China restricts rare earth elements in escalatory spiral

Hong Kong, October 14 (ANI): China has suddenly moved to control global access to rare earth elements - REEs for short - that are vital for semiconductor and microchip production. Beijing can do so because it dominates the rare earths market. In fact, China produced 240,000 tons in 2023, equating to 68.6% of global REEs.

Such ascendancy exposes the vulnerability of the USA, which considers China its top strategic rival. Even more, China accounts for 90% of all REE processing, a figure that rises to 99% for heavy rare earth processing. According to the US Geological Survey, 40% of rare earth reserves are found in China.

Referring to Beijing's new export controls, Dean W. Ball, a Senior Fellow at the Foundation for American Innovation, exclaimed, "This is a very big deal. China has asserted sweeping control over the entire global semiconductor supply chain, putting export license requirements on all rare earths used to manufacture advanced chips. If enforced aggressively, this policy could mean 'lights out' for the US artificial intelligence boom, and likely lead to a recession/economic crisis in the US in the short term."

China's Ministry of Commerce announced its controls via six announcements on 9 October, covering super-hard materials (i.e. synthetic diamonds); rare earth equipment and raw materials (processing machinery and chemicals); holmium, erbium, thulium, europium and ytterbium medium/heavy elements; lithium battery and graphic anode materials; foreign-made products containing Chinese rare earths; and rare earth technologies (e.g. mining, smelting, magnet and recycling technologies).

The first four controls will be implemented on 8 November. The penultimate one comes into force on 1 December, whilst the latter was actioned with immediate effect.

Under these regulations, China can delay, deny or restrict REE exports.

President Donald Trump responded immediately, posting on Truth Social, "They're becoming very hostile and sending letters to countries throughout the world, that they want to impose export controls on each and every element of production having to do with rare earths, and virtually anything else they can think of, even if it's not manufactured in China. Nobody has ever seen anything like this..."

Trump described it as "great trade hostility which came out of nowhere". Ironically, the same could be said of Trump's own volatile brand of foreign-trade policy. He added, "There's no way that China should be allowed to hold the world 'captive', but that seems to have been their plan for quite some time, starting with the magnets and other elements that they've quietly amassed into somewhat of a monopoly position, a rather sinister and hostile move, to say the least."

The US president promised to retaliate, plus he suggested an upcoming APEC meeting with Chairman Xi Jinping in South Korea was in jeopardy. "Dependent on what China says about the hostile 'order' that they've just put out, I'll be forced, as president of the United States of America, to financially counter their move. For every element that they've been able to monopolize, we have two."

And so it escalates. China vowed countermeasures if the USA imposes 100% tariffs on Chinese imports. A Ministry of Commerce spokesperson said on 12 October, "Resorting to threats of high tariffs isn't the right way to engage with China. If the US persists in acting unilaterally, China will resolutely take corresponding measures to safeguard its legitimate rights and interests. Our position on a tariff war remains consistent - we don't want one, but we're not afraid of one."

The spokesperson claimed, "US actions have seriously harmed China's interests and undermined the atmosphere of bilateral economic and trade talks. China firmly opposes these moves. For a long time, the United States has overstretched the concept of national security and abused export controls, adopting discriminatory measures against China, and imposing unilateral 'long-arm jurisdiction' restrictions on a wide range of products." US export controls cover 3,000+ items, compared to 900+ on China's list.

Nor is China afraid to use its REE policy as a geopolitical instrument. As an example, the Ministry of Commerce introduced export restrictions on seven REEs on 4 April in retaliation for American tariffs.

Ball of the Foundation for American Innovation explained, "This is a costly decision for them [China] too, and not without risk. These controls are being imposed on the whole world, not just the US."

In many respects, China is mirroring the US economic-security toolkit over the past few years. It presumably feels it deserves equality, and does not want its REEs being used in American weapons that might be used against it one day. Logically, China is now developing an architecture and export license system to monitor and enforce its rules, to manage risk, to prevent dual-use leakage and to respond in kind to the USA.

Ball assumes that China is doing this to gain leverage over the USA ahead of the scheduled Xi-Trump meeting at APEC. This may be so, but China's perception of US actions may provide a fuller explanation.

Chucheng Feng, founder of the Hutong Research analysis firm in China, believes this trade escalation is a direct result of the US Bureau of Industry and Security expanding export controls to cover blacklisted entities and their subsidiaries on 29 September.

Feng believes that unilateral American action upset a fragile equilibrium. Indeed, China's readout of a 19 September Trump-Xi phone call warned against unilateral moves undermining "the results of multiple rounds of talks".

Beijing likely believes the USA directly violated that warning. A pending US decision to impose port entry charges on Chinese-owned ships probably added insult to injury.

Feng wrote, "From Beijing's perspective, these actions aren't only substantive escalations, but further confirmation of the low credibility of the Trump administration. Beijing is effectively reactivating its April playbook - escalating first to force a negotiation reset, rather than waiting passively for the next talks."

