Time and time again, analysts try to point out that China has a lot more to lose in a US trade war scenario than the United States due to the significant trade surplus China keeps experiencing, a trade surplus which might end up being crippled by measures such as tariffs and a wide range of barriers to trade.
From a strictly monetary perspective, they are correct. But in today’s tricky economic as well as geopolitical landscape, seeing things in a linear manner might not be the wisest approach. For example, few people think about the processed rare-earth products dimension of US-Chinese trade because it seems like such a niche discussion that there is no way it could have systemically relevant implications… right?
In fact, the entire defense capabilities of the United States and pretty much any developed nation depend to a large degree on processed rare-earth products. From Tomahawk missiles that need these products for terrain and target identification purposes to future technologies which will likely become more and more dependent on the rare-earth dimension, there’s just no escaping this frequently-overlooked industry.
But what does China have to do with all of this? Can’t countries simply meet their rare-earth-related needs through internal production? The short answer is that they could but… well, just don’t. To elaborate, it is indeed true that the US for example had a solid rare earth processing industry up until the 80s but as of that point, China was able to put processed rare-earth products on the table at prices others just couldn’t compete with.
Strangely enough if you think about their name, rare-earth materials are actually not all that rare. You actually come across them rather frequently, but processing them is the tricky dimension because this endeavor tends to be a complex and highly polluting business, with the ores in question frequently containing radioactive elements such as thorium.
Through a combination between variables which range from environmental policies one can consider quite lax all the way to government subsidies, China is the main game in town (and actually, pretty much the only one, with other players being insignificant in terms of volume by comparison) with respect to PROCESSED rare-earth products. Since the days of Deng Xiaoping, China has made it a priority to achieve dominance in this industry, with Deng actually considering that China controlling rare-earth products will end up becoming the equivalent of oil-producing nations controlling the price of oil, with the many economic as well as geopolitical implications this generates.
As such, threats pertaining to potential embargo solutions with respect to processed rare-earth products can most definitely be considered an ace that China has up its sleeve. In the event of a large-scale conflict, the simple measures of banning exports of processed rare-earth products would be enough to cause huge problems for the defense industries of the United States or other geopolitical players.
Can the US and other nations do something about this status quo? In theory, yes, they have options which range from stockpiling products to encouraging the development of local processing businesses. Practically speaking, however, while the US does stockpile products, they are usually not fully-processed, nor is the quantity enough to make military analysts feel comfortable. With respect to encouraging domestic processing activities, let’s just say reviving an industry that has been overlooked for decades is easier said than done, not to mention the costs involved because due to them being considerably higher in the US (from labor costs to environmental compliance-related ones), it would take robust subsidies for the processing of rare-earth materials to be profitable enough in jurisdictions such as the US.
The conclusion of this article is therefore obvious: leaving overly-simplified rhetoric aside, it’s important to understand that there is more to international trade than meets the eye and over the years, China has ensured that it has geostrategic aces up its sleeve, increasing the likelihood that an eventual trade war would cause mutually assured (economic) destruction.