The latest wrinkle in the U.S./China trade war: China is threatening to use its status as the world's dominant supplier of rare earth minerals - a dozen-plus elements with catchy names as lanthanum, praseodymium and ytterbium -- to hurt the many U.S. companies dependent on them.
A lightly veiled threat from a Chinese government official was followed by more explicit threats from major Chinese newspapers, with one of the newspapers using language similar to that used in remarks made amid past conflicts with India and Vietnam.
The threats come, of course, after the U.S. put Chinese tech giant Huawei on an "entity list" that prohibits Huawei's U.S. suppliers from working with the company in the absence of government approval, and as a result could potentially deal a crippling blow to a company that does over $100 billion in annual sales.
If China was to either significantly restrict rare earth exports and/or place large export tariffs on them, firms relying on Chinese rare earth exports would undoubtedly feel a lot of pain in the near and intermediate-term. The U.S. Geological Survey estimates China accounted for over 70% of 2018's global rare earth production of 170,000 metric tons. While China's production share is likely to fall over the long run, given that it possesses just 37% of the world's estimated rare earth reserves, for now large reserves in places such as Vietnam, Brazil and Russia are being lightly tapped.
And tech and electronics companies are far from the only U.S. firms dependent on rare earths. The elements are heavily used within vehicle exhaust systems, as well as to help create metal alloys, build magnets used by motors and generators and polish materials such as glass, marble and granite. As a result, rare earth export restrictions would impact not only a company like Apple (AAPL) , but also the likes of Tesla (TSLA) , GM (GM) and Caterpillar (CAT) .
With all that said, I think China's rare earth threats drive home a basic fact that has often been overlooked as markets have mulled the implications of the U.S. government's recent Huawei actions: The U.S. and China each have a near-infinite number of options for doing massive economic damage to each other, given how connected their economies have become.
In addition to potentially slapping large new tariffs on Chinese exports, the U.S. could follow up on its Huawei actions by targeting other major Chinese tech and electronics firms in a similar manner -- names that come to mind include ZTE, Lenovo, Xiaomi and Oppo. The U.S. could also (among other things) place broader restrictions on the export of products such as chip manufacturing equipment and advanced industrial machinery to China.
China, for its part, could follow up on rare earth export restrictions by targeting the local operations of major U.S. multinationals -- potential names include everyone from Apple to IBM (IBM) to Boeing (BA) to Starbucks (SBUX) . Or it could throw U.S. debt markets into turmoil by unloading a large portion of the $1.2 trillion in U.S. treasuries it has amassed, although this would throw a wrench into Beijing's attempts to keep the yuan's value depressed relative to the dollar in order to make Chinese exports more attractive.
The mutually-assured destruction bound to result from a no-holds-barred trade war between Washington and Beijing still provides reasons to think some kind of truce will be reached before things really get out of hand. Neither side is likely to forget this fight anytime soon -- China will undoubtedly try to lower its long-term dependence on U.S. chips, software and manufacturing equipment, while U.S. firms will work to lower their dependence on Chinese manufacturing -- but that doesn't mean one act of escalation will keep being followed by another.