RPT-BREAKINGVIEWS-China's rare-earth lever is best used carefully

By Robyn Mak

HONG KONG, June 10 (Reuters Breakingviews) - In poker, it is easy to overplay a hand by being too aggressive. China's negotiators face a similar temptation in London this week in trade talks with U.S. officials, who have signalled that Washington would ease chip export controls on the People's Republic in exchange for Beijing accelerating rare-earth shipments. That's the result of President Xi Jinping's government shrewdly leveraging its dominance in these critical minerals. Its next challenge is to exercise restraint.

Thanks to decades of state-led investment, China has a stranglehold on the supply chain for rare earths, a group of metallic elements vital to consumer electronics, electric-car batteries, missile guidance systems and more: 70% of global mining, 85% of refining capacity and about 90% of metal alloy and magnet production involving them are controlled by the country, according to consultancy AlixPartners. The automotive sector is particularly vulnerable: rare earths are used in dozens of components, including side mirrors, stereo speakers, windshield wipers and even glass-polishing agents.

Little wonder auto executives and government officials across Europe, Japan and India have been sounding the alarm. In April, Beijing placed seven rare earths under export restrictions as part of its response to U.S. tariffs. That has resulted in delays as Chinese regulators work through a backlog of applications, though Washington has accused them of dragging their feet. Japan's Suzuki Motor 7269.T, Ford Motor F.N in the United States and some European suppliers have been impacted as a result, per Reuters.

There are valid reasons for panic. In 2010, China effectively halted rare-earth shipments temporarily to Japan after a diplomatic dispute. And since 2023 Beijing had already restricted overseas sales of at least 16 other minerals and related products before the recent action.

However, it is also not in Beijing's interest to be overly restrictive. Sure, it would take years and hefty outlays for other governments to develop alternative sources. But it will not be lost on Xi that U.S. chip controls and tech sanctions are precisely what accelerated the development of his country's own semiconductor industry. That is the criticism Jensen Huang, CEO of artificial intelligence chipmaker Nvidia NVDA.O, lobbed at Washington last month. The same may happen with global rare earths supply chains.

Japan, the world's top importer of such metals, has shown progress is possible: the country has cut its dependence on Chinese rare earths to 60% from 90% in 2010, partly thanks to international cooperation and investments in overseas mines. Japanese firms including Proterial Metals, formerly Hitachi Metals, and Toshiba are racing to develop rare-earth-free magnets.

Chinese officials have held back from imposing a blanket ban that would result in bigger disruptions for companies. Most of the country's export curbs in this realm to date target dual-use goods that have both civilian and military applications. That maybe because upping the ante would be self-defeating for China's long-term ambitions too.

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CONTEXT NEWS

U.S.-China trade talks are set to enter their second day in London on June 10, Reuters reported on June 9, citing a U.S. source familiar with the negotiations. U.S. President Donald Trump put a positive spin on the talks, saying that they were going well and he was "only getting good reports".

Separately, White House economic adviser Kevin Hassett said on June 9 that the U.S. team wanted a handshake from China on rare earths exports. Asked about the Chinese objection to U.S. curbs on semiconductor exports, Hassett said: "Our expectation is that after the handshake, then immediately after the handshake, any export controls from the U.S. will be eased, and the rare earths will be released in volume, and then we can go back to negotiating smaller matters." He did not specify which export controls would be eased.

China has restricted the export of at least 16 minerals and related products since 2023, according to Reuters. In April it added seven rare earths to that list as part of its retaliation against hefty U.S. tariffs.