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On Eve Of Trump’s Return, China’s Trade ‘Winnings’ Reach $1 Trillion
China's a reverse Art Vandelay: "Just exports, no imports?"
On Monday, Beijing released trade figures which showed shipments abroad rose 10.7% in December to nearly $340 billion. That was a stronger result than economists expected (consensus saw a 7% gain, give or take) and counted as the second-largest one-month tally ever, trailing only the final month of 2021, when a wildly imbalanced supply-demand equation -- i.e., the juxtaposition between shortages and "stimmy" across the Western world --
China has another weapon in their holster, and they’ve been refining it recently to ensure combat readiness: rare earths.
Credit the farsighted Deng Xiaoping for this one. He observed that much like the Middle East has oil which it can use as a weapon, China has rare earths. They currently mine about two-thirds of the world’s rare earths, but more importantly, they host close to 90% of the refining capacity. There’s a parallel story here too with lithium (not a rare earth element), where they’re only the world’s third largest miner (Australia mines around half of the world’s Lithium, and number two Chile mines over twice as much as China), but they refine, again, about 90% of the finished product.
China poured money into capacity for this in the 90s and then ran the rest of the world’s refiners out of business. No one really cried about it at the time. While heavy industries like steel or automobile manufacturing have enough political clout to make an issue out of dumping, the ytterbium lobby doesn’t have quite the same budget. Meanwhile, industries that actually use germanium, yttrium, and neodymium were happy to see their COGS go down. Also, no one is crying about not having a gallium refinery in their backyard. Rare earths refining is dirty stuff. The waste products are packed with super fun heavy metals like lead, cadmium, arsenic, mercury, and everyone’s favorite at-home science project ingredient thorium (for kids!).
Lithium’s not much better, as it requires vast amounts of sulfuric acid to refine. Be sure to wear gloves.
China made headlines recently in some trade-war retaliation by banning the exports of gallium and germanium to the United States. I think they picked those two because they make the opposite of exciting headlines. It’s hard to construct click-bait out of that. At the same time, it’s the kind of headline that makes tech manufacturing CEOs wet their pants and start scrambling for alternative suppliers (there aren’t any) and picking up their phones to call their pet congresspeople.
My theory is that was just step one in testing out an export ban. The difficulty China faces here is that we’re talking dry bulk ore. It’s easy to move around the globe, and if you’re not going to ban exports to the entire world, a ban is easy to circumvent. Praseodymium atoms don’t come with a bar code. They did something recently though that caught my attention. They announced a ban on reselling gallium and germanium to United States owned entities. In other words, they’re field-testing methods for making their export bans more effective. They want to have that ready to roll on day one after Trump implements new tariffs. I bet they have the press release already written.
There are other materials too. Antimony has also been targeted, recently hitting new all-time highs. Tungsten is in the cross-hairs. South Korea used to be the world’s largest exporter of tungsten. Their last mines shut down in the 90s. They were run out of business by cheaper competition… from China. Today, China produces 82% of the world’s supply of tungsten.
Trump’s negotiating style is entirely transactional, and his approach is extortion. Step 1: do something awful. Step 2: agree to stop doing the awful thing once he gets what he wants. This works because the other side lacks sufficient leverage. What’s Canada really going to threaten us with? We depend on them heavily for a few imports–lumber comes to mind–but they’re hardly things on which Canada has the market cornered. They’re just conveniently close. When it comes to the export of a long list of essential minerals though, China has something the rest of the world–in particular the high tech part of the world–desperately needs. I think Trump is going to make his usual opening move, and then find himself in the shocking situation where the counter move proves devastatingly effective. For once he’ll be the one forced to offer something in order to get what he needs.
Javier Bias has a Bloomberg piece out today that Canada has replaced the Saudi’s for our source of oil. So much so that the Saudi’s closed their NYC office that negotiated oil deals. Is Trump going to hit Canadian oil imports with 25% tariffs? What will that do to gas prices? Tariffs are so easy!
Excellent comment, fun to read too.