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12 June 2019

With Jonathan Pearlman

Xi’s Trump card

Last month, Xi Jinping visited a small magnet factory in south-east China. The plant belongs to JL MAG Rare-Earth Co., a Chinese company that produces magnets from rare earths, a group of seventeen little-known metals that are used to make phones, cameras, planes, electric cars, X-ray and MRI machines, and just about every other gadget upon which life in the developed world now seems to depend. Xi didn’t say much about the purpose of his visit. He didn’t need to.

China is the world’s biggest producer of rare earths, providing more than 70 per cent of global supply; it’s followed by Australia, which produces about 12 per cent and, along with the United States, is the only other substantial source. Xi’s quiet visit to the plant in Jiangxi Province was widely viewed as a reminder – or threat – to the United States of the damage China could inflict in an escalated trade war.

Chinese officials and state media bolstered this perception, suggesting rare earths could be the country’s “counter-weapon”. “Don’t say we didn’t warn you!” declared China’s People’s Daily. This was a direct rebuttal to Donald Trump’s claim that the US’s trade deficit with China – along with its military, economic and technological strengths – makes its trade war “easy to win”.

Xi’s rare-earth threat puts Australia in a delicate position. Processing raw rare-earth material is labour-intensive and environmentally hazardous. China set about becoming the main global supplier about thirty years ago, making it hard and costly for other countries to catch up now, especially if they have well-enforced employment and pollution laws. China effectively has a stranglehold on the global supply of one of the world’s most crucial ingredients.

The Australian company Lynas is the biggest producer outside China and could become a key supplier. Its shares have increased about 40 per cent since Xi’s factory visit. The firm said last week that it will prioritise the US military when it opens a new plant in Texas. Rare earths are used to build F-35 Joint Strike Fighters, military drones and Tomahawk cruise missiles.

So far, Canberra has not responded to Beijing’s veiled threat, at least publicly. However, if Xi blocks supplies, these seventeen elements could become a strategic asset for Australia. As with Australia’s large uranium reserves, their uses and destinations would be guided by government policy, not just the market.

The consequences of China using its rare earths as a counter-weapon are impossible to predict and may not all fall its way. In 2010, China reduced supplies to Japan amid the two country’s competing claims on islands in the East China Sea. Japan found alternative providers and developed ways to make some products, such as cars, without using rare earths. This led to China’s share of global supply dropping from 95 per cent to current levels of 70 per cent. A Chinese ban is also likely to encourage countries such as Australia to increase their yield, further eroding China’s share. And, as occurred with the 2010 ban on exports to Japan, China would likely earn a rebuke from the World Trade Organization, damaging Xi’s attempt to fashion himself as a champion of free trade.

The rare-earths stand-off is the latest twist in the long-running US–China trade war. It demonstrates the unpredictability and extent of the potential fallout. Australia is not immune. Heavily dependent on both Chinese trade and on US investment and security guarantees, it faces decisions that will affect the outcome.

In London last Tuesday, Scott Morrison said the trade war “is testing the system as never before, and is putting the prosperity and living standards of billions of people at risk”. The next day, he attended the seventy-fifth anniversary commemoration of the D-Day landings.


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No appetite for a “new Cold War” in Asia

“There may not be much that regional states can do to avert greater contestation between the United States and China. But in the meantime, a number of states are starting to make their own efforts to shape key aspects of the regional security and economic order. Indonesia importantly has put its head above the parapet in the G20 on defending the multilateral trade order, but that’s not the only sign of the regional awakening to the new reality.” Amy King, East Asia Forum

Australia’s response to extradition law “too bland”, Hong Kong community says

“Two petition letters with a combined 5000 signatures were delivered to Department of Foreign Affairs offices in Sydney and Melbourne on Tuesday. The letter[s] outlined concern that Hong Kong people residing in Australia, or any Australian citizen deemed to have violated Beijing’s law and seen as a threat to China’s ‘national security’ who happened to be in the territory, could be extradited to the mainland.” Bang Xiao and Sally BrooksABC News

Fierravanti-Wells’ outburst tells more than just a China story

“Differences on China cut across party lines. There is no China hawk party and no China dove party; instead, there are dove and hawk factions inside both parties. That does not bode well for a coherent and consistent approach to an international challenge that in many respects already dwarfs that posed by the Soviet Union.” Sam Roggeveen, The Interpreter (Lowy Institute)

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Clarity and consistency needed in Australia’s China policy

“Our reflex instinct to tolerate Beijing’s bad behaviour will damage us. If China’s leaders conclude that Australia will tolerate any slight, no one should be surprised if their ill-disguised disregard of us continues.” Peter Jennings, The Strategist (Australian Strategic Policy Institute)

Polarising dissent – the constructed narrative of Singapore’s new “fake news” law

“The PAP’s return to more authoritarian modes of governance is to be expected as Singapore prepares for its next changing of the guard, with newly minted Deputy Prime Minister Heng Swee Keat preparing to take over the top job during the course of the next parliamentary term.” Howard Lee and Terence Lee, The Asia Dialogue

Free from Australian Foreign Affairs

The company we keep – risk and reward in the time of Trump

“The question for Australia is how it can remain prosperous and secure in a world whose current form and future trajectory seem so uncertain. What can it change, and where must it adjust? How can Australia maximise the options available to it? Foreign policy will be central to its response.” Allan Gyngell, HERE

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IRAN–US
STAND-OFF

Resisting the enemy’s . . . bullying is the only way to stop him.

Ayatollah Ali Khamenei, supreme leader (Iran)

We’ll talk. One thing they can’t have is nuclear weapons.

Donald Trump, president (United States)

We cannot work miracles, but we will try to avert a failure [of the nuclear deal].

Heiko Maas, foreign minister (Germany)

Sources: Aljazeera, Reuters



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