Xi’s Rare Earths Bargaining Chip Is a Trade War Game Changer

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. I have a great relationship with President Xi. I expect to be able to make a good deal with him. And I want him to make a good deal for China. But it's got to be fair. Ahead of a high stakes meeting with Chinese President Xi Jinping next week, U.S. President Donald Trump said he looks forward to making a trade deal. Certainly there are a lot of people that are waiting for it. Maybe it won't happen. Maybe it won't happen. Things can happen where, for instance, maybe somebody will say, I don't want to meet, it's too nasty. But it's really not nasty.

1:41It's just business. If the meeting on the sidelines of the annual APEC summit goes as planned, it would be Trump and Xi's first in-person conversation since Trump began his second term and launched a trade war that's upended the relationship between the world's two largest economies. The U.S. went from negligible tariffs on China to 10 percent, then 20, then 54, then 104, then 145. There's no shortage of sticking points in a potential trade deal between the U.S. and China. But Bloomberg's Daniel Tenkate, executive editor of government and economics in Asia, says he's watching one critical element of these negotiations closely.

2:22As long as China agrees not to really disrupt the flow of rare earth magnets, then you could see that they could come to some sort of agreement where they extend this tentative truce. When China announced sweeping new controls on its exports of rare earths earlier this month, Treasury Secretary Scott Besant accused Beijing of pointing a bazooka at the global supply chain. Trump threatened to call off talks with Xi altogether and add an additional 100 percent tariff on China. But within 48 hours, Trump had backed off. I don't want them to play the rare earth game with us. And on Monday, the president signed a landmark deal with Australia to boost his supplies of rare earths as a strategic counter to China.

3:11The deal outlines$8.5 billion worth of projects, with both nations initially committing$1 billion over the next six months. In about a year from now, we'll have so much critical mineral and rare earths that you won't know what to do with them. His retreat was proof that the rare earths bazooka is a weapon to be reckoned with, and gives China serious leverage in this trade war with the U.S. Trump took his biggest swing at China, and he was forced to back down. And for Xi Jinping, that was a big political win. He was the only leader in the world who had enough ammunition to be able to force the Americans to back down.

3:51It is a game changer. And I think the U.S. and China are both coming to terms with this. You see the U.S. realizing that all of a sudden China is asserting these rights. And China's put the U.S. on the back foot a little bit here.

4:13This is The Big Tick Asia from Bloomberg News. I'm Wan Ha. Every week, we take you inside some of the world's biggest and most powerful economies and the markets, tycoons and businesses that drive this ever-shifting region. Today on the show, China has dominated the rare earth world for decades, but it's only now begun to make the most of that influence. We'll look at how it's using American trade tactics to press its rare earth's advantage and explore what weapons the U.S. has in its arsenal to fight back.

4:51China introduced new rules this month that clamp down on the supply and use of rare earths. Bloomberg's Dan Tan-Kate says the curbs go much further than previous restrictions. If any product contains even a trace amount of rare earths, then China has the right to restrict that product. So if you have 0.1 % of rare earths to make any given product in the world, you need a license and permission from China. Previous actions, China cut off supplies of rare earths to various companies. So if you needed rare earths to make an electric vehicle, for instance, and you bought that from China, China was saying you need a license to get these rare earths, whereas before you could freely buy them.

5:40Now, what China has done is they're not just stopping the rare earths from getting to those factories, but they're saying even if you use those rare earths to make that car, if you want to sell that car to another country, you're also going to need permission. Now, that just seems completely unworkable in reality. And that's what raises questions about, OK, are they going to put a stop to global trade? No, that's not in China's interest at all. But they are asserting the right to effectively intervene whenever they want. The rules are set to take effect later this year. And while it's unclear how Beijing plans to enforce them, Dan says the move shows just how powerful a weapon rare earths can be for China.

6:28They control a lot of the supply, somewhere in the neighborhood of about 70 % of that. But what China's real advantage is that they can process the rare earths. So once you take the rare earths out of the ground, you still need to ship them to somewhere where they can be processed into a material that can then be sent to a factory that can be used to make a phone or make a TV or something like that. And China controls nearly all of that technology now. The U.S. used to be the world's largest producer of rare earths, and they let that atrophy and disappear to China back in the 80s and 90s. So the issue is now that the amount of rare earth supply that includes no Chinese minerals or any processing by Chinese technology, using Chinese technology, is very small.

