1
00:00:00,200 --> 00:00:03,920
Donald Trump and Xi Jinping 
agreed this Thursday at their 

2
00:00:03,920 --> 00:00:08,840
first meeting in over six years 
to delay export controls on rare

3
00:00:08,840 --> 00:00:13,160
earth and on computer chips. 
The deal they struck lasts for 

4
00:00:13,160 --> 00:00:18,080
one year and follows months of 
escalating tariffs, retaliatory 

5
00:00:18,080 --> 00:00:20,920
restrictions, and stalled 
negotiations. 

6
00:00:21,240 --> 00:00:25,120
The US and China additionally 
reached agreements on American 

7
00:00:25,120 --> 00:00:29,760
tariffs related to fentanyl and 
on tit for tat levies on each 

8
00:00:29,760 --> 00:00:33,480
other's shipping industries. 
On the scale of up from zero to 

9
00:00:33,480 --> 00:00:37,080
10, with 10 being the best, I 
would say the meeting was at 12.

10
00:00:37,520 --> 00:00:41,400
While Donald Trump sounded 
triumphant after the meeting, 

11
00:00:41,680 --> 00:00:45,880
the deal was mostly seen as a 
win for China, where the US 

12
00:00:45,880 --> 00:00:49,840
accepted a negotiating link 
between its restrictions on high

13
00:00:49,840 --> 00:00:54,400
tech exports like AI chips and 
China's restrictions on rare 

14
00:00:54,400 --> 00:00:58,560
earth exports. 
With the 20% fentanyl tariff 

15
00:00:58,560 --> 00:01:04,160
halved, the average tariff rate 
on Chinese goods falls to 31%, 

16
00:01:04,319 --> 00:01:09,160
which is well below the 50% US 
tariffs on Brazil and India and 

17
00:01:09,160 --> 00:01:13,480
below the 35% tariffs on many 
Canadian goods, making 

18
00:01:13,480 --> 00:01:17,200
production in China more 
attractive, at least for now. 

19
00:01:17,840 --> 00:01:21,440
While markets seem to have 
breathed a sigh of relief, the 

20
00:01:21,440 --> 00:01:25,200
underlying tensions are still in
place and the Economist 

21
00:01:25,200 --> 00:01:29,360
described the agreement as 
sketchy, temporary and built on 

22
00:01:29,360 --> 00:01:32,120
sand. 
Rare earth elements have been a 

23
00:01:32,120 --> 00:01:35,520
key negotiating point in the 
most recent standoff. 

24
00:01:35,840 --> 00:01:40,040
These are crucial components in 
electric motors, smartphones, 

25
00:01:40,080 --> 00:01:44,560
airplanes, fiber optic networks,
medical imaging equipment and 

26
00:01:44,560 --> 00:01:47,600
much more. 
They also play a role in missile

27
00:01:47,960 --> 00:01:52,400
systems and jet engines. 
China has spent decades building

28
00:01:52,400 --> 00:01:56,080
dominance in their production, 
and that dominance is now being 

29
00:01:56,080 --> 00:02:00,160
used as leverage. 
Rare earths are a group of 17 

30
00:02:00,160 --> 00:02:04,120
metallic elements highlighted 
here on the periodic table, and 

31
00:02:04,120 --> 00:02:07,360
if you learn how to spell all of
their names, you'll have a real 

32
00:02:07,360 --> 00:02:11,000
edge in playing Scrabble. 
They're not particularly rare, 

33
00:02:11,000 --> 00:02:14,360
as their name would imply, but 
they're often found together in 

34
00:02:14,360 --> 00:02:18,440
low concentrations, which makes 
mining them and separating them 

35
00:02:18,440 --> 00:02:21,280
a very complex and expensive 
process. 

36
00:02:21,800 --> 00:02:25,680
The refining stage is messy, 
energy intensive, and often 

37
00:02:25,680 --> 00:02:29,440
involves strong assets. 
This is partially why China 

38
00:02:29,440 --> 00:02:32,960
dominates the industry. 
It built the infrastructure over

39
00:02:32,960 --> 00:02:36,760
the years, accepted the 
environmental costs, and scaled 

40
00:02:36,760 --> 00:02:39,840
up production when other 
countries were reluctant to get 

41
00:02:39,840 --> 00:02:42,640
involved. 
While rare earth production has 

42
00:02:42,640 --> 00:02:47,120
grown massively over the last 25
years, demand has grown just as 

43
00:02:47,120 --> 00:02:49,200
fast. 
These elements have become 

44
00:02:49,200 --> 00:02:51,720
almost indispensable in modern 
manufacturing. 

