After calling a pause to the threatened tariffs on Canada and Mexico, President Donald Trump has turned his attention more firmly to China with no word of tariff rollbacks. What has gotten less attention is the trade war China is engaging in with the United States.
Despite the hand-wringing about the effects of tariffs on bilateral trade, China has very little leverage in the bilateral trade war with the United States. Make no mistake: China can respond and adapt, as it has done in various ways, but it has little leverage to impose pain upon the United States.
For example, there are almost no products made exclusively in China that the United States cannot obtain or purchase from other countries. While China is engaging in mass third-country purchases of embargoed semiconductors to continue artificial intelligence development, the United States responded to the tariffs of the Trump and Biden administrations with almost no disruption and merely increased purchases from other states. There are very few leverage points China has to threaten the United States.
China is in a difficult position because, unlike the United States, China produces almost nothing that cannot easily be purchased elsewhere or, as economists refer to this phenomenon, substitutability. If firms left China en masse to Mexico, Vietnam, or the United States to make garments or assemble electronics, this would actually fulfill the goal of the tariffs.
Even with some industries in China capable of meeting nearly 100 percent of global demand, Beijing is reluctant to impose countermeasures because those products can be easily substituted with alternatives or similar products. It fears losing that business and potential leverage point.
However, China has recently opted to utilize one of its few areas of dominance as a producer of specialized metals and minerals, commonly known as rare earths, which are frequently used in high-tech manufacturing, such as mobile phones, as well as in low-tech sectors like batteries and solar panels.
Depending on the specific metal, China can claim nearly 90 percent of the market share in the mining, refining, and production of certain rare earth metals, and typically maintains about 50 to 60 percent. In an attempt to retaliate for what it sees as unfair export controls on semiconductors, Beijing recently announced export controls on these and related metals.
There are, however, a couple of problems with China’s attempt at export controls. Despite being called rare earth metals, these metals are not really all that rare. In reality, they are relatively common. They are not commonly mined because they are environmentally very dirty, from the runoff to land degradation, requiring large amounts of ore. China has gladly built refiners and mining operations domestically while purchasing reserves overseas in an attempt to corner the market.
China actually tried to do the same when it had an even more dominant market share roughly a decade ago, with a full embargo of rare earth exports at one point. A few years later, with little fanfare, Beijing rolled back its ill-guided strategy. Why?
A couple of small mines were opened, and firms around the world rushed to rapidly increase recycling, and there was little Beijing could do to keep China’s stranglehold on the market.
Other than headlines on state media, there seems to be little to be gained from the current version. Not only have more mines come online, but governments are also more aware of the threat posed by China’s stranglehold on this sector, with support for more non-Chinese mining activity.
Within the past year, it was announced that the United States has two deposits of lithium—widely used in industrial applications, such as batteries for electric cars and other similar uses—that would be the largest in the world. With the Trump administration signaling a willingness to expedite these types of projects to reduce the United States’ reliance on Chinese products, it seems like a strange time for Beijing to attempt an ill-conceived economic war.
Unraveling the minds of Chinese economic planners seems fraught with peril in the best of times. Understanding why they would give the Trump administration and others even more cause for concern, given China’s lack of market power, product substitutability, and recent discoveries, seems even more puzzling.
As the French proverb from Napolean goes, never stop your enemy when they are making a mistake.