Hutong Research's founder added: "Beijing's underlying logic is straightforward: the US is more vulnerable to a rare earth supply shock than China is to incremental export controls on semiconductors. In recent weeks, Chinese policymakers have sent increasingly clear signals that they're prepared to accelerate the domestic semiconductor supply chain at all costs, even if it means absorbing short-term inefficiencies. This gives Beijing confidence that rare earth leverage is more decisive than chip export pressure. In a negotiation setting, it'll likely seek a deep tariff cut in exchange for stable REE flows."

Ryan Hass, Director of the John L. Thornton China Center at the Brookings Institute in the USA, commented, "This is the new reality of US-China relations. China has spent the past several years building tools to reciprocate US actions and remind the US of its leverage. This action is consistent with PRC behavior all year - hold firm, hit the US where it hurts, leave the door open to negotiate."

Hass believes, despite a fair amount of US-China activity, "Under the surface, the mega-trend of the relationship is that both countries are pursuing strategies to reduce dependence and insulate themselves from each other."

He further assessed, "China's leaders believe they're making progress in reducing dependence on the US and West and finding ways to weaponize chokepoints for their own advantage. China's exports to the US as a percentage of overall exports have been shrinking and now are below 15%. Xi has made self-reliance a central feature of his national agenda. China's success in weaponizing rare earths and magnets earlier this year to compel Trump to retreat on trade war may have led the PRC to grow overconfident in its leverage in relationship."

Hass continued, "Under Trump, America's efforts to reduce dependence on China have not taken the form of a coordinated campaign like in China, but they've been a visible feature of America's foreign policy ... There was a tacit understanding that a pause in escalation worked for both sides. It gave them both time and space to build greater self-reliance. Trump's strong reaction to China's new export controls suggests that he felt like Beijing broke that tacit understanding."

Ball concurred, advising "it's time for the US to get serious about export controls on semiconductor manufacturing equipment". He continued, "Because we've been mostly unserious about this issue, China has stockpiled most durable equipment needed to make semiconductors; so most controls will not have an immediate effect. However, there are some consumable materials needed for semiconductor manufacturing that China cannot make domestically. Even better, these consumables are also often degradable, meaning one can only stockpile so much."

Ball concluded, "This exact thing has been high on my list of nightmare scenarios for US-China tech competition, but understood correctly, it's also an opportunity." He said it was high time the USA expanded its rare earth capacity.

Gracelin Baskaran, Director of the Critical Minerals Security Program at the Center for Strategic and International Studies, wrote: "Even before these latest measures, the US defense industrial base faced significant challenges and had limited production capacity and limited ability to rapidly scale to meet rising defense technology needs.

The new restrictions will only deepen these vulnerabilities, further widening the capability gap and allowing China to accelerate the expansion of its military strength at a faster pace than the United States at a time when tension is rising in the Indo-Pacific region."

Another expert, Rush Doshi, an assistant professor of security studies at Georgetown University's School of Foreign Service, remarked, "The American approach has been unserious. We launched a trade war without preparation, without allies and without reducing our own vulnerabilities. So we're losing. The Trump team still has cards it could play to reset the baseline, and Beijing is wrong to back Trump into a corner. Lots of uncertainty ahead," he predicted.

Doshi also pointed out: "Beijing seems a little rattled by the global response, but is resolved to keep the regime ... They're worried about the global reaction to their moves. So they stressed (twice) verbatim that these export control measures on rare earths are not prohibitions/bans. They don't want to withdraw the controls. They also stressed these controls are their sovereign right. They haven't announced a response to Trump's threats. They say only the boilerplate 'they do not want to fight, but aren't afraid of fighting'. [This] suggests they may not want to see further escalation."

Doshi said the bottom line is that "Trump wants this regime withdrawn. Beijing won't do that, but is trying to reassure it won't implement it punitively. Obviously, that isn't a credible promise on Beijing's part, and US and PRC positions are at odds."

Ball advised, "I'd retaliate strongly, but in a targeted manner. The ultimate route to de-escalation here is tariffs and broader trade war policy moves." He added that events underscore "the urgency for the US plus allies/partners to accelerate domestic efforts to mine and refine rare earths". Ball admitted that while China supplies these commodities in abundance and at low cost, REEs are "fundamentally, just commodities. We can make them."

Hass expects more twists and turns before Trump and Xi arrive in South Korea for APEC. "I don't expect either side to make major concessions to the other, though. I don't anticipate either leader will retreat much from his current position between now and the end of the month. If the two leaders end up meeting in Korea, it'll be to set a course and direction and boundaries around future competition. Beijing will want to use the meeting to signal greater stability and predictability in the relationship. I wouldn't bet on major deliverables."

Others hope Chinese export controls may not be as dire as predicted, and that China will not whimsically apply them to the detriment of all. The USA permits computer chips to be sold around the world for civilian use, but balks at them ending up in Chinese weapons. Similarly, China may allow REEs for civil uses to go unaffected.

Unfortunately, however, trade frictions due to strategic competition and national security have become the norm. (ANI)

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