The US economy needs terbium and other key rare earths to operate, and it is totally dependent on China. Trump needed to do a deal in Switzerland over the weekend to continue access.
China is playing a wider game, and it also needed to take the heat out of the tariff war.
Accordingly, the two nations are now drawing up the base landscape for global trade. Wall Street is celebrating, but longer term the market will respond to those that are winners in the new environment and those that lose.
But that landscape will also include Ukraine and Europe. In addition, the fact that in the Indian-Pakistan conflict China’s J-20 confirmed that it was the best fighter aircraft n the world with the possible exception of the F-22 which the US no longer makes.
President Trump was elected on a clear policy to impose tariffs and use that tariff revenue plus government spending cost reductions to deliver much lower taxes. The globalised world we have enjoyed the last three decades is coming to an end.
China now understands that the environment in which it must trade for the foreseeable future has changed. The lower level of tariffs have been negotiated in Switzerland will prevent total collapse of world trade while the two nations try to negotiate an operating model.
China is adjusting to the fact that the President Trump negotiating strategy is to create a chaos that will create opportunities to negotiate a deal that would otherwise not be possible. The China tit-for-tat tariff game was classic President Trump.
But President Trump now understands that he’s ability to play that game is curbed by the US inability to access terbium and other heavy rare earths.
Australia has large deposits of these minerals and can speed up production. It is likely that Ukraine also has these minerals, although its rare earth deposits require more drilling and exploration, which has not been possible given they are in a war zone.
Almost certainly there are unexploded bombs in the area. Significantly, Chinese President Xi Jinping spent days with Russian President Vladimir Putin during Moscow’s end of World War II celebrations.
Immediately after the meetings Putin announced Russia would meet Ukraine in Turkey to sort out a peace deal.
Vladimir Putin is in poor health and may not go to Turkey, but he initiated the discussions.
Given that the looming peace discussions came directly after Chinese Russian negotiations rather than after discussions with the US or Europe we may see a role for China.
My guess is that somewhere in the negotiation Xi’s dream of completing the fast train project from the Pacific to the Atlantic will be raised.
Part of any settlement will involve Ukraine’s rare earths, where the US has negotiated access as President Trump seeks to break the China monopoly.
Meanwhile, in defence, India has linked to western technology and has French-made Rafale jet fighter. Pakistan uses Chinese technology, and for the first time the two technologies were in combat.
As expected the J-20 proved the superior aircraft which is a grim warning to Australia that if any Asian nation buys the Chinese J-20 it will have clear air superiority over Australia with our fault prone JSF/F35. Taiwan will also be studying the defence technology battles.
Australia needs a prosperous China that requires steel for infrastructure, and therefore the thaw in US China relations is good news. But the US wants to restore both its steel and aluminium industries and their markets with the aid of tariffs and low energy costs. Australia is deliberately converting into a high-cost energy country, which is not smart.
But potentially if large amounts of Chinese steel were used in any Pacific to Atlantic fast train line our iron ore would be used.
Now that the US is moving onto a tariff based, low tax, cheap energy economy will see China seek to increase its trade relations in the Pacific region. Australian needs to make sure that we are part of any regional trade deals. Indeed, we should be promoting them.
But meanwhile, the US is going to seek much closer relations with India, and we will also need to seek to be part of those negotiations.
If we are skilled, we can emerge with a good outcome, but we must restore our position as a reliable supplier of both gas and iron ore. The new environmental minister Murray Watt has a vital role in gas. BHP wants to continue to control its mines and not cede control to the union movement as is envisaged in the industrial relations act. There is great danger here.
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