Beijing is using its supply chain ‘leverage’ to retaliate against Donald Trump’s tariffs.

If you are going to pick a fight, be sure you are ready to do so. The administration’s objective of reducing this country’s unhealthy dependence on China is worthwhile and increasingly urgent. Nevertheless, so deep are the trade relationships between the U.S. and China (something that should never have happened, but that is another topic) that disengagement was always going to take a scalpel, not a chain saw. That’s not the way that things have been going lately.

In retaliation against some measures rightly taken by the Biden administration last year to further limit access to U.S. technology, China restricted the export of certain minerals that could have military as well as civilian applications. It was therefore predictable that, when Donald Trump entered into a major tariff war with China, Beijing would use its supply chain “leverage” to hit back (The Art of the Deal 101).

And so, the Wall Street Journal reports:

In the auto industry, rare-earths are what allow electric-vehicle motors to function at high speed. They are also used in less exotic, though no less critical, functions from windshield wipers and headlights.

China was supposed to have eased export controls on rare-earth magnets as part of a 90-day tariff truce agreement with the White House, but the country has slow walked license approvals for magnets. Trump accused China of violating its deal with the U.S. China has pushed back at the notion that it was to blame, alleging “discriminatory and restrictive measures” by Washington, including restricting exports of AI chips and revoking visas for Chinese students.

As exports of rare-earth magnets have virtually ground to a halt, carmakers face hard decisions about whether they can continue to keep some plants operating, according to people familiar with the planning.

In May, industry groups representing most major automakers and parts suppliers told the Trump administration that vehicle production could be reduced or shut down imminently without more rare-earth components from China.

Rare earths are not particularly rare, but China has established a dominant position and advanced know-how in processing them (separating them from the rock in which they are embedded). Rare earths are more widely used in electric vehicles (EVs) than conventional cars, but they are used in the latter too. Besides, according to the WSJ, there is a limit to how much production car companies can switch away from EVs because of federal fuel-economy standards. Those can surely be scrapped or suspended, but the underlying problem would still remain.

Not to pile on (no, to pile on), but now was not the best moment (not that there is a good moment) to add to automakers’ woes by doubling steel and aluminum tariffs.

One of the reasons to oppose industrial policy of the type advocated by the old left and new right is the near certainty that it will be administered with a degree of incompetence that would be remarkable if it had not been seen so many times before. In this respect, at least, the Trump administration is sticking to tradition.

Oh, yes, there is also this. Among the companies vulnerable to shortages of rare earths are drone manufacturers, which are also typically reliant on Chinese batteries.

Forbes (April 16):

In October, America got a peek at what a worst case scenario might look like when China sanctioned military contractor Skydio, cutting off the battery supply for America’s largest small drone maker, which has raised more than $850 million from investors like Andreessen Horowitz and Accel. The company said it wouldn’t be able to secure new suppliers until this spring, and would be forced to ration batteries…

Ukraine has just delivered a powerful (and, by implication, alarming) reminder of what drones can now do. It should go without saying that the U.S. cannot risk being dependent on China in this area.

I looked at the rare earths issue last year in a post headed Mine, Baby, Mine. That message has become more urgent and needs supplementing with Process, Baby, Process. The drone battery supply line also needs to change, a problem with which Ukraine is clearly dealing. A call to Kyiv would be wise. Soon.