Tariff trouble turns into rare earth rumble
Beijing's new export controls on rare earth elements (REEs) have industry and governments fearing for the future.
ICYMI: On Friday, Beijing announced a multi-pronged response to the US's 34% "Liberation Day" tariff on Chinese imports.
As part of the response, Beijing placed seven (of 17) REEs – samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium – on its "restricted" export control list.
- That means Chinese exporters will now need special licenses to sell these elements abroad, giving Beijing the power to choke off supply to US companies while maintaining exports elsewhere.
Beijing's use of export controls on REEs will keep many businesses up at night:
- China dominates REEs, representing 60% of global extraction and – more importantly – 90% of the processing that makes REEs usable.
- Chinese REE curbs threaten myriad strategic and sensitive industries, from energy and chips to aerospace and remote sensing.
There is room to increase the pain:
- Officials could always move REEs on the "restricted" list to the "prohibited" list at a later date.
- There are also ten other REEs left to target, one way or another.
Chinese officials promise the controls won't disrupt global industry (CNMIA).
- Officially, China says it will only deny licenses for exports going to dual-use applications.
- But this promise convinces exactly no one.
Get real: This move represents a complete shadow ban on exports of these REEs to the US.
- That's not immediately cataclysmic, as the US mainly imports downstream products that Japan and others make using Chinese REEs.
- But now, the risks to the US from even these downstream dependencies have increased significantly.
Our take: China will increasingly pressure producers in Japan and elsewhere to stop shipping goods containing REEs to the US.
- Still, China's short-term coercive power is limited on this front, as it can't risk further driving up regional trade tensions smack in the middle of a global trade war.