For months, Donald Trump has imposed unprecedented levels of tariffs and trade restrictions on China, part of a strategy to force Xi Jinping into talks that the U.S. president hopes will help cut the trade deficit and boost American manufacturing.

With U.S. tariffs soaring to 145% and the Trump administration boasting that it has the upper hand over China, Beijing has turned the tables, essentially halting exports of the one thing the modern world can't live without: rare-earth magnets.

As slowing shipments of products containing obscure elements like dysprosium and terbium begin to pinch industries from autos to defense, the U.S. and other countries are quickly reaching their weakest point. Ford Motor Co. and Suzuki Motor Corp. are halting some production, Elon Musk says the shortage is hurting his robotics business and governments are scrambling to secure some suppliers outside China.

The two-way trade dispute is becoming a global crisis. "It creates urgency," said Rowena Smith, chief executive of Australian Strategic Materials Ltd., which makes alloys for magnets at a plant in South Korea. "Mobile phones are becoming very popular, and it's not just the U.S. that's affecting everyone." That pressure, coupled with steep tariffs, prompted the U.S. and China to agree to a truce in Geneva last month.

Trade duties have since fallen, and the U.S. is expected to see a steady flow of rare-earth magnets. But Beijing still requires companies to obtain licenses to buy the critical materials, causing delays that have further heightened tensions. The U.S. has struck again, increasing restrictions on chip design software, jet engine parts and even threatening student visas.

Finally, Trump got what he had long wanted: a phone call with Xi to get relations back on track. Then on Tuesday night, U.S. and Chinese trade negotiators announced a breakthrough after a second day of talks in London. While the details were sketchy, there was no doubt about the essence of the negotiations.

"We certainly hope that the rare earth and magnetic mineral issues that relate to the United States will be resolved under the framework," Commerce Secretary Howard Lutnick told reporters, adding that U.S. countermeasures would be eased once China's export licenses are approved.

Indeed, hours after Lutnick spoke, China's top rare earth magnet maker, JL Mag Rare-Earth Co., said it had received export licenses to countries including the U.S. Its Hong Kong-listed shares jumped as much as 12%. That underscored the moves in the broader market. A gauge of Chinese stocks listed in Hong Kong rose 1.1% to its highest since March. In contrast, S&P 500 futures fell as much as 0.4%.

English: For all the U.S. bluster, company executives and analysts said the episode showed how quickly China's advantage in the rare earth trade can be used to secure concessions from countries whenever tensions escalate, as they almost certainly will. "While the U.S. appears to be taking the lead in reviving trade talks, China may be quietly securing the upper hand," said Hebe Chen, an analyst at Vantage Markets in Melbourne. China is "weaponizing its dominance in rare earths to shift the balance in negotiations," she added.

That's partly because China's new licensing requirements around exports of rare earths and other critical minerals are so detailed that Beijing is building a sophisticated understanding of where every kilogram it produces ends up and why, according to two people familiar with the process, who asked not to be identified because of the sensitivity of the matter.

In the latest flare-up, the bottleneck emerged when China slowed approvals for products — notably magnets — that contain trace amounts of seven rare earths, while also restricting sales of the raw elements. That insight will be a "sword of Damocles" hanging over all sorts of negotiations for years to come, one of the people said. And not just with the U.S.

"By slowing down licensing approvals over the past few months, China has sent a clear message to Europe: we can hurt you if we feel the need," said Noah Barkin, senior adviser at Rhodium Group. (alg)

Source: Bloomberg