Commentary: The USA-China Rare Earth Elements Face-off

If the USA-China trade war was not so serious, it would make good entertainment.  The negative implications stemming from US tariffs are beginning to punish American businesses large and small.  When we see Tim Cook make a trip to meet with President Trump, there is obviously a good reason.   The purpose of this commentary is to convey his belief that tariffs are bad medicine.  The very least that will happen is an aggravating price environment that will surely lead to inflation.  Beyond the economic issues relating to our present tariff war, there is a far more serious consequence on the horizon.  The USA is not acting with good diplomacy in relation to China and we are quickly moving from a trade war to a Cold War.  When it comes to things like rare earth elements, China is the de facto world supplier.  There is a very real risk that China will simply turn off the supply.  This possibility is not economic in nature, it would be catastrophic.  America could see critical domestic industry suffer and be crippled. If it were not for quick thinking of someone on in the Trump administration, our own foolish tariff policy would have led to devastation in America’s domestic petroleum processing sector.  Worse, our core defense capability could stop in its tracks.

The Editor is of the belief that trade wars, specifically tariffs never end up with one winner.  In the near-to-intermediate-term, Americans will simply end up paying more money for things they need.  Does America have an industrial disadvantage to China?  Yes, we do and it will take work to fix things.  Over time, we will win some and we will lose some.  There is an interesting concept in business called “innovation”.  Innovation leads to the development of new products that often have pricing power.  History shows us that innovators are rewarded.  Take Tesla as an example.  Despite some of Elon Musk’s antics and new competitors on the horizon, Tesla innovated and came up with fantastic products.  Do you know one of the most popular cars in Hong Kong?  It is a Tesla…and price has nothing to do with it.  

The trade chaos started in January 2018 when Trump imposed tariffs on solar panels and washing machines of 30 to 50 percent. The impact of tariffs on solar panels and washing machines has not been good for America.  If you have a few spare minutes, make a review of stories about the solar panel installation companies in America that have suffered.  Small local businesses that help homeowners and large industrial projects were devastated by the tariffs.  Good hard-working been and women in America are taking the money from their good-paying jobs and paying more money for washing machines.   Consumer Reports published an article with this rather ominous subtitle: 

While the outlook for prices is unclear, you might want to buy a new washer sooner rather than later

For brevity, the Editor will skip discussion about the rather hollow trade benefit from the steel and aluminum tariffs.  It is best that we get right down to the “China problem”.  President Trump and his band of hawks seem to think they can push China into submission with the shock and awe of tariffs.  This charade started on July 6, the Trump administration set a tariff of 25% on 800 categories of goods imported from China worth $50 billion.  

Did Tim Cook know that some things were brewing on the tariff front when he had dinner with Trump in April 2018?  Remember, Tim Cook visited the White House three full months before the initial tariffs were announced.  We only bring up Tim Cook because Apple has a lot of influence and money.  It looks like Apple is a winner in the short-term because the China-produced Apple products are not on the tariff list.  

In the most recent round of USA tariffs, we saw the most comprehensive list of goods included.  The only problem with the list is the fact that some items are mission critical to the USA.  Specifically, rare earth elements have been on the list and then off the list.  For the time being, they are off the list.  Why did the rare earth elements come off the list?  

Like a number of items that have magically dropped off the list (like items associated with Apple Computer), one would speculate that lobbyists had something to do with it.  Five groups of rare earth elements used in fluid catalytic cracking (FCC) units, which produce gasoline and refinery-grade propylene were removed from the list in recent days.  

We can bet that the large oil and gas companies and refineries had something to do with these deletions.  This is so because without FCCs, the USA would be unable to make gasoline.  The thriving domestic oil and gas business would be stopped in its tracks.  An interesting perspective to keep in mind is that some of the same rare earth elements used to convert crude to gasoline are also used to make key weapons and parts of the US Defense arsenal.  Are the leaders of our country foolish enough to think that China will let America skip around with economic tariffs but continue to opportunistically buy mission critical goods like rare earth elements from them?  Let’s hope there is some reasonable diplomacy going on behind the scenes.  Otherwise, the USA is taking a very big risk in a zero sum game.  What could happen if China cuts of the USA supply of rare earth elements? 

The following quotes are drawn from the 2012 Defense Authorization Act:

“Recent studies have shown that rare earths are essential to the production, sustainment, and operation of U.S. military equipment…Reliable access to the necessary material, regardless of the overall level of defense demand, is a bedrock requirement for DOD.”

These are some examples:

-Each nuclear-powered SSN-774 Virginia-class fast attack submarine requires about 9,200 pounds of rare earth minerals;

-Each DDG-51 Aegis destroyer needs about 5,200 pounds;

-Each F-35 Joint Strike fighter needs about 920 pounds;  

According to a 2013 Congressional Research Service report, rare earths are also essential to precision-guided munitions, lasers, satellite communications, radar, sonar and other military equipment.

 

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