliance have yet been specified.
So maybe Xi Jinping’s new tech offensive is mainly a negotiating tactic – and not a very promising one.
China’s rare earths move looks fishy for some other reasons, too. For example, why now? Especially if China is supposed to be winning the economic wars – and in no small measure because of Trump blunders and misjudgements? And if most polls show Mr. Trump’s tariffs to be unpopular with Americans? Don’t forget moreover, the possibility that by the end of the year, the Supreme Court may strike down many of the levies as unconstitutional. Why don’t the Chinese just wait for the United States to fall into their laps? What’s the rush?
Of course, some of the most obvious answers (which are by no means mutually exclusive), are that the United States is at least doing pretty darned well in the trade war; that its economy is getting stronger (just look at the third quarter growth projected in this widely followed forecast); that ongoing deflation (meaning there’s feeble demand at home for all the goods and services Chinese entities turn out) reveals that its economic woes are nowhere near over; and that Xi Jinping knows this.
Yet another development suggesting that China’s leaders doubt that time is on their side: a report (still unconfirmed but interestingly, not explicitly denied by the White House), that Beijing has offered to make a trillion dollars worth of investments in the United States in return for an easing of various national security restrictions on Chinese activities. If this quid pro quo has been accurately described, it means that Beijing is willing to pay a staggering price to boost its exports to the United States – and that reviving some sales to America has become a major Chinese priority.
Late in a football game, a team with possession but slightly behind on the scoreboard and viewing defeat as imminent will typically throw a “Hail Mary” – a long pass that brings victory if completed, but whose odds of success are minimal. China’s dramatic tightening of rare earths-related export restrictions seem suspiciously like such a desperation heave, exposing not Beijing’s burgeoning power and confidence, but its mounting vulnerabilities and fears.
