U.S.-China trade relations are more optimistic than people think, says AEI's Derek Scissors

Key Concepts

• Rare Earths: A group of 17 chemical elements with unique properties crucial for many modern technologies.
• Refining: The process of extracting and purifying rare earth elements from their ore.
• Supply Chains: The network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer.
• Critical Minerals: Minerals deemed essential for economic or national security and whose supply chains are vulnerable to disruption.
• Tariffs: Taxes imposed on imported goods.
• Coercive Pressure: The use of threats or force to influence the behavior of others.

US-China Trade Dynamics and Rare Earths

The discussion centers on the US effort to reduce its dependence on China, particularly concerning rare earths, while China aims to stimulate its economy. President Trump's meeting with the Australian Prime Minister highlights Australia's significant reserves of critical minerals.

Key Points:

• Focus on Refining, Not Just Reserves: The core problem for the US is not a lack of rare earth reserves, as the US actually exports rare earths to China. The critical issue is the refining capacity.
• Australia's Role: Australia possesses the largest rare earth refiner outside of China, located in Malaysia and owned by an Australian company. This entity has invested in and has experience in refining, making it a crucial partner for the US.
• Comprehensive Response Needed: The US response to the rare earth challenge must be comprehensive, extending beyond mining to include refining capabilities.
• Broader Issues Beyond Rare Earths: The trade tensions extend beyond rare earths, as evidenced by China's reduced rare earth exports in September and its complete halt of US soybean imports for the first time in seven years.

Short-Term vs. Long-Term Trade Outlook

The expert, Derek Scissors, offers a nuanced view on the immediate and future implications of US-China trade disputes.

Key Points:

• Short-Term Optimism: In the short term, Scissors believes a deal is possible. He suggests China might delay implementing controls on products using Chinese rare earths or refined rare earths, potentially in exchange for concessions from the US. A resumption of US soybean exports to China could be part of such a deal.
• Long-Term Challenge: This short-term resolution does not address the fundamental long-term problem. China is actively building its capacity and mechanisms, and they are unlikely to stop at rare earths.
• Potential for Further Disruption: China could extend its leverage to other critical supply chains, such as fine chemicals used in pharmaceuticals, which are in high global demand.
• US Policy Focus: The Trump administration's long-term policy has been more focused on trade balances and tariffs, whereas China's advantage lies in its control over supply chains.

US Strategy and Allied Cooperation

The conversation explores how the US can counter China's supply chain advantages.

Key Points:

• Importance of Allies: Working with allies is crucial for the US to counter China's supply chain power quickly.
• Australia's Contribution: Australia can immediately assist the US with rare earth refining.
• Global Network: Other potential allies and resource locations include Japan (which has faced Chinese rare earth embargoes before) and Canada, as well as other countries with critical mineral resources.
• Shifting Policy Focus: The US needs to shift its long-term policy focus from tariffs to supply chain resilience.

Dismissal of Chinese Trade Official

The abrupt dismissal of a Chinese trade official, noted by Treasury Secretary Mnuchin, is discussed.

Key Points:

• Internal Chinese Politics: Scissors views the dismissal as an "unnecessary irritant" and suggests it might be part of ongoing internal purges within China.
• Short-Term Deal Facilitation: The Chinese might have dismissed the official to facilitate a short-term deal with the US, with the possibility of reinstating him later.

China's Long-Term Strategy and 2027 Target

The discussion touches upon China's long-term strategic goals, including a potential 2027 self-sufficiency target.

Key Points:

• Long-Term Production Capacity Build-up: China's enduring strategy has been to build its production capacity, especially in advanced technology, not necessarily to increase consumption.
• Leverage and Coercion: This production capacity is intended to give China leverage over other countries, compelling them to cooperate, particularly on issues like Taiwan.
• 2027 as a Strategic Marker: While 2027 is cited as a potential year for China's self-sufficiency and capability to retake Taiwan, Scissors emphasizes that the exact year is less important than the underlying long-term strategy. The goal is to build production capability, which is working and increasing China's global importance and coercive power.
• Economic Impact: This strategy, while potentially harming China's economy in some ways, is effective in achieving its geopolitical objectives.

Synthesis and Conclusion

The core takeaway is that while the US can pursue short-term trade agreements with China, the long-term challenge lies in China's strategic build-up of supply chain dominance. The US must move beyond focusing solely on rare earth mining and instead prioritize refining capabilities and collaborate with allies to diversify critical mineral and technology supply chains. China's long-term strategy, exemplified by its focus on production capacity and potential self-sufficiency targets, aims to increase its global leverage and coercive power, particularly concerning geopolitical issues like Taiwan. The US needs to adapt its policy to address this supply chain advantage, rather than solely relying on tariffs.