Xi Jinping has gone mad: Rare earths edition

Via Bloomie:

President Xi Jinping’s visit to a rare earths facility fueled speculation that the strategic materials could be weaponized in China’s tit-for-tat with the U.S. on trade.

Shares in JL MAG Rare-Earth Co. surged by their daily limit Monday after state news agency Xinhua said the Chinese president had stopped by the company in Jiangxi. Official news outlets give regular updates on the whereabouts of top leaders, sometimes leading to share spikes on the belief that companies have been handed official backing.

Shares in JL MAG Rare-Earth jumped after President Xi visited the company
But the visits may also flag policy priorities, and rare earths have featured in the escalating trade spat between the U.S. and China. The Asian country raised tariffs to 25% from 10% on American imports, while the U.S. excluded rare earths from its own list of prospective tariffs on roughly $300 billion worth of Chinese goods to be targeted in the next wave of measures.

The U.S. relies on China, the dominant global supplier, for about 80% of its rare earths imports. Xi was accompanied on the trip to JL MAG by Liu He, the vice premier who has led the Chinese side in the trade negotiations.

The visit “sends a warning signal to the U.S. that China may use rare earths as a retaliation measure as the trade war heats up,” Yang Kunhe, analyst at Pacific Securities Co., said by phone from Beijing. That could include curbs on rare earth exports to the U.S., he said.

This is not as bad as it seems. There are rare earths elsewhere that can be accessed with re-opened mines, including in Australia.

Nonetheless, it is an uncomfortable bluff. China is playing an extremely high stakes game. Blocking access to raw materials goes far beyond tariffs or security measures. This is the nuclear option that precipitates wars, just as the US resources blockade of Japan pre-WWII did.

Moreover, if China were to block access to rare earths, the logical counter is to blockade commodities that are of  particular value to the Communist Party of China (CPC). I can think of no two dirts that fit the bill better than iron ore and coking coal, which are the two key raw material inputs into CPC economic legitimacy, given they enable each stimulus drive. The US could lean on Australia to prohibit these trades and the Chinese economy would be in instantaneous strife.

Don’t get me wrong. I’m not saying things will go this way. There is nothing good for anyone in it and it is a severe intensification from where we are today.

And given it is China that is the largest importer in the world of pretty much any dirt you care to mention, it has everything to lose in ANY kind of commodities blockade.

Toying with such things is just a little bit crazy.

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