Who has the upper hand as Beijing weaponizes rare earths in its trade clash with Washington?

Beijing is tightening its clamps on components that are integral to technology supply chains. Lithium batteries and related material, artificial diamonds that have industrial uses and rare earths like holmium, erbium, thulium, europium and ytterbium have been put on China’s export-control list.

This development comes on the heels of samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium being added to that list this year.

To comprehend the extent of the curbs and China’s supply stranglehold, take dysprosium, which is used in semiconductors. China refines 99% of this rare earth; a facility near Shanghai under its ministry of land resources accounts for the entire world’s production. In what constitutes Beijing’s extra-territorialization of domestic laws, entities making products that require such Chinese inputs will need a licence before their output is sold to a third country.

For instance, Beijing is seeking commitments from New Delhi that the rare earth magnets supplied by it will be used solely to fulfil domestic needs.

China had introduced export curbs in December 2020 with its Export Control Law. This law prohibits the export of advanced technology and materials deemed strategic to specific companies, and allows the Chinese government to act against nations that violate its national security or “interests." John Moolenaar, chairperson of the US Select Committee on China, has likened Beijing’s latest rare-earth curbs to an “economic declaration of war."

In a related development, Canadian firm TechInsights and others have been added to China’s list of ‘unreliable entities’ that seeks to penalize “entities that hurt the commercial interests of Chinese companies." Such companies could face trade restrictions, an investment ban in China and a bar on the entry of their employees to the country.

Huawei has been spearheading Beijing’s drive to develop domestic alternatives to foreign chips and its action against TechInsights shows that it will seek retribution against firms that get in the way of its tech self-reliance mission.

TechInsights, a provider of data related to advanced technology and intellectual property, has been banned from dealing with organizations or individuals in China. It allegedly unearthed Chinese tech major Huawei’s dependence on foreign semiconductors and revealed the identities of its hidden suppliers.

Since 2019, Washington has placed Huawei on a blacklist that prohibits chip-makers that do business with the US from working directly with it. Huawei has been spearheading Beijing’s drive to develop domestic alternatives to foreign chips and its action against TechInsights shows that it will seek retribution against firms that get in the way of its tech self-reliance mission.

Beijing has justified these expanding export-control measures by stating that many of these items have military applications and it is merely protecting its national security and interests. It has also signalled that it looks forward to using bilateral negotiations and other exchange mechanisms to discuss its rules.

Beijing announced its policy revision just days ahead of a meeting between US President Donald Trump and Chinese President Xi Jinping scheduled at the end of October. Its export-supply aggression reveals an intention of using important industrial and technological inputs as leverage. Sure enough, Trump responded with a threat to levy an extra 100% tariff on Chinese imports over and above the 30% already in place.

While the Chinese onslaught escalates Beijing-Washington tensions, it also highlights the unpredictability in the dynamics between Xi and Trump. Earlier this year, Trump had threatened to slap an unprecedented 145% import levy on Chinese goods. In turn, Xi had responded with a 125% retaliatory tariff. Several rounds of talks led to a truce and many extensions to it, with US tariffs on Chinese products settling at 30% and Chinese levies on American goods at 10%.

Trump responded with a threat to levy an extra 100% tariff on Chinese imports over and above the 30% already in place.

In September’s round of talks in Madrid, both sides seemed to make progress, arriving at a “basic framework" over control of social-media app TikTok, although the pricklier issue of tariffs was pushed down the road for the next round of talks.

The Trump administration gave TikTok another lease of life to operate in the US, with Bytedance—the company that owns this popular video-sharing app—getting time until 16 December to transfer control to an American entity.

The Trump administration had earlier cited national security considerations in seeking ByteDance’s divestment, yet kept dawdling over the deadline. A key factor behind Trump’s leniency towards TikTok was that his popularity among its users had grown. This could also have led Beijing to drop its reservations against the divestment and use it instead as a strategic lever.

Earlier, the resolve of America’s tech-export curbs against China seemed to be weakening after Trump took a policy U-turn to allow the sale of Nvidia’s AI chips.

Former US president Richard Nixon wrote in his autobiography that Communist leaders believed in Vladimir Lenin’s principle: Probe with bayonets, and if you encounter mush, proceed; if you encounter steel, withdraw.

In his pursuit of a trade deal, Trump seems to be reversing his China policy bit by bit. Xi is better prepared with a retaliatory arsenal for this trade war 2.0. He has not only revealed a capacity to throw his adversary off balance, but appears to be encountering mush.

This commentary was originally appeared in Mint.

• International Affairs
• China
• India
• USA and Canada
• China export controls
• dysprosium
• Huawei
• lithium batteries
• national security
• rare earths
• semiconductors
• tariffs
• tech self-reliance
• US-China trade

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