Speculation that China could use its dominance in rare earth minerals as a weapon in the trade war intensified after a Chinese official warned that products made from the materials should not be used against China’s development.
The comment, reported by CCTV, was taken as a veiled threat aimed at the U.S. and its technology companies that are dependent on the materials. Last week, Chinese President Xi Jinping visited rare earth mining and processing facilities, adding to speculation that China could make the minerals more expensive or unavailable if the trade war continues to expand.
Rare earth imports are a relatively small part of the $420 billion U.S. goods deficit with China, but their worth far outstrips their dollar value. The materials are critical in the creation of such things as iPhones, electric vehicles and advanced precision weapons.
“This is still not official. The U.S. only imported about 4,000 tons of rare earths, worth about $175 million. The problem is most of the rare earths we import are embedded already in the technology. If we buy a computer, they are already in it. That makes it harder for China to cut us off,” said Marc Chandler, global market strategist at Bannockburn Global Forex.
Chandler said the official’s comment was not an official threat from the Chinese government. “The reason the market latches on to this is they think China will retaliate, they just don’t know how,” said Chandler. “Once they think it through they will realize this will not be today or tomorrow. In order for China to do it comes at a big cost to them. It makes it too severe.”
Bank of America Merrill Lynch strategists, in a note, point out that the U.S. Department of Defense has termed China’s domination of the rare earth market as potentially dangerous, given the offshoring of manufacturing and vulnerabilities in America’s manufacturing and defense industrial base.
China produced about 78% of rare earths in 2018, and owns about 40% of global resources. Bank of America strategists noted the dominance of China is due to the fact that its government classified them as a strategic resource and has emphasized exploration and extraction of the raw materials for about 100 years.
Reference: CNBC
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