China has a secret trade war option: a rare earth embargo


Image for China has a secret trade war option: a rare earth embargo

With the potential for an expanded trade war with China, the U.S. needs to consider some of the less obvious economic and national security risks that could come into play. China holds a secret weapon that could cripple us instantly. Let’s call it, Trade War Option “57 – 71”.

The chemical elements on the periodic table with atomic numbers 57 through 71 make up the critical elements called rare earths. Two more, Scandium and Yttrium, reside elsewhere on the periodic table and complete the group.

The U.S. is 100 percent import-dependent on all of these critical defense materials and 100 percent import-dependent exclusively on China for these materials after they are processed into metallic form (the state required for most technology and defense applications).

Rare earth metals are so critical and in so many defense components for guided missiles, smart bombs, targeting lasers, sonar, radar, night vision and high temperature resistant metals for military jet engines, that if China cut us off, the U.S. could not replace or build most of our advanced weapon systems.

These materials are also found in smart phones, small electric motors, sensors and catalysts in automobiles, computers, commercial aircraft and most green technology. If China embargoed these materials the U.S. would be forced to shut down all or most of our nation’s technology manufacturing assembly lines.

This single category of imports, with a global resource value of about $3 billion, becomes an essential input to about $7 trillion in value-added goods on a global basis. The U.S. controls zero.

How did we get into this precarious position?


The most recent 2016 Government Accounting Office (GAO) report called China’s monopoly on rare earths a “bedrock national security issue,” and back in 2010, the GAO warned Congress that it could take up to 15 years for the U.S. to re-develop its own rare earth supply chain. Still, Congress failed to act.

This history of neglect goes all the way back to 1993 when Congress allowed the sale of America’s leading rare earth magnet company, Magnequech, to China via a straw-man transaction that was linked directly to the family of Deng Xiaoping, the former Premier Leader of China. The Indiana-based company produced nearly all of the rare earth magnets for our guided missiles and smart bombs, but Congress chose to ignore the warnings of Pentagon experts like Peter Leitner and let the sale proceed.

With Trump’s Trade war looming and sabers rattling from the White House Executive Office, there is no doubt that China is mulling over its options. What’s very clear, is that “Option 57 -71” could be unleashed on us any time.

While Trump’s trade dispute with China is certainly legitimate, this administration had better have something in place if it’s going to continue to push forward unless it is prepared to back down and concede everything to China.

Unfortunately, the biggest risk to launching a trade war against the People’s Republic of China comes from the most obscure of imported goods.

Victoria Bruce is the author of Sellout: How Washington Gave Away America’s Technological Soul and One Man’s Fight to Bring it Home. The book follows Jim Kennedy and his quest to wake up Washington to the threat of the Chinese monopoly on rare earths.

With the release of dueling tariff lists in the last 24 hours, China and the US are getting dangerously close to a bona fide trade war. On China’s potential hit list are US-made aircrafts, soybeans, and automobiles, which made up a combined 30% of the $130.4 billion in US exports to China in 2017.

In aggregate, trade wars don’t leave anyone better off. But some people will suffer more than others if China’s tariffs go through. For instance, given that China buys between a half and a third of US soybean exports, Midwestern farmers will be badly hurt if China’s proposed tariffs take effect.

And as with any conflict, there are bound to be people and companies who would benefit from a US-China trade war, too. Here are a few of the unexpected winners who stand to gain if the tariffs take effect.

US wine drinkers

China just slapped a 15% tariff on the US’s $82 million worth of wine exports (paywall) to China. That loss of demand will, in theory, push down wine prices stateside. (Bourbon-drinkers should be less psyched, however. Though American whiskey now faces a possible 25% duty, China only accounted for 0.5% of US whiskey exports in 2016.)

Canadian cranberry growers

China’s new 15% tariff on fresh US cranberries was of little concern to US growers—most of whom are in Wisconsin and Massachusetts—because they don’t export a lot of them. Now, however, the Chinese government is mulling a 25% duty on dried cranberries. China’s fast-growing demand for dried cranberries (paywall) has made it the US’s number-two export destination, after the Netherlands. That’s worrisome news for the US cranberry industry, which is already grappling with a berry glut.

Who will meet the needs of the cranberry-hungry Chinese masses? As the world’s second-biggest producer, Canada is well positioned to step in exporting “marsh apples“—as they’re sometime known in the Great White North—to China. Meanwhile, if the Chinese Craisin-barrier goes up, Americans can at least look forward to a slightly cheaper Thanksgiving come November.

Latin American soybean farmers

Without the US, there are simply not enough soybeans on the planet to meet Chinese demand, said Capital Economics in a recent note. Watch Brazil and Argentina—the second- and (distantly) third-biggest soybean exporters, after the US—cash in if the tariff on US soybeans comes to pass.

Japanese and Mexican pork eaters

China eats more pork than any other country. As surging income growth over the last 20 or so years has buoyed that demand, US pig farmers have benefited handsomely. In 2016, for instance, around 13% of China’s $3.2 billion in pork imports came from the US. New 25% tariffs on American pork will hit farmers hard. But that extra supply will likely push down prices paid by the top buyers of US swine, Japan and Mexico.

Airbus

The Chinese tariffs propose placing a duty of 25% on US aircraft weighing between 15 and 45 metric tons (17 and 50 tons). Though it’s a little unclear, that probably affects Boeing’s 737 jet, a major source of expected profits (its bigger planes wouldn’t face extra duties).

China is a huge source of demand for planes. In 2016, nearly three-quarters of the $7.5 billion in aircraft under the category currently at risk of Chinese tariffs came from the US (presumably made by Boeing). Only two companies make planes in the volume China needs: Boeing and its European competitor, Airbus.

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