China Indicates Rare Earths Export Controls on the Horizon, Taking a National Security-Based End Use and End User Approach

Chinese Government States Position on Trade Talks, Huawei, and “Structural” Demands

China’s State Council on Information Office released today a white paper on U.S.-China trade talks and China’s official position. At a related press conference, China’s vice-minister for commerce reportedly addressed several points of contention, including the United States’ recent addition of Huawei and 68 of its “affiliates” to the Entity List, prohibiting or making substantially more difficult exports of U.S.-source goods and services to Huawei and its listed affiliates. (The United States, through the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a 90-day Temporary General License that partially lifts the export restrictions instituted by the listing of Huawei and its affiliates). The vice-minister described the Huawei designations as an “abuse of export controls.” (For more on Huawei (and ZTE), see MassPoint’s publications on the U.S.-China techwar).

The Chinese government’s white paper reportedly describes the United States’ position as implacable, and U.S. demands as out of bounds. The white paper, according to the Financial Times, states that “the more the US government is offered, the more it wants,” and adds that the United States “persisted with exorbitant demands . . . and insisted on including mandatory requirements [that infringe on] China’s sovereign affairs in the deal.” (The United States has demanded “structural” reforms by China, including limiting the role of the government in the economy and business both domestically and globally. These and other “structural” issues are depicted in MassPoint’s graphic illustrating the range of U.S.-China issues from the U.S. perspective).

China: Potential Rare Earths Export Controls

On the issue of potential restrictions by China of  rare earth elements, which are essential to the manufacture of defense articles, electric vehicles, medical devices, and a range of electronics, the vice-minister stated that: China “would like to meet justified demand [for rare earths] . . . But if some countries use rare earths to produce products to contain China’s development, then this is unacceptable.” The statement is notable. First, it adds substance to recent speculation—triggered  by the Chinese’ president’s visit to a rare earths facility—that China might leverage its rare earths dominance for trade war advantage. (News outlets have reported that China might apply any rare earths export curbs to heavy rare earth elements).

More important, the vice-minister’s comments suggest that China might take a targeted approach to any restrictions on rare earth elements that echoes, or effectively duplicates, the approach of the United States, which is to control exports based on “end use” and “end user” where one or both conflict with or potentially undermine U.S. national security interests (which include technological leadership and economic security). The express adoption of an end use-end user approach that, presumably, would be aimed primarily at the United States, would be ironic (Huawei and other Chinese companies, such as Fujian Jinhua, have been denied export privileges on broad national security grounds provided for by the Export Administration Regulations (EAR)).

Moreover, should China impose targeted, national security-based rare earths export restrictions and be challenged, as it was before successfully at the WTO by the United States and other countries, China might now have a “national security” legal defense (or an “essential security” defense, in the parlance of  the General Agreement on Tariffs and Trade (GATT)). (In a first test of “national security” exceptions to trade frameworks, a WTO ruling recently addressed the contours of national security exceptions in a case involving Russia and Ukraine, indicating that a country’s claimed national security basis for adverse trade action should be objective and is reviewable).

Of course, as China has not yet imposed any new rare earths export restrictions aimed at the United States, specific U.S. sectors like defense, or others, any further discussion of potential legal claims and defenses is premature and beyond current developments. The key point, for now, is that if China adopts a targeted export controls approach that is based— or purports to be based—on “national security” interests, China will effectively duplicate long-standing U.S. legal and regulatory approaches to export controls. If taken, the approach would be all the more noteworthy given the Trump Administration’s penchant for asserting “national security” to justify a range of actions (such as diverting appropriated funds to build wall and potentially imposing tariffs on Mexican goods to advance border control objectives).

Next Steps for Rare Earth Elements Importers 

Given the limited sources of rare earth elements supplies and China’s global dominance of as a supplier, near-term supply chain modification options are not, as a general matter, feasible. However, manufacturers of electronic devices, defense articles, electric vehicles, and other goods can take steps to understand and attempt to mitigate supply chain risks in the near to medium term. These include:

• Closely monitor developments in China and the United States.
• Develop policy points designed to influence legal and policy actions by supplier and importer nations, particularly points that illustrate why any export restrictions should be—in the interests both of supplier nations and importers—narrowly tailored to meet stated “national security” or other goals.
• Understand the United States’ strategic position on rare earth elements and other “critical minerals,” and recent legal and policy developments.
• Explore and embed in efforts to develop rare earths and other critical minerals alternatives, such as those in development or exploration by scientists, industry, and others.
• Understand that export controls are not the only threat to critical minerals (e.g., cobalt) supply flows—environmental, social, and governance (ESG) issues, among others, are disruptive to supply chains and are more readily manageable.

Read MassPoint’s trade war, tech war, and critical minerals/critical resources publications at MassPoint’s blog and publications pages.