China Economic Update: June 2019

Can China weaponise rare earths to open a new front in the trade war?

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  • Rare earth minerals are a small share of US-China trade, but it has been suggested that the threat of a Chinese export ban could provide China some leverage in the current trade dispute. The US is highly dependent on imports to meet its rare earth needs – which include high tech applications – theoretically exposing the country to some considerable pain, despite the modest scale of trade.
  • Last month the trade tensions between the US and China re-escalated, counter to the earlier expectations (as recent as April this year) of an imminent deal that would resolve the dispute between the two countries. On 5 May, The United States announced that it would increase the rate of the tariffs on around US$200 billion worth of Chinese exports from 10% to 25% (the second phase of trade measures introduced) and start the process of implementing a third phase, that would result in virtually all Chinese exports to the US coming under tariffs.
  • The range of market responses to the potential rare earth restrictions have been somewhat extreme – ranging between views that these measures could have a powerful impact on the US economy, to those that suggest there will be minimal pain as non-Chinese supply grows in response. We would argue that the truth probably lies somewhere in the middle – that the potential negative impacts of export restrictions are too small to significantly impact the United States, but also that China’s dominant position in rare earths supply is unlikely to be challenged in the short term.

For further details, please see the China Economic Update – June 2019