Macroscope | From rare earths to soy, the trade war will force the US and China to diversify supply

Even if Beijing and Washington eventually find a way to paper over their differences, there’s no going back to the way things were. Vulnerabilities have been exposed. In the commodity space, US dependency on China’s rare earth metals and China’s reliance on American farmers for vast volumes of agricultural imports are no longer tenable options. That reality will have global implications in the commodity sector, just as occurred in the 1970s when, even though Tokyo and Washington were close allies, Japan’s relationship with the United States hit a bump in the road after the Nixon administration briefly banned US soy exports to Japan. As for China and the United States, writing for Project Syndicate last week, Joschka Fischer, Germany’s foreign minister and vice-chancellor from 1998-2005, argued that the China-US trade war “has assumed the form of a hegemonic struggle”. If Fischer is right, then going forward, neither Beijing nor Washington will want to be too dependent on each other in any areas of strategic importance. This would have specific implications in the wider commodity space as when US president Jimmy Carter put curbs on grain sales to the USSR in 1980. Carter’s successor, Ronald Reagan, may have removed those restrictions in 1981, but Soviet purchases of US grain didn’t return to earlier levels. Today, dependency on China for rare earth imports now preoccupies Washington. Rare earths and soybeans have become live issues in the China-US trade war, exposing national vulnerabilities in the process “If China or Russia were to stop exports to the United States and its allies for a prolonged period – similar to China’s rare earths embargo in 2010 – an extended supply disruption could cause significant shocks throughout US and foreign critical mineral supply chains,” the US Commerce Department said last week. Ross is right to have concerns, though it might seem odd that the United States ever allowed itself to get into this position. Clearly, previous US administrations had been happy to allow this situation to develop. As it stands, around 59 per cent of the US’ imports of rare earths – minerals essential for consumer electronics and military equipment – emanated from China last year, according to the US International Trade Commission. Weaponise rare earths? China shouldn’t make the same mistake twice The Pentagon’s Defence Logistics Agency is already seeking to diversify its sources of supply of rare earth metals, and has had discussions with potential suppliers in Burundi and Malawi. China itself has good relations with both of those African nations and indeed many others. Burundi has already joined the Belt and Road Initiative. In truth, there’s no quick rare earth fix for the United States, even though Washington is now committed to “take unprecedented action to ensure that the United States will not be cut off from these vital materials”. China, on the other hand, does have choices when it comes to weaning itself off a dependency on the United States for certain agricultural products, such as soy. Indeed, Beijing has already chosen to exercise such options, limiting its imports of US soy as part of its strategic response to Washington’s levying of tariffs on Chinese goods. In a quirk of fate, to a large extent, China has Japan to thank for this opportunity. For just seven days in 1973, spooked by a rise in soybean prices that he felt would drive up food inflation at home, US president Richard Nixon banned the export of soy to Japan, causing consternation in Tokyo. Markets are focused on the wrong trade war risk As, at this time, the US had almost a monopoly over soybean exports, this ban was a major problem for Japan’s consumers, given the importance of soy in their national diet. That soy embargo may have only lasted a week but Japanese authorities were determined not to be caught out again. Tokyo decided to help develop an alternative source of soybeans and set its sights on Brazil. In the decades that followed, backed by investment from Japan, Brazilian soybean production surged, though at the cost of significant deforestation. From a small output in 1973, Brazil is set to produce some 115 tonnes of soy in 2018-19, according to US Department of Agriculture forecasts, with some 70 tonnes predicted to be available for export. That’s good news for China, which has been a voracious buyer of Brazilian soybeans as the China-US trade war has intensified. In December 2018, China bought 97 per cent of Brazil’s total soybean exports, according to Brazilian customs data. China should think twice before using rare earths ‘weapon’ in trade war Rare earths and soybeans have become live issues in the China-US trade war, exposing national vulnerabilities in the process. Neither side can afford to allow those vulnerabilities to be left unaddressed, even if trade differences are eventually resolved. The clock cannot be turned back. Neal Kimberley is a commentator on macroeconomics and financial markets

.css-1m2rp1p{color:#34b8b5;}Macroscope | From rare earths to soy, the trade war will force the US and China to diversify supply

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;} The US has started looking into alternative suppliers for the elements that power hi-tech. Beijing has already done the same with soy, and even a trade war resolution won’t stop this process

Macroscope | From rare earths to soy, the trade war will force the US and China to diversify supply

The US has started looking into alternative suppliers for the elements that power hi-tech. Beijing has already done the same with soy, and even a trade war resolution won’t stop this process