China threatens to play the rare earths card

China is threatening to use rare earths exports as a tool in its bitter trade fight with the United States. Thus far, the threat is more rhetorical than real, but it is an option if China wants to escalate the dispute. Doing so would strip China of an important diplomatic fig leaf and make clear to the world that Beijing is ready to fight without constraint when challenged.

Rare earths are a group of 17 metals used in a wide range of high technology products, from cellphones to cancer treatment drugs to automobile emissions systems. They are also vital to advanced weapons and other strategic systems, such as jet engines, lasers, night vision goggles and displays, and as a result have been designated as “critical” by the U.S. government.

In fact, rare earths are not hard to find at all: They are spread throughout the Earth, but they are typically found in small quantities and mining them is an expensive and destructive process. China has become the world’s largest producer of rare earths, accounting for about 70 percent of production and reckoned to possess over a third of global reserves. Just as important, China has encouraged the development of rare earth-processing industries, consolidating its grip over the supply chain. Since 2004, China has supplied about 80 percent of U.S. rare earth imports, prompting the Defense Department to raise concerns about that dependence.

Those concerns have become real in the wake of the burgeoning trade dispute between the U.S. and China. Washington has imposed billions of dollars in tariffs on Chinese exports to the U.S. and Beijing has struggled to match those sanctions, since U.S. exports to China are much smaller. Apparently, it has decided that rare earths are the leverage it needs after the U.S. blacklisted Chinese telecommunications equipment giant Huawei, a move that has raised fears about the firm’s future.

After the U.S. announced sanctions against Huawei, Chinese President Xi Jinping visited a rare earths magnet manufacturer in Ganzhou, in southeastern Jiangxi province. It was a visit loaded with symbolism: That area is where the Chinese Communist Party set up a revolutionary base before the historic Long March in 1934-1935, perhaps the defining moment in CCP history. No Chinese citizen would miss the reference or conclude anything other than that China faces a similarly critical moment in its history and will have to rely on the same grit and determination to deal with this challenge.

Official Chinese government sources have obliquely noted the possibility of restricting rare earths exports, but the nationalist press, such as the hard-line Global Times, has called for Beijing to play the “rare earths card” and noted that the government is “seriously considering” it. More alarming is language in People’s Daily commentary, less inflammatory than that of the Global Times, but more authoritative. The article used the Chinese phrase “don’t say I didn’t warn you,” wording the newspaper used in 1962 before China’s war with India and again in 1979 before China and Vietnam fought.

Japan knows well that such threats must be taken seriously. China cut off rare earths exports to this country during the standoff over the Senkaku Islands in 2010, although Beijing claimed that the shortage was the result of export quotas to protect the environment, rather than a move to punish Tokyo. The quotas were later dropped after Beijing lost a case on the issue at the World Trade Organization. That incident seared its way into Japanese — and global — consciousness about Chinese tactics in the event of a crisis; Beijing made clear that it was prepared to fight asymmetrically in such situations. If China decides to play hardball and suspend shipments, it will deepen fears that it is an unreliable trade partner.

Other countries are developing alternative suppliers of rare earths. There are mines around the world, but they are low-level producers, with the exception of Lynas Corp., an Australian company that is the only major producer of rare earths outside China; it has a 10 percent global market share. It has a mine in western Australia, a processing plant in Malaysia and it recently concluded an agreement to build a processing facility in Texas. Japan has been instrumental in providing the financing for this alternative supply chain. There are three other processing plants under construction or in planning in the U.S., but they will not be online until 2022. To help fill any anticipated gap, rare earths consumers are also accelerating recycling programs for the minerals, and the U.S. Defense Department has developed a program to spur domestic production through economic incentives.

Playing the rare earths card will be disruptive — as intended — but following through on that threat will reveal China’s contempt for the global trade order it purportedly respects and supports. Hopefully, the Beijing leadership will see that this tactic will harm China far more than it helps it.