Trade War: China May Retaliate by Cutting Rare-Earths Supplies

Shares in rare earth-related companies soared on Tuesday, led by jumps in Chinese producers a day after President Xi Jinping visited a rare earth firmly in his country's southern region, sparking speculation the sector could be the next front in the U.S. President Donald Trump's trade war against China.

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President Xi visited Monday a processing plant of 'rare-earths', which are essential chemical elements for the manufacture of high-tech products such as smartphones, wind turbines, electric vehicles batteries, airplanes, night-vision goggles, precision-guided weapons, communications equipment, GPS equipment and other defense-related electronics.

"Restriction of rare earth exports is certainly one of the cards that Xi has up his sleeve to force U.S. manufacturers to think twice about their veto strategies for Chinese companies," Wong Kam Fai, a professor at the China's University at Hong Kong, told EFE and explained that 80 percent of the U.S. rare-earths imports come from China.

James H. Nolt, a New York University professor, who is an expert in China international relations, expressed a similar opinion.

"An embargo on these materials is the most logical move that Xi could take," he said and explained that China produces over 90 percent of the rare earths' global supply, which means that "cutting off their supply could paralyze the U.S. high technology production."

President Trump included Huawei in a blacklist of companies which are denied access to U.S. technologies and market. This prompted Google to withdraw the licenses for the Chinese company's products, although the U.S. government has issued a 90-day extension to facilitate a transition.

After that lapse, companies such as Intel, Qualcomm, Xilinx, Broadcom, Infineon Technologies, Micron Technology and Western Digital will no longer provide supplies to Huawei.

Regardless of what the Chinese government could do in the future, Trump's trade war is itself severely affecting U.S. companies at home and abroad. The 75 percent of the China-based U.S. companies are being negatively affected, according to a survey conducted by the U.S. Chamber in China and the U.S. Chamber in Shanghai.

"Tariffs' negative impact is clear and harms the competitiveness of U.S. companies in China," pointed out the AmCham China & AmCham Shanghai study of 430 companies, 61 percent of which work in manufacturing-related industries, 26 percent in services, 5 percent in retail and distribution, and 8 percent in other industries.

Despite high-level dialogues with China, Trump increased on May 10 tariffs from 10 to 25 percent for more than 5,000 Chinese products.

According to the survey, the impact of tariffs is felt through lower demand for products (52 percent), higher manufacturing costs (42 percent) and higher product sales prices (38 percent).

To deal with the trade war, U.S. companies working in China are delaying their investment decisions (33 percent) or adopting the "In China, for China Strategy" (35 percent), a local policy which seeks to establish manufacturing and supply within China to serve mainly to the Chinese market.

"This strategy is a rational option for many companies to isolate themselves from the tariffs' effects and maintain their capacity to seek opportunities in the domestic market," holds the AmCham China & AmCham Shanghai study.

However, 41 percent of the U.S. companies are considering moving their operations from China to Southeast Asia countries or Mexico. Less than 6 percent the U.S. companies said they will go back to their homeland.

Regarding the U.S. trade policy, China's Foreign Ministry spokesman Lu Kang indicated that Xi's government will maintain favorable measures for foreign investors wishing to invest in the Asian country.

"Even with U.S. threats to raise tariffs, foreign investors remain enthusiastic about the Chinese market... which shows that they still trust China's economic prospects and benefits they will obtain," Lu said, adding that Beijing "remains committed to providing a fair, transparent and ​​​​​​​non-discriminatory environment for all companies."​​​​​​​