It’s clear who has greater leverage in the trade talks. It’s not Trump

As the latest rounds of trade negotiations between the US and China enter their second day, it is clear who has the greater leverage. And it’s not America.

Unlike last month’s talks in Geneva, where the 90-day trade truce centred on the tit-for-tat exchange of extreme tariffs, the London meetings appear to be focused on export controls. For China, they’re about the US restrictions on exports of advanced semiconductors to China, and for the US, they’re about China’s restrictions on exports of rare earths to the US and its allies.

Chinese President Xi Jinping has a weapon more powerful in the trade war than Donald Trump’s tariffs.

The shift in the nature of the negotiations points to a belated recognition by the US that China’s dominance of rare earths – critical to most advanced manufacturing – could shut down key manufacturing sectors in the US, including the auto and defence industries.

It’s a more potent trade weapon than Donald Trump’s tariffs because those exports can be turned on and off, almost instantly, by Beijing’s decree. With China supplying about 90 per cent of the world’s rare earths and almost all rare earth magnets, there is no significant alternative source of supply.

When the US decided to impose punitive tariffs on China in April as the centrepiece of its “Liberation Day” trade war on the rest of the world, it should have recognised that China had a more powerful weapon up its sleeve than the retaliatory tariffs it imposed on US imports.

Its failure to recognise this shows how poor the Trump administration’s preparation for an escalation of trade hostilities with China has been.

China is showing [rare earths] can be deployed against multiple objectives, and Beijing’s export controls make them more sophisticated, less cumbersome and arguably more effective than the crude weapon of Trump’s tariffs.

China’s stranglehold on rare earths has hardly been a state secret, with the Biden administration going to great lengths to help develop alternate sources of supply, albeit that none of those new mines and processing plants will be available at a sufficiently meaningful scale in the near term.

It has taken China more than a decade to entrench its dominance of rare earths, a dominance that was an important plank of the “Made in China 2025” strategy – complete with state directions and subsidies – that it first unveiled in 2015.

It will equally take years, if not decades, to develop the mines and processing plants in the US and elsewhere that would be required to dilute the reliance on China’s supplies, which represent about 80 per cent of America’s demand for rare earths.

The American reliance on China for critical minerals, and China’s demonstration of its ability to weaponise them and create a major choke point for American industry and the US military, explains why export controls have displaced tariffs as the major talking point in London.

China effectively shut down exports of the half dozen rare earths currently subject to export controls (it has similar dominance over more of the 17 rare earth elements that it could add to its list), despite agreeing to suspend its non-tariff response to Trump’s tariffs at the Geneva meeting.

At that meeting, the US agreed to temporarily lower its 145 per cent tariffs on China’s exports to 30 per cent and China reduced its tariffs on US exports from 125 per cent to 10 per cent.

While Trump accused China of having “totally violated” that agreement by restricting its rare earth exports, China countered by pointing to the post-Geneva US suspension of sales of jet engine technology, more restrictions in advanced semiconductor and chemical sales and a proposal to revoke visas for some categories of Chinese students.

Trump’s National Economic Council director Kevin Hassett said at the weekend the US was looking to restore the flow of “crucial” rare earths to the same levels as they were before April 2 – “Liberation Day”– and noted that there had been some increase in their supply in recent days, albeit not to the levels the US believe China had agreed to.

After a phone call between Trump and Xi Jinping last Thursday, China on Friday granted temporary export licences for rare earth sales to the three major US carmakers, GM, Ford and Stellantis, whose production was threatened by their inability to secure supply.

The issue of the restrictions on access to rare earths was addressed in the phone call, which Trump said had resulted in a very positive conclusion for both countries.

“There should no longer be any questions respecting the complexity of rare earth products,” Trump said, whatever that might mean. There’s nothing complex about rare earth products: while they are abundant, China controls almost all the supply of metals critical to most advanced technologies, from mobile phones to America’s F-35 jet fighters.

It would appear that China is prepared to trade access to rare earths for American concessions on access to advanced semiconductors and jet engines and a softening of the US approach to Chinese students, although the US remains adamant that it won’t relax the restrictions on Nvidia’s most advanced AI chips.

It’s an easy concession for China to make, given that it can calibrate its export controls to dial them up or down depending on the intensity of the trade tensions with the US.

Concessions on advanced semiconductors are somewhat more difficult for the US, given that the Biden administration continually tightened them to protect the US lead in artificial intelligence technologies. There has been strong bipartisan support within Congress for those measures.

While China has been closing the gap between its domestic chip-making capabilities and those of the US at a surprising pace, it still lags the US in terms of the most advanced chips, their design and manufacture. (Much of the manufacturing is done by US allies, particularly Taiwan.)

Access to more advanced chips could accelerate the development of China’s domestic industry, which America is conscious of. But if the Trump administration wants access to rare earths, it will have to offer something valuable.

US Treasury Secretary Scott Bessent after the first day of trade talks with China at Lancaster House in London on Monday.Credit: Bloomberg

As Trump showed during his first term, he regards any trade deal, bad or unenforceable, as a triumph as long as he, the self-proclaimed consummate dealmaker, can announce it.

Xi also wants a deal, given that China’s economy is struggling, and the trade war will inflict more damage. China’s negotiators, however, won’t agree to anything that portrays a deal as a win for Trump.

America isn’t the only economy reliant on China for rare earths. European carmakers have also been panicking about their access, or lack of it, to China’s supply of rare earths and rare earth magnets.

It seems China has throttled supply to everyone, both as leverage for separate trade issues and perhaps to prevent third countries from being coerced by US trade negotiators into aiding America by shutting their markets to Chinese exports diverted by US tariffs.

China can also use its dominance of critical minerals to create distance between the US and its allies – all of whom now face Trump’s 10 per cent universal tariff and potentially punitive reciprocal tariffs unless they agree to trade deals that heavily favour the US – by using rare earths as both carrot and stick.

China suggested at the weekend that, having started to issue more licences for exports of magnets to Europe, it might be prepared to negotiate a deal with the European Union on rare earths.

It has been wanting the EU to reduce the tariffs it has imposed on imported Chinese vehicles to offset the impact of China’s subsidies and the withdrawal of restrictions on exports of some European technologies to China.

Rare earths might, as Trump said, be complex, but China is showing they can be deployed against multiple objectives, and Beijing’s export controls make them more sophisticated, less cumbersome and arguably more effective than the crude weapon of Trump’s tariffs.

With the value of those exports last year less than $US500 million ($767 million), there’s also far less at stake for China and its economy in restricting their sale than there is from the trillions of dollars of taxes that Trump’s tariffs will impose on US companies and consumers.

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