Build good external relations for steady supplies of critical materials

Last week, China and the United States (US) agreed essentially to take forward the mini-deal on tariffs agreed at Geneva last month and to go easy on export controls. For now, the anxieties about serious disruptions to the supply chains of critical materials for making several goods, including fighter jets, medical equipment, electric vehicles, etc, have lessened somewhat. Both countries are keeping their options on the way forward based on their own assessment on how far the other is willing to go to keep the supplies flowing.

 

Since 2018, the US has been imposing one restriction or the other on the export of high-tech items to Chinese companies with a specific intent to constrain China’s overall advancement in technologies.  Earlier this year, the Trump administration hiked the tariff on goods from China to 145 per cent. China retaliated by not only imposing 125 per cent tariffs on goods from the US but also by subjecting the export of rare earth metals to licencing. The applications for export licences call for justifications based on the end-use of the items by the buyers, a procedure that entailed delays. Now, that process may speed up but China is issuing licenses for six months only, preferring to assess the responses and then taking a call on granting further export licenses.

 

Under the agreements at the World Trade Organization (WTO) that assure most favoured nation (MFN) treatment to all countries, reasonable certainty of reliable supply chains and steady tariffs enabled all the countries to increase their interdependence. 

 

President Trump, however, preferred to quarrel with all the countries under the assumption that its economic, political, and military strength gives the US a unique position to impose its will on the others. China is the only country that has effectively challenged this belief by retaliating against unilateral imposition of reciprocal tariffs and export controls by the US. The leaders in China and the US are now looking for a face-saving deal as the trade war is hurting the commercial interests in both countries.

 

The global supply chains were seriously disrupted during the Covid-19 pandemic that started in China. Thereafter, most buyers developed new sources of supply with a China plus one strategy. So, it is surprising that in the case of rare earth metals, not many alternate sources were developed, and now, China controls about 90 per cent of global supplies and is in a position to withhold the supplies to the rest of the world. China gained dominance in the field by not only investing in the acquisition of sources of supply of rare earths and developing processing capabilities but also by using its pricing power to stifle competition. That has alarmed many producers around the world, including India.

 

Serious doubts have now emerged in many countries regarding dependence on other countries for critical materials because it is not easy to develop alternate sources of supplies quickly. That leaves on the table the only option of maintaining good relations with such countries, especially China, in the hope of getting steady supplies. The medium and long-term strategy should be to remain vigilant against monopolistic power that some countries may acquire in specific fields and develop alternate sources of supply.  It might be tempting to talk of self-reliance in strategic sectors, but a better strategy would be to build mutually beneficial collaboration with producers in friendly countries.