7:21And is it viable then for the world to somehow very quickly establish another supply chain for rare earths that doesn't rely on China? It depends on who you talk to there. Again, I mean, Trump will say, in a year, we'll be okay, we'll have enough supplies, we'll be able to get the processing up and running in the US is doing I mean, the Pentagon has taken a stake in MP materials, which owned the largest rarest mine in the US, which is based in California. We've also seen the US government taking equity stakes in some Australian producers. You have Australia pitching itself as the savior in this regard.

8:03But the problem there is that if you talk to certain people in the industry, they say, actually, getting the technologies up to process these heavy rare earths is not that easy. It actually takes a lot of time to come up with. And you're starting from scratch almost because you've lost some of the materials to do that. The issue also is that even if you have a country like Malaysia processing a lot of rare earths. If they're using Chinese equipment, then China can also block those rare earths from going to the US. So the amount of the rare earth supply chain globally that doesn't just include minerals from China, but also doesn't rely on Chinese technology to process those minerals, that is very small.

8:49And that is the fundamental issue now. China has spent years cultivating its rare earth industry. Today, it dominates the market as a producer and refiner of these vital minerals. But it's only recently been trumping the rare earth card in trade negotiations. If you look in the 1980s, China's known that it has rare earths. Deng Xiaoping at one point said the Middle East has oil, China has rare earths. So they started processing really once China emerged from the Mao years and they started opening up the country. Rare earths was one of the first industries that they really started to develop. And you saw a lot of the rare earth production moving from the U.S.

9:33and other places to China in the 90s. And by the 2000s, they've had a very firm grip on the supply, almost 90, 95 percent. And things really came to a head in 2010 when there was a territorial dispute with Japan and China cut off rare earths then. And that really spooked Japan and the world really had known that, OK, we can't rely on China anymore for supplies of rare earths. China can just flip a switch, cut us off, and then suddenly we don't have the building blocks we need to produce a lot of the technology and products that are used in the modern economy. But even after that, we're still here 15 years later and China still has a stranglehold on the world supply.

10:23Rare Earths have been central to negotiations between the U.S. and China since Trump relaunched his trade war earlier this year. When Trump imposed tariffs of more than 100 % back in April, Xi cut off crucial rare earth supplies to the U.S. The resumption of rare earth shipments was top of Trump's wish list during trade talks with China in June. It was also a key component of the trade truce between the two countries. That's set to expire next month. The fundamental part of the truce is that the tariffs go down to around 55%. And in return, the US gets enough rare earths magnets that it needs to function to keep its factories open.

11:05The issue is that China really wants the US to stop putting any other measures on. China saw the deal as we want no more export controls. We want no more punitive actions against Chinese companies. So they saw the Commerce Department in particular doing that. and the Hawks in the United States continuing to press ahead with that. And they basically just said, we need to put a stop to this and we're going to take this opportunity to put this really big measure in place. China's latest moves, pressing its advantage with rare earths, were met with outrage in the White House. But their tactics taken directly from America's own manual on how to wage a trade war.

11:52After the break, we'll look at how China is trying to beat America at its own game, and how the U.S. is retaliating.

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13:31During Donald Trump's first term in office, he dropped the hammer on China, blacklisting Chinese telecom giants and cutting the country off from critical U.S. chips and software. Of course, Huawei, not the only one affected by these decisions. The blast radius in terms of Huawei supply is pretty wide. Overnight, Huawei, China's crown jewel in tech and the world's biggest maker of telecom gear, found itself scrambling. And so did Beijing. For all its economic muscle, China had no real way to strike back. Bloomberg's Dan Tenkate says that moment was a wake-up call for Chinese President Xi Jinping to look at how the U.S.

14:11used the law to shape export rules and control global trade and copy that playbook. The U.S. basically showed China the way for doing all of these things. And so what you saw was after Trump's first term, Xi Jinping went out and he got those tools. And in 2020, they passed an export control law that gave them the ability to do everything that the U.S. was currently doing to them. And if you look at the current rule, this rule that, okay, if there is even a trace amount of rarest, we can control everything. That comes directly from something called the Foreign Direct Product Rule, which the U.S.

