China has been dropping hints that it will weaponize its rare earths as a trade-war tactic. Here's why it probably won't follow through.

Xinhua/Xie Huanchi via GettyChinese President Xi Jinping visiting JL MAG Rare-Earth Company’s factory in Ganzhou, in eastern China, on May 20. That visit prompted speculation that Beijing would withhold rare-earth exports to the US in the trade war.
  • Beijing has been threatening to withhold exports of its rare-earth materials to the US as a trade-war tactic.
  • China is the world’s largest supplier of rare earth, and the US heavily relies on it to make things like smartphones and cruise missiles.
  • But rare-earth experts believe Beijing won’t follow through with those threats, with one expert calling them just “loud saber-rattling” to get Washington back to the negotiating table.
  • It wouldn’t be in China’s interests if the US and other countries looked to other sources for their rare-earth imports.
  • Visit Business Insider’s homepage for more stories.

Over the past week China has dropped numerous hints, via state-media editorials and a highly publicized visit by President Xi Jinping to a magnet factory, that it might restrict exports of rare-earth materials to the US to retaliate against Washington in the countries’ trade war.

Given the US’s heavy reliance on the minerals – composed of 17 elements on the periodic table – in its supply chains, such a move could cripple the American tech, defence, and manufacturing industries. Rare earths are crucial to the making of products such as batteries, smartphones, electric cars, and cruise missiles.

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Stocks in Chinese rare-earth companies have skyrocketed, and global stocks plummeted as traders braced for further trade-war tensions.

But experts don’t think Beijing will follow through with those threats. Here’s why.

When China last weaponised rare earths, it didn’t go well

China temporarily cut off rare-earth exports to Japan in 2010 amid a maritime dispute that saw a Chinese boat captain captured by Japanese authorities.

Though Japan immediately released the Chinese captain – in what The New York Times described at the time as a “humiliating retreat” – it also started looking into how to wean itself off Chinese exports of rare earths.

For the five to seven years after the maritime dispute, Japan started sourcing from rare-earth mines outside China and switching to alternative means of producing its electronics.

Beijing is aware that cutting off rare-earth supplies to other countries would end up weaning them off its exports, experts say.

“China recognises that other countries would do that if it weaponizes and bans rare earths,” Ryan Castilloux, the managing director of the rare-earth consultancy Adamas Intelligence, told Business Insider. “They know they shouldn’t do that.”

Kokichiro Mio, an expert on China’s economy at Japan’s NLI Research Institute, also told Agence France-Presse that a Chinese halt on rare-earth exports to the US “would accelerate moves to find alternative supply sources.”

‘Loud saber-rattling’

China’s threat to withhold rare-earth materials from the US is most likely just a form of “loud saber-rattling” to get the US to return to negotiations over the yearlong trade war, Castilloux said.

“It suggests that China feels its hands are tied, and eyeing the nuclear button that is rare earths,” he said.

Beijing hopes to “instill some more cooperation at the negotiating with the US by hoping the US will back down,” he said, adding that China was “using rare earths, which they recognise are so integral to US industries.”

Washington and Beijing have engaged in a tit-for-tat battle over tariffs over the past two months after US officials accused their Chinese counterparts of reneging on commitments to which they previously committed.

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China rare earth stocks xi visitMarkets InsiderShares in China Rare Earth Holdings skyrocketed after Xi’s visit to a rare-earth factory in eastern China on May 20.

China’s recent publicity around its rare-earth industry has already driven up share prices in related companies and driven up the prices of the commodities.

“China will cause some disruption in supply to show that they are serious but will not stop supplying as this is too disruptive and aggressive for the present state of conflict,” Brian Menell, the CEO of the metal-investment group TechMet, told Business Insider.

“China also does not want a flood of new rare-earth investments into non-Chinese sources of supply,” he added.

Shares in Rainbow Rare Earths, a mining company that sources minerals outside China, jumped 17% on Wednesday in light of China’s threats. TechMet also invests in Rainbow Rare Earths.

Martin Eales, the CEO of Rainbow Rare Earths, believes Beijing could afford to take the plunge, however, because rare-earth exports make up a relatively small amount of China’s export balance with the US.

“I’m sure it is quite possible for China to do this as part of a wider series of actions linked to any trade war with the US,” he told Business Insider.

The US imported $US160 million worth of rare-earth materials in 2018, according to the US Geological Survey. Eighty per cent of such imports came from China from 2014 to 2017, the USGS noted, meaning that the US most likely imported about $US128 million worth of rare earth from China last year.

That would be just 0.024% of the $US526 billion that the US imported from China in 2017, the most recent data available per World Bank statistics.

“This is certainly a relatively insignificant sum to China in the context of overall trade,” Eales said.

Trump xiGetty Images / Thomas Peter-PoolXi and President Donald Trump in Beijing last year.

‘The damage is done’

China’s threat to withhold rare earths is already causing the US to explore ways to reduce its dependence on the Chinese exports – such as by developing rare-earth sources outside China.

“Even if it doesn’t go ahead, it’s a wake-up call,” Castilloux said of Chinese restrictions. “It’s causing the US and other countries to take a more serious look into their supply chains.”

The Department of Defence on Wednesday said it was seeking new federal funds to support US production of rare-earth minerals to wean the country off its reliance on China, according to Reuters. While there are some rare-earth mines in the US, American manufacturers still largely depend on China.

Bill Bishop, who writes the Sinocism newsletter on Chinese current affairs, tweeted on Wednesday in response to Beijing’s editorials on rare earth: “There is no walking back this threat, even if not implemented the damage is done.”

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Rare-earth experts overwhelmingly agree that shifting rare-earth supplies out of China could take several years.

For this reason, Beijing’s halting rare-earth exports is “not necessarily a high-confidence, viable plan B right now, as it would take one to several years to establish an entirely standalone supply chain outside China,” Castilloux said.

“The US will need to develop and construct a full processing facility but also have this tailored to a known source of feedstock that can provide a guaranteed long-term supply,” Eales, the Rainbow Rare Earths CEO, whose company mines in Burundi, said. “All of this may take several years.”

Menell, the CEO of TechMet, added: “Provided other non-Chinese sources are developed and expanded, it may take five to 10 years for the US to wean itself off Chinese supply of rare earths.”

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