China’s Rare Earths 1, Donald Trump 0

In a little more than two months of one country blocking exports of a set of minerals, and the magnets made using them, some of the world’s biggest carmakers are either pausing production or warning of major delays ahead.

Let that sink in — a century-old industry can be brought to its knees in a matter of nine weeks.

In Japan, Suzuki Motor says it is suspending production of its flagship car Swift due to China's rare earth restrictions. In Europe, auto supplier association CLEPA says several production lines have been shut down because of a shortage of the minerals, while big names like Bosch and BMW say their suppliers have been affected. In the US, Ford Motor shut down production of the Ford Explorer at its Chicago plant for a week in May, and this week auto suppliers said “immediate action” was required to prevent a pause in production.

Diplomats, automakers and other executives from India, Japan and Europe are now seeking urgent meetings with Chinese officials to push for faster approval of magnet exports. US President Donald Trump also spoke with China’s Xi Jinping overnight, but as was pointed out to the New York Times, Beijing is not about to ease its hold on rare earths — just like the US is unlikely to remove all its chip export curbs.

While all that is going on, China has announced it will further tighten its hold on rare earth trade by setting up a “tracking system” to determine who exactly gets the licenses to buy them. It has also doubled down on its blockade strategy, saying the export controls are “in line with international practices”.

No matter which side you’re on in the US-China trade war, there is no denying that these circumstances have given Beijing an outsized leverage in trade talks.

As Mark Smith, CEO of American mineral development company NioCorp, put it to CNBC: “China holds all of the cards”.

Smith’s interview paints a dire image of the world’s dependence on China for these materials that are critical to practically every bit of technology we need today — automobiles, smartphones, chips, wireless technology, wind turbines, robotics… it's a long list.

“China produces 100% of the heavy rare earths that we all need in the world today… Any rare permanent magnet that needs a higher temperature needs to have… either dysprosium or terbium. There's one producer of [those] in the world today,” Smith says. Both dysprosium and terbium are part of the list of the seven heavy rare earths whose exports China has blocked. Smith also makes it clear that anything other than “cooperating with China” is not an option. “It takes three years to build out a project like this,” he points out.

That sentiment was echoed by another industry executive, Joshua Ballard, the CEO of USA Rare Earth, who told CBS News that the US was “a good 10, 15 years behind” in the production of these critical minerals and a long way off from reducing its dependency on China.

What that means is even if every country in the world starts planning its own rare earth supply chain today, it wouldn’t solve the problem that China’s ongoing blockade creates in the here and now. And who knows what cards China will play to make the most of that leverage.

For US President Donald Trump, who won the election on the promise of an "American economic revival”, the loss of jobs and growth threatened by the rare earth chaos could severely complicate trade talks.

And if you’re thinking China’s blockade will only hurt EVs — an industry Trump has no real love for — think again. Rare earths today are needed to manufacture nearly every component in any automobile, from seats, seatbelts, windshield wipers and headlamps, to steering, motors, sensors and displays. Really, it’s a long list.

That would mean this crisis will hurt gas-powered vehicles too, and in turn the oil and gas industry, whose executives donated millions to Trump’s campaign.

Of course, the US is not the only country hurting over China’s blockade. India, Japan, South Korea, the European Union — everyone is alarmed. But the trade talks with the US will paint an essential picture of just how far China is willing to go with these restrictions — and not just because it began its blockade in retaliation to Washington's trade war.

Almost all affected nations have had a difficult relationship with Beijing and have employed some form of restrictions in their trade and business with China. So if Beijing plays hardball with Washington in these negotiations — despite facing a massive impact on its economy — what would it mean for the future course of dialogue with countries that are a lot less relevant to its economy?

Safe to say: it is not likely to be a pretty picture.

What does China have to lose?

It’s worth noting that even if China is holding all of the cards, it does have some vulnerabilities. An extended trade war with the US has already hurt its exports and put at risk millions of jobs. Plus, the extreme volatility right now will possibly be the violent wake-up call that major manufacturing countries have needed to seriously start focusing on addressing the vulnerabilities in their rare earth supply chains.

Last month, for instance, the Australian government pledged $763 million to set up a strategic reserve of critical minerals using the country's mineral deposits. Separately, the EU said this week it was developing 13 new raw material projects outside the bloc to tackle its China dependence. Across the bloc, various companies are also attempting to develop some capacity to produce rare earths. Japan, meanwhile, is considering stronger cooperation with the US on rare earth supply chains as part of its upcoming tariff talks. And India is also planning to establish long-term stockpiles of rare earth magnets by offering incentives for domestic production.

Meanwhile, some carmakers are considering downgrading the tech that has improved automobiles — like adjustable seats, high-end speakers or new modern engines that are more efficient but require rare earths.

And yet, China could still emerge as a big winner from the current chaos.

As so many experts have already pointed out, none of these moves are enough to solve the crisis right now. China has spent decades and billions of dollars to build its might in rare earths. And that stronghold will not ease up any time soon. Rare earth magnets also make up a tiny share of its overall exports to the US and elsewhere. So halting shipments will cause minimal pain to its economy but inflict significant damage across the world.

The Wall Street Journal also reports that carmakers may actually double down on producing in China to tackle their rare earth shortage — an outcome that would be the antithesis of this years-long trade war.

But, most importantly, the licensing regime, which is reportedly being overseen by just three senior bureaucrats, will give China an extensive — and exclusive — inside look into how and where its rare earths are used across the world. Everything from which company in which country procures rare earths, to what purpose they use them for will be information now at Beijing’s fingertips.

• Auto dealers in China have appealed to carmakers to stop dumping too many cars on their sales outlets.

• A prominent US Senator has warned that Washington’s moves to revoke visas for Chinese students studying in the US will only benefit the CCP.

• A smartphone smuggled out of North Korea has given a glimpse of the extraordinary measures the notorious regime takes to monitor its citizens.
  

• And South Korea’s newly elected leader President Lee Jae-myung plans to keep trade talks with the US at the top of his agenda but will not rush into any deals.