China Trumpets Trade War Mettle With Strategic Mineral Advantage

China’s Foreign Ministry said Wednesday that, while it doesn’t want one, the country is “not afraid” of a trade war with the United States. The ruling Communist party’s mouthpiece China Daily added insult to chest-puffing, telling the US to “stop whining about itself being a victim in global trade.”

At the same time, Beijing is reportedly open to “respectful” talks with a US envoy — talk about hot and cold messaging. But there are more than words in play, as experts are now warning China has taken steps that could cause a critical shortage of key materials for US weapons manufacturers.

Mining Their Own Business

The size of the tariffs in the nascent trade conflict are, at this point, almost cartoonish. The White House said Tuesday that Chinese imports now face up to a 245% tariff, while Beijing put a 125% levy on goods going the other way.

Last week, China’s Commerce Ministry went so far as to say the increasingly eye-popping percentages of duties on both sides risked becoming “a joke” — which could explain why the country has played a deadly serious card against which the US has little capability to retaliate directly. China is a top global producer of 30 of the 50 minerals the US considers critical, and is America’s source for more than half of its annual supply. Beijing had already placed export controls on four of them — gallium, germanium, antimony and graphite — in response to earlier US tariffs and, last week, it added seven more, in this case from among the 17 rare earth minerals designated critical.

The rare earths are used in chip-making, but they’re also crucial to a lot of military technology — the Center for Strategic and International Studies (CSIS) noted they are “crucial” components in F-35 fighter jets (one of which contains more than 900 pounds of rare earths), battleships (an Arleigh Burke-class DDG-51 destroyer takes 5,200 pounds) and submarines (9,200 pounds per Virginia-class vessel):

• While China accounts for 61% of global mined rare earth production, it has a virtual monopoly on processing of the minerals with 92% of global output, according to the International Energy Agency. In other words, China can deprive the US almost entirely of rare earth minerals, which it’s already doing in a handful of cases.
• Think tank Chatham House warned this could do “serious damage to the US defense industry” which has notably held up amid this year’s market turmoil: the iShares U.S. Aerospace & Defense ETF has returned 2.7% this year and Morgan Stanley upgraded the defense sector to “attractive” Wednesday.

Worse yet, as CSIS notes, America has no direct answer as “there is no heavy rare earths separation happening in the United States at present” (and current plans that will only produce a fraction of what China does are still at least a few years away, as US “capabilities are largely early-stage”).

The Almighty American Consumer: While America can’t be so surgical with its response in this case, that’s not to suggest its tariffs won’t deal a heavy blow. China boasted Wednesday of 5.4% year-on-year GDP growth in the first quarter, which beat projections and leapfrogged 2024’s 5% pace. But that applied to a period before the latest heavy tariffs kicked in: Among the many banks to slash their annual projection for China’s growth this year, factoring in trade uncertainty, are Citi (from 4.7% to 4.2%), Goldman Sachs (from 4.5% to 4%) and Morgan Stanley (from 4.5% to 4.2%). Both sides have plenty of incentive to make those “respectful” talks happen.