12 June 2019
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.