Will China Play The Rare Earth Card In The Trade War?

The rumor that China might play its “rare earth card” was the rumor today that helped push down both stock and oil markets according to a variety of reports.  The trigger for this seems to have been a visit on May 26 by China’s president, Xi  Jinping, to a rare earth facility, along with some rumbling statements associated with that visit.  They may not do it, but the possibility of blocking exports to the US of exports of rare earth metals shows that China has potential weapons if Trump follows through with more vigorous trade barriers.  How serious is this threat?

It is probably not as serious as it might  have been a decade ago.  In 1990 a solid majority of these critical elements were produced outside  of China, with the US being a major source, particularly California.  But production here and in some other nations such as Australia was reduced substantially as mining of many of these involves substantial environmental damage.  At the same time China entered the opening and expanded production, getting to be the source of about 90 percent of all production by 2010.  However, due to events then increased efforts to increase production of them elsewhere, especially Malaysia, Australia, and South Africa, has reduced this to 70 percent.

In 2010 China used the weapon against Japan.  A Chinese fisher was captured by Japanese forces when he  entered a zone controlled by the Japanese but claimed by China.  As the Chinese demanded release of the fisher, they halted exports of several of these metals used to produce electric cars. The Japanese gave up and returned the fisher.

There are 17 of these recognized rare earth elements, although it is often noted that they are not really all that rare.  Some of the more important ones are neodymium,  which is used in lasers and in magnets used in wind turbines and electric motors, yttrium used in superconductors, lanthanum used in cameras and telescope lenses, cerium used in catalytic converters, yttrium used in superconductors, gadolinium used in TV screens and MRIs, and praseodymium used in aircraft engines.

An irony of this situation is that these rare earths are used in technologies that are important to move us off dependence on fossil fuels towards more sustainable energy sources, such as wind and electric cars.  This may be a serious limit to long run growth. It is ironic that this may be getting caught up in a stupid trade war staged by our president against China.

Barkley Rosser