China has a near-monopoly of rare earth minerals, a key component in everything from iPhones to missile guidance systems
While Donald Trump has threatened to erect steep trade barriers against China, Beijing has at least one secret weapon that should make the US president-elect think twice before starting any trade war with the country.
China has a near-monopoly on global production of rare earth minerals, with an estimated 95 percent of production. Rare earths are used to manufacture everything from electric cars, missiles and wind turbines to iPhones and flat-screen televisions.
â€œIf China was to stop exporting this it would be a big problem for the US, at least in the short term,â€ Allan von Mehren, chief analyst at Danske Bank in Copenhagen, said in an interview. â€œChina holds a trump card in the near-monopoly of rare earth minerals.â€
Rare earths do exist in other parts of the world, but the concentrations are lower and it would be much more expensive to get the same quantities needed to substitute for Chinese rare earths, he explains.
It would not be the first time China has disrupted global trade in the minerals.
Chinaâ€™s commerce ministry slashedÂ export quotas for rare earth metals in 2011, citing stockpiling in Japan, smuggling and the environmental damage in China from processing the metals from ore. Prices spiked and caused difficulties for global manufacturers already in need of more supply.
And demand continues to rise. The global rare earth magnet market is expected to grow at a compound annual rate of 13.2% to reach $41.41 billion by 2022, according to a November 18 report by Infoholic Research.
The WTO eventually ruled that China slashing its rare earth export tariffs was a breach of trading rules, von Mehren said. â€œBut if China believes Trump is breaching rules too, they would retaliate before the WTO would have time to make a ruling against the US.â€
If the United States were to impose a 45 percent tariff, which Trump has suggested, Chinaâ€™sÂ manufacturing companies would suffer. In yet another sign of the political sensitivity, the US-China Economic and Security Review Commission, a congressional panel, said that all Chinese state-owned companies should be barred from acquiring companies in the US.
â€œIf China is hit with a wide range of US defensive measures on trade and investment then it is likely to react with its own array of targeted responses, creating the risk of a trade war,â€ said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Global Insight.
It is still too early to evaluate what a tit-for-tat confrontation by the US would meanÂ for China. However, while Trumpâ€™sÂ rhetoric has been tough on China, there is a limit to how far he can go down the protectionist path, von Mehren concludes.
â€œI think [rare earth] is only a weapon China would use if Trump got very protectionist. But itâ€™s likely a weapon they will remind him about if he signals any big steps towards China,â€ he said. Â â€œItâ€™s one of the cards they have in their hand.â€