China is using rare earths as a means of exerting pressure in the trade dispute with the USA and the EU

Beijing. The fact that China's leader Xi Jinping is extremely confident going into the summit with US President Donald Trump on Thursday is mainly due to the rare earths. Because China has a virtual monopoly on critical raw materials, without which production at many industrial groups comes to a standstill. And the state leadership has shown that it is using this as political leverage. Successfully.

On April 4th last year, Beijing armed its most powerful weapon to date in the trade dispute with the USA. Instead of responding to US President Donald Trump's tariff escalation with counter tariffs, China stopped the export of rare earths and permanent magnets from one day to the next. The lack of critical materials led to production bottlenecks in the USA, but also in Europe.

German industry representatives in China doubt that Beijing was aware of how far-reaching the effects of the export restrictions are, especially since they also affected Europe. But Beijing is now more or less openly using the supply of rare earths as a means of pressure against the USA, against the EU and against Japan.

The rare earths and permanent magnets are exported again. But the bureaucratic effort is high and the process is opaque. Chinese authorities or trading partners sometimes demand deep insights into construction plans and supply chains of German and international companies. In addition, usually only as much is approved as is absolutely needed. It is therefore not possible to build up inventories in order to reduce dependency.

The measures have led to “significant supply chain disruptions and lost sales for European companies,” according to a position paper by the European Chamber of Commerce in China published on Tuesday. The Chamber therefore calls for a clear and transparent procedure for applying for export permits.

The decline in exports of rare earth magnets to the USA in the run-up to the Trump-Xi summit also shows that Beijing keeps its leverage firmly in hand. They fell 20 percent in August compared to the previous month and were 13 percent lower than a year earlier, according to Chinese export statistics.

From Beijing's perspective, the export controls have proven to be extremely effective - and the government is using them as a bargaining chip. The talks between Trump and Xi in Washington are also about extending the standstill agreement that the two heads of state agreed in Busan, South Korea, last October.

At that time, Trump agreed to temporarily suspend additional tariffs of up to 145 percent on Chinese imports. Xi agreed to postpone the planned extraterritorial expansion of export controls on rare earths for a year and to allow exports of the critical raw materials again. The deadline expires on November 10th unless Trump and Xi agree on an extension.

The export controls are part of the defense instruments that Beijing has built up as a lesson from Trump's first term in office. At that time, he also hit the People's Republic with tariffs and sanctions and caught the government relatively unprepared. In the years that followed, China deliberately reduced its dependencies and built up a defense arsenal that, in addition to export controls, also includes sanctions lists and a statute to block foreign sanctions.

The fact that Xi does not trust the Peace of Busan is also evident from the fact that China has expanded its defense instruments since the spring to include a whole series of new laws and regulations. In doing so, Beijing wants to extend its legal influence beyond the country's borders in order to counter sanctions, particularly from the USA. Anyone who, in the opinion of the government, harms China faces bans on leaving the country, fines or even imprisonment.

Since the beginning of the year, China has enacted at least five far-reaching laws with extraterritorial effect. In particular, the State Council's regulations from spring with serial numbers 834 and 835 are causing uncertainty among German and international companies. Specifically, these are the Ordinance on the Security of Industrial and Supply Chains (834) and the Ordinance on Preventing Inappropriate Extraterritorial Application of Foreign Legislation (835).

According to the German Chamber of Commerce in China, there have never been as many concerned inquiries from Germany as regarding these decrees. For the most part, the regulations would only formalize rules that were already in force.

Experts also assume that they are primarily intended as a signal for Chinese companies. But global companies are increasingly concerned about getting caught between the two fronts. Because anyone who adheres to US sanctions may be violating Chinese law. Anyone who checks their supply chain in China, for example for the use of forced labor or with the aim of reducing their dependencies, could also be prosecuted there.

At some German companies, the review of supply chains is on hold for the time being, according to German industrial circles in Beijing. The fact that the US Industry Association for Responsible Behavior in Global Supply Chains (RBA) was blacklisted by the Chinese Ministry of Commerce in August caused additional uncertainty.

Since then, there has been unrest, particularly among auditing companies and compliance officers in companies. Some of them did not dare to travel to China at the moment. However, no one wants to talk about it openly for fear of the consequences.

Beijing has already applied Regulation 835 twice against the EU. China's Justice Ministry in June declared the anti-subsidy investigation into Chinese airport scanner maker Nuctech "inappropriate." People or organizations that cooperate with the EU in the investigation risk being punished in China.