14:51passed that in 1959. The Foreign Direct Product Rule. It allows the U.S. to ban the sale of products to foreign firms if any part of a product is made with American intellectual property. Over the years, the U.S. would implement that against China. So there was an exchange, One in particular where Walter Mondale, the vice president at the time, went to China and he spoke with Deng Xiaoping in 1979. And a lot of that conversation was around, OK, what can you sell us? And Deng at one point expressed frustration. He said the Japanese and the Europeans won't even sell us a product because it has an American component.

15:34And that principle is essentially what China is doing today. If you have a bit of rare earth that's been manufactured through our processes, then we assert the right to be able to control that. And China's ultimate goal here is not necessarily to restrict trade and try and shut down the global supply chains. It certainly doesn't have the capability to enforce that at all. But it does want the same tools as the U.S. And it wants to show the world that, hey, we can mess with you anytime we want. We can assert the right to come in and block you from doing things.

16:19Dan says the U.S. still has plenty of weapons of its own. And China isn't in a good position to fight off a sustained attack on trade. It's struggling with manufacturing overcapacity, a slump in consumer spending, and an ailing property sector. Dan says it's not that America's trade measures wouldn't be highly effective against China. It's that using them could be risky to the U.S. The U.S. has a lot in its arsenal. The question is what measures can the U.S. put in place that won't blow back on America? and that looks limited to things like airplane parts, chip design software, ethane, and a few other things that China needs that the U.S.

17:07has. Now, the other big one is tariffs. Obviously, if Trump wanted to put 150 % tariffs on Chinese goods heading into America, that would do serious economic damage to China, but it would also hurt the U.S. The U.S. also controls the financial system, so it could do drastic things there. But again, anything they do on that front will also blow back at the U.S. So Trump is looking for something that he can hit China with that wouldn't hurt the U.S. And there's not too many great options. He can do some things, but ultimately, he wants a deal where everybody wins. Now, looking ahead, Trump and Xi will meet at the APEC summit in South Korea next week.

17:49What are the likely outcomes that we can expect from that? As long as China agrees not to really disrupt the flow of rare earth magnets, then you could see that they could come to some sort of agreement where they extend this tentative truce. Trump also wants the TikTok deal completed, and Xi needs to sign off on that. So that's another thing that could come out of it. And the other major thing is on soybean purchases. That's a big constituency for the U.S. and for Trump. So China's not buying soybeans anymore, and it says it can't because the tariffs are too high. But if there's some agreement on that, then that could also be something we see out of that meeting.

18:35So it sounds like there are things that both countries want that could still make them walk away and say, we got to win? Yeah, I think the ultimate problem here is that the space for a deal is very limited by all the national security restrictions that both sides have on each other. I think that they don't really see a deal until you get particularly Congress and the Hawks in Washington coming to the conclusion that it's okay to have China involved. That's just politically very difficult to see, particularly with all the concerns about Chinese spying, China's military might. You'd have to fundamentally change the conversation in Washington.

19:15Now, Trump, during his first term, he basically flipped the conversation on China and turned it into a bipartisan consensus against China and for more hawkish posture towards China. So if anyone can change the conversation in Washington toward China, it could be Trump. But Beijing's move to leverage its rare-earth advantage has now boxed Washington in, limiting its options and raising the possibility that this dispute may have no clear resolution, at least not anytime soon. If you think about the leverage that both sides have on each other right now, China has this rare earth card. So what is the U.S.

19:57doing? They're working overtime to try and create an alternative supply chain so they're no longer dependent on China. China's doing the same thing on their side. They're trying to maintain this advantage as much as possible. And also look at the areas where the U.S. has leverage over them, particularly on high-end NVIDIA chips. And they're trying to build their own chips so they're not relying on the U.S. So both economies are not necessarily looking for ways to work together over the long term. They're looking for ways to not be reliant on each other. Neither country has any leverage on them.

20:32And that's where they're heading. And so that dynamic doesn't lead me to be optimistic that we're going to get a long term conclusion to this anytime soon.

20:47This is The Big Take Asia from Bloomberg News. I'm Wan Ha. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you like the episode, make sure to subscribe and review The Big Take Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening. See you next time.

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