BREAKINGVIEWS-US-China tensions want for a circuit breaker

By Robyn Mak

HONG KONG, Oct 13 (Reuters Breakingviews) - The truce between the United States and China always looked too good to last. What's surprising is how quickly it has fallen apart. The world's two largest economies are not holding back in showcasing their leverage over one another ahead of a possible meeting between Donald Trump and Xi Jinping to hammer out a trade deal. Even if the leaders can agree on some things in the coming weeks, mutual dependencies on rare earths and chips mean hostilities can break out at any moment.

The pair are rolling out a dizzying array of tit-for-tat measures against each other. In September, the U.S. Commerce Department widened its net of blacklisted companies to include subsidiaries that are at least 50% owned by sanctioned firms and added two Chinese firms onto its Entity List for helping Shanghai-based chipmaker Semiconductor Manufacturing International 0981.HK to acquire off-limits U.S. gear. New fees targeting China-linked ships at their first port of call in the United States are also set to go into effect this week. But it wasn't until last week when the People's Republic hit back, and hard, prompting Trump to threaten an additional 100% levies on Chinese goods and curbs on U.S. software exports.

As part of sweeping new export controls, Beijing for the first time plans to assert extra-territorial control both over any product that contains minimal amounts of certain Chinese-origin rare earths and battery-related materials and over products made using Chinese equipment and technology. From December, foreign manufacturers will have to apply for a license if they want to use any of those controlled items. The expanding list now covers 12 out of the 17 types of rare earths, lithium ion battery materials and synthetic diamonds.

China's new rules mimic the U.S. Foreign Direct Product Rule that has cut off China from high-end American technology, including for chips and chipmaking equipment. Given China's dominance in batteries, rare earths separation, refining, and permanent magnet production, Beijing is effectively laying claim to global supply chains spanning autos, wind power, electronics, aerospace and semiconductors - sectors vital to economic and national security. That's rattling Wall Street and is a bad omen for Chinese companies too: Shares of the $250 billion battery maker Contemporary Amperex Technology 300750.SZ fell 7% on Friday. Moreover, the Chinese government has already stated that defense users will not be granted licenses and that applications related to advanced processors will only be approved on a case-by-case basis.

Many rare earths used in chipmaking now fall under Beijing's controlled list.That suggests manufacturers like Taiwan's TSMC 2330.TW and South Korea's Samsung Electronics 005930.KS will be impacted if they want to make cutting-edge accelerators for artificial intelligence. Taiwanese officials have downplayed the impact, saying the island mainly sources these products from Europe, the United States and Japan where governments are stepping up efforts to develop their own supply chains. Still, China's tightened oversight may make it harder for those countries to achieve self-sufficiency.

As of Monday morning, Beijing has refrained from matching Trump's 100% tariff threat - a sign that Xi does not want to escalate further. But while there is still time until most of the latest measures on both sides take effect, neither country is likely to significantly roll back their export controls. They may simply agree to postpone implementing certain parts or grant one-year licenses to provide a period of certainty.

So long as the United States depends on Chinese rare earths and batteries, and China depends on American tech and chips, it will be nearly impossible to untangle export controls and national security concerns from trade.

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CONTEXT NEWS

China's Ministry of Commerce on October 12 said U.S. President Donald Trump's threat to impose 100% tariffs on Chinese goods was hypocritical and defended its curbs on rare earths and other materials. The ministry also criticised a series of U.S. measures since September, including the addition of Chinese companies to a U.S. trade blacklist and Washington's imposition on port fees on China-linked ships.

Trump on October 10 threatened to impose additional levies of 100% on Chinese goods, along with new export controls on "any and all critical software" by November 1.

Starting in December, foreign firms will need a license from the Chinese government to export products that by value contain 0.1 percent Chinese-origin heavy rare earths, or were produced using the country's technologies, China's commerce ministry announced on October 9, citing national security.

Chinese officials also expanded a list of materials and technologies under export controls, adding five more types of rare earths, some battery anodes, synthetic diamonds and other equipment. These are due to take effect on November 8. Separately, the Chinese government on October 9 announced new port fees on U.S. ships and started an antitrust investigation into U.S. chip firm Qualcomm.