The world’s investors, executives, policymakers and politicians all now keep an eye on the Truth Social account @realDonaldTrump. The president’s posts have the power to move markets and even shake up the world order.
Now there’s another habit they might need to cultivate: watching the announcements from China’s ministry of commerce.
The ministry’s initially low-key announcement last week of new regulations on Chinese rare earth exports has sent shock waves through the West.
Beijing awarded itself the power to dictate what many companies, based anywhere in the world, do with key products that contain rare earths or battery materials sourced from China. The sweeping powers affect everything from cars to solar panels and missiles. And almost all companies affected have nowhere else to go.
“This is a completely new dawn. This no longer has anything to do with trade. We’ve morphed from a trade war into a grey-zone operation,” says James Kynge, a China watcher at think tank Chatham House.
“It’s a complete step change in China’s leverage and China’s ability to coerce not only the US, but every other country in the West, if it chooses to do so. The evidence of the past suggests that Beijing may well use this leverage. And then we’re into a whole different world.”
For years, Beijing has been building up an arsenal of economic weaponry. Chinese goods could be either withheld from a country or dumped on it. Exports to China could be blocked. The world’s largest creditor could toy with an indebted government’s bond market, or call in its loans.
From time to time, it has turned this coercive firepower on countries that it views as transgressive. Countries including Japan, Norway, Lithuania and Australia have already been put through the vice.
Now, it is showing the world just how far it is prepared to go.
The new rare earth powers have been announced amid claims that Britain dropped a trial against two alleged Chinese spies because of its dependence on Beijing for cash.
The case against two Britons collapsed after the Government failed to brand China a national security threat explicitly. The spooks have also reportedly been kept away from a decision on whether Beijing can build a new super-embassy in London.
In the US, Trump’s response has veered between pugnacious and placatory. After the rare earths decision, he vowed massive tariffs, only to back-pedal two days later. On Tuesday, he was back on the war path: China’s quiet boycott of US soybeans was “an economically hostile act” that would require “retribution”, he told his Truth Social followers.
Beijing has described its latest rare earths measure as retaliatory, not escalatory.
“China has said in as many words that it has modelled its own approach on what the US has been doing,” says Nigel Inkster, a former deputy MI6 chief now at Enodo Economics.
China’s use of economic weaponry
But Xi has spent his entire presidency building towards this moment. Economic weapons have always been part of his arsenal.
The most obvious is the Belt and Road Initiative (BRI), a $1.3tn (£970bn) scheme of loans, grants and investments used to fund infrastructure projects in 150 countries worldwide.
The programme creates openings for Chinese investments and contracts for its companies. It locks economies into Chinese trade and freight corridors. It buys influence over governments.
The first half of this year was the BRI’s biggest yet: $66bn of construction contracts were awarded and $57bn of investments made, according to a report from Australia’s Griffith University and China’s Green Finance and Development Centre. There were record outlays on energy, metals and mining and technology.
The BRI has helped China become the world’s largest lender to developing countries. Its total now exceeds the combined lending of the International Monetary Fund, the World Bank and the Paris Club of 22 major creditor countries.
When the projects are debt-funded, Chinese lenders often demand key assets as collateral.
“If you’re in hock to China for billions and billions of US dollars, then you’ve got to be nice to China,” says Kynge. “I wouldn’t quite call it coercion. I call it leverage, but it could turn into coercion.”
The Stimson Centre has suggested that the BRI may have helped steer some developing countries away from recognising Taiwan diplomatically.
Although recipient countries benefit from the infrastructure, the BRI investment can go awry.
In Sri Lanka, a Chinese company took control of the Hambantota port in 2017 under a 99-year lease after the government in Colombo was unable to repay the debt.
In Ethiopia, a railway to the Port of Djibouti fell short of both the coast and Ethiopia’s industrial parks. The BRI had also saddled Ethiopia with debt, concentrated among Chinese creditors. According to a report published by the Hong Kong Trade Development Council, “positive spillovers from investment and lending from China have been limited”.
The second weapon in Xi’s arsenal is the monopolies China has built up in supply chains for goods the world cannot do without. The country’s mines churn out 61pc of the world’s rare earths, and its refiners and manufacturers process 92pc of the world’s supply.
China also holds dominant positions in the manufacture of batteries, solar panels and wind turbines, giving it the power to control prices, profitability and market access worldwide.
Many of the major producers are state-owned, state-controlled, or at the whim of state direction – meaning Beijing can use them as a lever of coercion.
“It’s not just China’s readiness to withhold access to things, it’s also the other side of the coin: China can flood international markets with highly subsidised products like electric vehicles and solar panels. For Europe, this is a particular cause for concern,” Inkster says.
Beijing exercises this control behind the fig leaf of bureaucratic procedures. The rare earth “ban” in April was actually just a new licensing process. Similarly, import bans – such as those on Australian wine, barley and lobsters in 2020 – were framed as anti-dumping or sanitary measures.
“China disguises such actions as technical trade disputes, but the intent is political and the outcome is coercive,” said John Coyne, from the Australian Strategic Policy Institute.
Now, China is deploying this weapon even more blatantly. Recently, it has simply stopped buying American soybeans, sorghum and beef.
The boycott is a significant blow to American farmers. China bought $12.6bn of US soybeans last year but has not purchased any since May. Trump has noticed: on Tuesday, he threatened to retaliate by terminating US imports of Chinese cooking oil.
Beijing is increasingly complementing this leverage with its third weapon: strategic investments, which reward friendly countries like Hungary and Spain, while freezing out the miscreants.
In the past two years, Spain welcomed a €1bn battery gigafactory investment, and two EV ventures worth a combined €1.7bn. When the EU was readying tariffs on Chinese-made EVs last year, the pushback came from Spanish Prime Minister Pedro Sanchez.
Britain and the EU have stepped up their security screening of Chinese investments, and the country has been ejected from nuclear and steel projects in the UK.
But Labour has lately sounded more emollient. “China, because of its emerging economic status, isn’t just unignorable, it is also desirable to engage with,” Peter Kyle, the Business Secretary, said recently during a trip to Beijing.
Kynge wonders when, or whether, London and the European capitals will get serious about building resilience to China’s leverage. He reckons Beijing’s latest rare earth clampdown could be “a catalyst, finally, to goad the EU and the UK into action”.
“If we do actually do something, then maybe in several years, when we’ve built up some kind of a resilient supply chain for rare earths, people will look back at this moment and say China overplayed its hand,” he says.
Building up alternative supplies of rare earths will be a costly and lengthy task. In the meantime, Inkster has another suggestion: don’t be cowed. He counsels Britain and its allies to stiffen their spines, starting with the espionage prosecution.
“I honestly doubt that prosecuting this case would have a significant impact on China’s readiness to trade or invest. And even if it did, I think it would be temporary and reversible,” he says.
“At a time when the Chinese economy is still going through a pretty rough patch, they’re unlikely to want to cut off their noses just to spite their face.”
But with the world’s second-largest economy flexing its ever-growing muscles, and Trump’s America less squarely at Britain’s back, the former spook’s advice may go unheeded.
Telegraph Media