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A New Chapter in the Tech Wars? Weaponization of Trade Back on the Menu as U.S.-Chinese Tensions Soar

The world breathed a collective sigh of relief when Chinese drills in the seas and skies surrounding Taiwan wrapped up without further incident this Monday.

Nevertheless, tension between the U.S. and China over the island, which some analysts consider “the most dangerous standoff between global superpowers, even as the war in Ukraine rages,” remain high, and a recent development in the trade arena may add further fuel to the fire.

The territorial dispute over Taiwan may make for the flashiest headlines, but, as followers of ARPN well know, the trade dimension of the geopolitics of critical mineral supply chains have emerged as a new frontier in the tech wars between Beijing and Washington, D.C., and conflict has been smoldering over the past few years, particularly over Rare Earth Elements (REEs).

When reports of Chinese threats to “play the Rare Earths card” – to escalate its trade dispute with the then-Trump administration to include rare earths minerals — surfaced in 2019, ARPN’s Daniel McGroarty argued the move could galvanize support for legislation or further executive actions to reduce U.S. overreliance on foreign supply and processing of critical metals and minerals.  By July 2019, then-President Trump issued a Presidential Determination under the Defense Production Act of 1950 designating all links in the rare earth permanent magnet supply chain as “essential for the national defense,” and eligible for U.S. Government funding and support.

But the wheels of government grind slowly.  A pandemic, a new war, and several supply chain shocks later, the United States and its allies have indeed taken a number of steps to decouple from China and shore up its own critical mineral supply chains.  As a result, China’s share of global REE production, which stood at roughly 90% a decade ago, has dropped to 70% last year, according to the USGS, though most processing is still under Chinese control.

Western nations have also secured a number of trade deals to decouple from China marking a “huge realignment in trade – one that goes by names like ‘friendshoring’ and ‘nearshoring’ – and having occurred “so rapidly that they’ve wrongfooted Beijing,” as Mary Hui writes in a three-part series for Quartz.

Hui cites a two-year old deal between U.S. and European rare earth firms which involves processing monazite sands in Utah to produce rare earth carbonates, then ship them to Estonia for processing, as well as another project in which REE ores from Canada will undergo preliminary processing there to then be shipped to Norway for further processing.  Meanwhile, Japan has strengthened its REE cooperation with Australia.

Those efforts notwithstanding, China still has substantial leverage, especially in the processing segment, and has in recent months kicked its efforts to consolidate its REE sector into high gear [see our post here] while doubling down on an aggressive investment spree overseas to re-establish an “abundant supply of rare earth, so [as] to have the world’s cheapest feed for China’s downstream industries.”

As tensions between China and the West, and specifically China and the United States have soured, the specter of export controls began rearing its head again.

In October 2022, in a move that observers have deemed a paradigm shift in U.S. export control policy toward explicit containment of China’s technological advancement, Washington, D.C. imposed a set of sweeping controls on advanced semiconductors and semiconductor manufacturing equipment to China, and has been able to secure Japanese and Dutch agreement to a deal restricting China’s access to advanced semiconductor manufacturing equipment.

While China until recently had yet to “substantively respond” to the semiconductor export controls, industry sources suspected “they’re likely going to use rare earths as a bargaining chip since rare earths are a weak point for Japan and the U.S.” – and these experts were proven right when Nikkei reported last week that Beijing was considering prohibiting exports of certain rare earth magnet technology through updates to a technology export restrictions list last updated in 2020.

According to Nikkei, “[t]he revisions would either ban or restrict exports of technology to process and refine rare-earth elements. There are also proposed provisions that would prohibit or limit exports of alloy tech for making high-performance magnets derived from rare earths. In all, there are 43 amendments or additions in the draft list first announced in December by the commerce and technology ministries. Officials have finished taking public comments from experts, and the changes are expected to go into force this year.”

As followers of ARPN well know, China is no stranger to playing the Rare Earths card, and they may recall the 2010 standoff between China and Japan in which Beijing blocked REE sales to Japanese users over a heated flare up in the context of the long-standing dispute over control of the Senkaku Islands in the East China Sea.

It’s not 2010 anymore. Dependencies have shifted, and a new global realignment has begun. It remains to be seen how this new chapter plays out, but it is clear that as the export restrictions ratchet is being tightened, the weaponization of trade in the tech wars is back on the menu.