45
00:02:52,320 --> 00:02:55,960
Neodymium magnets, for example, 
are used in electric motors, 

46
00:02:56,040 --> 00:03:00,360
wind turbines, and hard drives. 
They're small, powerful, and 

47
00:03:00,360 --> 00:03:03,800
efficient, ideal for 
miniaturizing components and 

48
00:03:03,800 --> 00:03:07,160
reducing energy consumption. 
It would be difficult to build 

49
00:03:07,160 --> 00:03:09,280
something like a drone without 
them. 

50
00:03:09,840 --> 00:03:13,200
Rare earths are also used in 
things like polishing powders, 

51
00:03:13,200 --> 00:03:16,080
battery alloys, and medical 
imaging equipment. 

52
00:03:16,280 --> 00:03:19,480
They play a critical role in the
production of fiber optic 

53
00:03:19,480 --> 00:03:23,160
cables, which form the backbone 
of the Internet and modern 

54
00:03:23,160 --> 00:03:27,160
telecommunications networks. 
Different rare earths are used 

55
00:03:27,160 --> 00:03:31,000
to dope the glass fibers, 
enabling the amplification of 

56
00:03:31,000 --> 00:03:34,880
light signals over long 
distances without degradation. 

57
00:03:35,160 --> 00:03:38,440
This is essential for 
maintaining high speed data 

58
00:03:38,440 --> 00:03:42,160
transmission across across 
continents, powering everything 

59
00:03:42,160 --> 00:03:45,240
from video streaming and cloud 
computing to financial 

60
00:03:45,240 --> 00:03:48,000
transactions and global 
communications. 

61
00:03:48,280 --> 00:03:51,720
Without rare earth, the 
efficiency and reach of fiber 

62
00:03:51,720 --> 00:03:55,440
optic networks would be severely
limited, undermining the 

63
00:03:55,440 --> 00:03:58,520
infrastructure that supports the
digital economy. 

64
00:03:59,240 --> 00:04:03,680
Military applications exist too,
and these are usually hyped in 

65
00:04:03,680 --> 00:04:07,040
articles whenever the supply of 
rare earths is cut off. 

66
00:04:07,280 --> 00:04:11,080
But these applications are not 
the primary driver of demand. 

67
00:04:11,320 --> 00:04:14,920
Harvard points out that electric
cars require six times the 

68
00:04:14,920 --> 00:04:19,480
mineral inputs of conventional 
cars, and wind plants require 9 

69
00:04:19,480 --> 00:04:22,440
times more minerals than gas 
fired plants. 

70
00:04:22,640 --> 00:04:26,600
So while rare earths do have 
military uses like in missile 

71
00:04:26,600 --> 00:04:30,240
guidance systems, jet engines 
and radar equipment, the 

72
00:04:30,240 --> 00:04:33,760
quantities needed for military 
applications are relatively 

73
00:04:33,760 --> 00:04:36,520
small. 
The main demand comes from 

74
00:04:36,520 --> 00:04:40,160
civilian industries like 
electronics, cars, energy, and 

75
00:04:40,160 --> 00:04:44,440
telecommunications. 
From the 1960s through to the 

76
00:04:44,440 --> 00:04:48,800
1980's, the United States was 
the dominant global producer of 

77
00:04:48,800 --> 00:04:52,600
rare earth elements, largely due
to the Mountain Pass mine in 

78
00:04:52,600 --> 00:04:57,320
California, which was shut down 
in 2002 after a toxic waste 

79
00:04:57,320 --> 00:05:00,400
spill where radioactive 
wastewater leaked into the 

80
00:05:00,400 --> 00:05:04,160
surrounding desert. 
The mine was no longer viable 

81
00:05:04,160 --> 00:05:08,040
due to cheaper Chinese imports, 
environmental compliance costs, 

82
00:05:08,040 --> 00:05:12,000
and pollution issues. 
The site was revived in 2012, 

83
00:05:12,280 --> 00:05:16,720
went bankrupt in 2015 and was 
taken over by financiers who 

84
00:05:16,720 --> 00:05:22,320
founded MP Materials in 2017. 
Earlier this year, the US 

85
00:05:22,320 --> 00:05:27,760
government acquired a 15% stake 
in the company for $400 million 

86
00:05:27,920 --> 00:05:31,640
as part of a broader public 
private partnership aimed at 

87
00:05:31,640 --> 00:05:35,360
building a domestic supply chain
for rare earth magnets. 

