US-China trade war rages on
As the US-China trade war rages on, the two sides are looking for ammo. After announcing it would increase tariffs on $60 billion worth of US goods, China is exhausted as far as imports are concerned. However, it is now looking at rare earth exports to strike back at the US.
China could use rare earth metals as ammo in trade war
The world got the first subtle warning of China’s intention to use rare-earth minerals in the trade war when Chinese president Xi Jinping visited a rare earth plant last week. Rare earth minerals are a group of 17 chemical elements that have wide applications from technology to military equipment. China has a dominant position as a rare earth producer. China produces about 95% of the world’s rare earth minerals, and the US depends on China for as much as 80% of its imports. The VanEck Vectors Rare Earth/Strategic Metals ETF (REMX), which provides exposure to companies involved in rare earth mining, has been soaring on China’s threats.
The Chinese newspaper Global Times reported that China may “weaponize its rare earths in an escalation of the trade war with the US.” The paper also quoted a National Development and Commission spokesperson as saying “If any country wants to use products made of China’s rare earth exports to contain China’s development, the Chinese people would not be happy with that.”
Impact on US tech
A restriction on rare earth exports from China (FXI) could be detrimental to US technology companies (SMH), which are already caught in the crosshairs of the trade war. US companies such as Apple (AAPL) could have trouble if the threatened ban comes into effect.
If this escalation happens, the US could come up with a number of restrictions on China, which would likely lead to further escalation, which would be bad news for the US as well as Chinese markets, which are also reeling under the impact of the trade war. The S&P 500 (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite (QQQ) have already fallen 4.7%, 4.3%, and 7.1%, respectively, since Trump’s initial tweets regarding trade war escalation on May 5.