Beijing’s supply chain power play tests Trump’s tariff threats

China has huge leverage over the US through its ability to control rare earth and magnet supply chains across the globe, potentially causing massive disruption to critical US industries not limited to defence and AI. Picture: AP

America has been caught on the back foot in its trade war with Beijing, with Washington vacillating over its tariff escalation after Donald Trump threatened additional tariffs of 100 per cent on Chinese goods.

This is a major turning point not only for the global trading system, but for the national security of America and the rest of the world. While Donald Trump posted on social media earlier this week not to “worry about China, it will all be fine”, it is Beijing that feels it has an ace up its sleeve.

The threat of an effective trade embargo by the US President was issued only after Beijing revealed it was willing to more aggressively wield its clout as the world’s largest trading and manufacturing nation to advance its geostrategic objectives.

This was a calculated tactic ahead of the planned meeting between Xi Jinping and Trump at the APEC summit in South Korea at the end of the month – their first in-person engagement since 2019 – with China this week responding to the threats of US retaliation by saying it was willing to “fight until the end”.

The episode revealed the huge leverage China has over the US through its ability to control rare earth and magnet supply chains across the globe, potentially causing massive disruption to critical US industries not limited to defence and artificial intelligence.

Beijing knows this threat is kryptonite for US markets, which went into shock at the trade conflagration last week, with the S&P500 falling by 2.7 per cent on Friday in its worst day since April when Trump first unveiled his sweeping reciprocal tariffs.

This is an area of acute vulnerability for Washington, with Beijing betting that the US economy will not be able to withstand a prolonged trade fight. It is now pressing its advantage.

If Trump is forced to climb down from his tariff threats, it will be seen as a key strategic victory for Beijing. But it will also reinforce China as a nation willing to hold vital supply chains across the world hostage to advance its own political and strategic objectives.

While the US was the largest producer of rare earths until the 1980s, the Centre for Strategic and International Studies in Washington says China now accounts for about 70 per cent of rare earths mining, 90 per cent of separation and 93 per cent of magnet manufacturing.

There is only one operating rare earth mine in America, the Mountain Pass Mine in California owned by MP Materials, in which Gina Rinehart’s Hancock Prospecting has a more than 5 per cent stake.

The Lynas Rare Earths – the only key supplier of the critical minerals outside China – processing plant in Kalgoorlie, Western Australia. Picture: Bloomberg

Under the second Trump administration, America is aiming to accelerate the diversification of its critical mineral supply chains – an action that opens up key opportunities for co-operation with Australia at a challenging time in the alliance relationship.

Anthony Albanese is visiting the White House next week to meet with Trump and will be hoping to lock in opportunities to expand US access to Australian rare earths and critical minerals, with the administration exploring the prospect of equity stakes for US firms in Australian projects.

However, it is clear that America will need to move swiftly to diversify. The sweeping changes unveiled by China represent the biggest expansion of its export control regime in years, with Trump himself describing them as an “extraordinarily aggressive position” and a “moral disgrace”.

China’s Commerce Ministry issued its new rules for the exports of rare earth elements on October 9. Five new elements were added to the seven REEs already subject to restrictive export controls, taking the total to 12.

Tightening its grip over global supply chains, China also took the extra step of enabling extraterritorial controls. For the first time, foreign companies would need to obtain a licence from the Chinese Commerce Ministry before they shipped products – regardless of whether they were made in China – so long as they contained more than 0.1 per cent of Chinese-origin rare earth elements by value.

This would capture critical products across the spectrum ranging from EV batteries to semiconductors. The effect of the shake-up threatens to hand the Chinese control over the supply of AI chips made in the US.

Defence manufacturers would also be hit hard. The new rules mean that no Chinese licences could be granted for the export of any defence components made using Chinese rare earths. Yet they are critical for a host of military capabilities ranging from F-35 fighter jets to Virginia-class submarines and Tomahawk missiles.

Donald Trump is threatening to impose a massive increase of tariffs on Chinese imports in response to China’s announcement of new export controls on rare earths. Picture: Getty Images

Exporters of Chinese technologies used in rare earth mining, refining or processing would also be subject to much stricter controls and require licences from the Commerce Ministry.

The new regime, scheduled to start from December, was blasted by the White House as an attempt to “exert control over the entire world’s technology supply chains”. Trump was stunned, declaring “nobody has ever seen anything like this”.

The US President has threatened tough measures in retaliation but has since sent mixed signals about whether he will follow through. How Trump handles the stand-off will be key to revealing who has the tactical edge as the trade war rolls on.

A meeting between Trump and Xi at the APEC summit will be pivotal in delivering a potential off-ramp for the spiralling tensions. But it will also help set the trajectory for the intersection of global trade and security in coming years.