Xi in command: Rare earths elevate China's trade war edge
"Americans scored an own goal," "Xi Jinping is on top in the war of nerves," experts are evaluating the recent events in the U.S.-China trade war. However, some argue that the Chinese cannot afford an economic war with the Americans and need to be cautious.
- Americans scored an own goal. The tariff war has turned into a trade war. It's no longer just tariffs, but also non-tariff solutions, rare earth metals, banks, flows, and services, comments Prof. Bogdan Góralczyk, a sinologist. In this way, he referred to Beijing's suspension of exporting some rare earth minerals and magnets crucial to the global automotive, aviation, and semiconductor industries, as "The New York Times" reported.
The American newspaper pointed out that without key raw materials, the production of electric motors would not be possible. These are needed for the production of electric cars, drones, missiles, or spacecraft. Half of the deposits of samarium, gadolinium, or terbium, used, among other things, in the manufacturing of fibre optics, processors, lasers, or magnets, are located in China.
Beijing's actions are the result of decisions made by Donald Trump. In February, the U.S. president imposed a 20% tariff on Chinese goods, followed by an additional 34%. In retaliation, China imposed 54% tariffs on most American goods. Trump escalated by an extra 50%, resulting in 104% tariffs on almost all products imported from China. Beijing responded again: it raised tariffs on American goods to 84%. On Wednesday, April 9, at 8:00 AM ET, Trump surprised again by suspending new tariffs on almost all countries worldwide for three months, but raised tariffs on China to as much as 145%.
"War of nerves" at the top of power
Shortly afterward, Trump, however, suspended higher tariffs on smartphones, computers, and other devices and electronic components. This was done "quietly," Bloomberg reported.
"Xi Jinping is on top in the war of nerves," commented Jakub Jakóbowski, Centre for Eastern Studies director.
- Donald Trump's actions indicate that his strategy is based primarily on the desire to force the opponent to negotiate, not as was recently suggested, on the global reorganization of trade. The earlier suspension of mutual tariffs for all countries except China evidences this approach. It is China that Donald Trump perceives as the greatest adversary, which has become an industrial powerhouse in recent decades, according to Michał Stajniak, deputy director of XTB's Analysis Department.
The analyst adds that China has an advantage in the form of the rare earth metals market, which it can control up to 90%. The world is trying to diversify supplies, but it will take years.
Many American companies are dependent on access to rare raw materials controlled by China. These include Lockheed Martin, Tesla, General Motors, Raytheon Technologies, and even Apple, although in the case of the latter company, it is worth noting that almost all production is located outside the U.S. It should also be remembered that companies exporting these raw materials are waiting for licenses, hence there is no official export ban, only a suspension for a shorter or longer time - explains Stajniak.
In his opinion, we should remember the COVID-19 pandemic and the world's reaction to the supply chain disruption after 2020.
- There was a sharp increase in the prices of some components, mainly chips, which were needed, among other things, for car production. On the other hand, the United States is the largest consumer in the world, so abandoning this market is not so easy. Europe is, of course, a possible direction, but flooding this market with Chinese goods will certainly also lead to the imposition of tariffs by Europe, believes Stajniak.
China and the fight for interests
Krzysztof Szumski, Poland's ambassador to China from 2005 to 2009, says that "the Chinese did not start this fight and are not looking for a provocation," which should be a part of their millennial tradition. - However, they know how to take care of their interests. That's why they hit back at Trump in a painful way. Eventually, an agreement will be reached. Diplomats will sit at the table just like in Trump's first term. The difference is that the scope of actions of both administrations is more ruthless than before, he believes.
Since his return to the White House, Donald Trump's administration has been trying to pursue its interests from a position of strength. An example is the incident on February 28 in the Oval Office when Ukrainian President Volodymyr Zelensky heard that "he has no cards" in the negotiations of the so-called raw material agreement. However, some believe that Americans will not be dealing these cards in the clash with China because they must first acquire them.
- The balance of power has shifted to favour China. Beijing is playing the long game, which gives it more options. But as they know, they are also heating up, maintaining more calm outwardly. A kinetic fight, however, is not on the table, and soon, perhaps within a few months, there will be serious talks. It will probably end with slightly higher tariffs than before, but with solutions that make life easier for both sides being agreed upon. However, in politics, nothing is specific; a single incident in the South China Sea is enough - Szumski argues.
Who is weaker?
Ian Bremmer, the founder of the consulting firm Eurasia Group, which deals with global political risk analysis, offers a different perspective on the U.S.-China clash.
The Chinese economy is performing poorly. China can afford a trade war with the United States much less than the U.S. - the expert believes.
He adds that although the Chinese are more patient and have a more stable internal policy because their leader will rule for a long time, their economy is struggling.
- The Chinese are not buying; they don't want to spend money because they don't trust their government, and consumer moods are weak. American tariffs were also targeted at Southeast Asian countries, countries to which China exports. That's why I think the Middle Kingdom is in trouble, and we will see a capital flight from that direction. I think the Chinese will be very cautious in deciding on further escalation of the trade war with the Americans. In the long run, they may come out victorious, but they must be patient and deal with the blow from the world's most powerful country - Bremmer said in Scott Galloway's podcast "The Prof G Pod".
However, the Chinese will not allow themselves to be pushed into a defensive position.
- Saving face in Chinese matters is fundamental. Officially, they cannot give in too much because Chairman Xi would be compromised. Therefore, changes will be made on the principle of absolute balance, also in terms of propaganda; otherwise, the Chinese will not accept it. This is the sine qua non condition (necessary condition - ed.) for any agreement. Trump already knows what he's dealing with, and I think he will be more cautious - summarizes Krzysztof Szumski.
