China's Rare Earth Export Controls Shift Balance of Power in US-China Trade Talks

China's unexpected move to require export licenses for rare earths and related magnets has given the country significant leverage over the US, forcing Washington to reassess its strategy in trade talks. The rare earths export control has disrupted global supply chains and increased pressure on the US to engage in further trade negotiations. As a result, there are hopes for a new round of trade talks in London, following a conversation between US President Donald Trump and Chinese President Xi Jinping on Thursday.

China's dominance of the global supply chain for rare earths, a key mineral used in high-tech industries, has allowed the country to use export controls as a tool to gain an advantage in trade talks. The move has also raised concerns among the US, European Union, and other countries that China may use similar export controls on other critical goods, further straining trade relationships. As a result, countries are starting to take steps to reduce their dependence on China's industrial supply chain and build up their own stockpiles of critical materials.

Key Takeaways:

• China's export controls on rare earths have given the country significant leverage in trade talks with the US and other countries.
• The US and EU are considering building up their resource stockpiles and developing alternatives to reduce dependence on China's industrial supply chain.
• China's control of the global supply chain for rare earths has allowed the country to use export controls as a tool to gain an advantage in trade talks.
• The US has imposed restrictions on the sale of semiconductors and chipmaking equipment to China, adding to tensions in the trade relationship.
• Countries are starting to take steps to reduce their dependence on China's industrial supply chain, including building up their own stockpiles of critical materials.
• The impact of China's rare earth export controls has already led to a series of urgent bilateral negotiations in Beijing.
• Implementation of export controls on other critical goods, such as titanium, magnesium and light rare earths, is possible if Beijing wants to respond to future trade escalations.
• Countries affected by the rare earth controls have expressed concerns about the lack of transparency in the approval process, as over three-quarters of companies affected by the controls only have three months of stockpiles left.

Statistics:

• More than three-quarters of companies affected by the rare earth controls have only three months of stockpiles left (American Chamber of Europe in China).
• China dominates 61% of the global supply chain for high-tech minerals, including rare earths, titanium, magnesium and light rare earths (Trivium analysis).
• China also dominated the production of new ultra-powerful magnets, more powerful transistors, denser and cheaper batteries, and new chips and software (Gavekal analysis).
• The value of China's rare earth exports to the US and other countries has already been affected, with a decline of 20% in Q1 2019 compared to Q1 2018 (Chinese customs data).

Sources:

• Andrew Gilholm, head of China analysis at consultancy Control Risks
• Arthur Kroeber, head of research at consultancy Gavekal
• Tom Nunlist, Shanghai-based associate director at Trivium
• Ilaria Mazzocco, industrial policy expert with the Center for Strategic and International Studies think-tank
• Reuters
• American Chamber of Europe in China