This week’s agreement between the United States and China to suspend some export controls has restored last month’s truce in the trade war between the world’s two biggest economies. But substantial tariffs remain in place on both sides and the deal, the full details of which have yet to be made public, does not appear to address the fundamental issues in the US-China trade relationship.
Washington and Beijing agreed in Geneva last month to wind back most of the tit-for-tat tariffs that had reached 145 per cent for Chinese goods going to the US and 125 per cent on American exports to China. But their framework for negotiations fell apart after the US accused China of backsliding on a promise to issue export licences for rare earth minerals and powerful magnets associated with them.
China has a near monopoly on these products, which are used in the production of everything from electric vehicle engines to fighter jets and drones. Unable to source the magnets elsewhere, some car manufacturers in the US had to halt production in factories and the effective export ban threatened manufacturing in other sectors.
Washington retaliated by restricting the sale of jet engines and ethane, which China needs for the production of plastic. And secretary of state Marco Rubio threatened to revoke the visas of Chinese students at American universities.
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This week’s deal saw Beijing agree to start issuing export licences to US companies for rare earth minerals and magnets immediately and Washington agreed to drop its retaliatory measures. But China insisted on limiting the export licences to six months, so that it can choke off the supply later if the trade talks go badly.
The stand-off has highlighted how supply chains can be weaponised in trade disputes, often with a more immediate and painful impact than the imposition of tariffs. The US has for years limited exports of advanced semiconductor technology to China and persuaded its allies in Europe and Japan to follow suit.
As the world’s leading exporter of steel, ships, machinery, textiles and many other goods, China has more of this kind of leverage at its disposal than any other country. And its chokehold on the rare earth minerals and magnets at the centre of the dispute with the US allows it to use export licences as a negotiating chip with other countries too.
This strengthens Beijing’s hand as it seeks to persuade other trading partners to resist pressure from the Trump administration to restrict trade with China as part of their own tariff deals with the US.
Trump has said that he would decide within two weeks on the level of tariffs each country would face, a promise of more uncertainty, market turbulence and lost opportunities.