88
00:05:35,680 --> 00:05:40,600
Apple has committed $500 million
in a long term partnership to 

89
00:05:40,600 --> 00:05:44,600
source American Made rare earth 
magnets and to build a rare 

90
00:05:44,600 --> 00:05:47,720
earth recycling facility at 
Mountain Pass. 

91
00:05:48,160 --> 00:05:51,960
Starting in the 1990s, a 
combination of environmental 

92
00:05:51,960 --> 00:05:56,560
regulations, corporate short 
termism and outsourcing led to a

93
00:05:56,560 --> 00:05:59,120
decline in US rare earths 
production. 

94
00:05:59,400 --> 00:06:03,160
China, meanwhile, strategically 
invested in the industry, 

95
00:06:03,280 --> 00:06:06,920
offering lower costs and fewer 
environmental constraints. 

96
00:06:07,160 --> 00:06:11,640
By the early 2000s, China had 
overtaken the US, and today 

97
00:06:11,640 --> 00:06:15,920
supply buys around 80% of the 
world's rare earths and handles 

98
00:06:15,920 --> 00:06:21,200
over 90% of the refining. 
China also manufacturers nearly 

99
00:06:21,200 --> 00:06:24,600
all of the magnets that use rare
earth materials. 

100
00:06:25,240 --> 00:06:28,920
In China, the entire supply 
chain from ore to finish 

101
00:06:28,920 --> 00:06:32,760
components is vertically 
integrated and geographically 

102
00:06:32,760 --> 00:06:35,800
concentrated. 
China's dominance is possibly 

103
00:06:35,800 --> 00:06:40,040
more strategic than economic in 
nature, as selling rare earths 

104
00:06:40,080 --> 00:06:44,520
isn't hugely profitable. 
The US spends more than 20 times

105
00:06:44,520 --> 00:06:49,080
as much on avocado imports each 
year as it does on rare earths. 

106
00:06:49,520 --> 00:06:52,200
The difference, of course, is 
that no one ever threatened to 

107
00:06:52,200 --> 00:06:56,800
cut off the guacamole supply. 
Because railroads are so deeply 

108
00:06:56,800 --> 00:07:00,880
embedded in the supply chains of
nearly every advanced industry, 

109
00:07:01,040 --> 00:07:04,720
control over their flow means 
influence over production 

110
00:07:04,720 --> 00:07:09,400
timelines, pricing, and provides
huge geopolitical leverage when 

111
00:07:09,400 --> 00:07:12,520
needed. 
China's geopolitical edge in 

112
00:07:12,520 --> 00:07:16,600
controlling this small industry 
comes from its ability to cause 

113
00:07:16,600 --> 00:07:20,280
huge disruptions. 
When export licenses are delayed

114
00:07:20,280 --> 00:07:24,600
or denied, supply chains around 
the world come to a halt. 

115
00:07:25,120 --> 00:07:29,000
Rare earth elements, despite 
their name, are not particularly

116
00:07:29,000 --> 00:07:33,440
rare, but the ability to refine 
and produce them at scale is. 

117
00:07:33,760 --> 00:07:37,440
China has built that capacity 
through decades of industrial 

118
00:07:37,440 --> 00:07:41,400
investment, environmental 
tolerance, and technical process

119
00:07:41,400 --> 00:07:44,920
development. 
The process is messy, expensive 

120
00:07:44,920 --> 00:07:48,160
and difficult to scale U 
quickly, making it extremely 

121
00:07:48,160 --> 00:07:51,280
difficult to rebuild this 
industry under Western 

122
00:07:51,280 --> 00:07:53,800
environmental and regulatory 
constraints. 

123
00:07:54,400 --> 00:07:58,440
Environmental approvals can take
years in Western countries, 

124
00:07:58,600 --> 00:08:02,240
labor costs are significantly 
higher than in China, and 

125
00:08:02,240 --> 00:08:06,160
expertise in production is 
extremely limited, as most of 

126
00:08:06,160 --> 00:08:10,080
the engineers would experience 
in this space retired many years

127
00:08:10,080 --> 00:08:12,640
ago. 
Even with government backing and

128
00:08:12,640 --> 00:08:16,800
corporate investment, progress 
has been slow as rebuilding 

129
00:08:16,800 --> 00:08:20,520
capacity requires more than just
access to raw materials. 

130
00:08:20,680 --> 00:08:25,920
It requires technical expertise,
regulatory change and long term 

131
00:08:25,920 --> 00:08:29,480
investment. 
China's export licensing system 

132
00:08:29,600 --> 00:08:32,880
has become a central tool in its
trade strategy. 

133
00:08:33,039 --> 00:08:36,400
Since 2023, the Chinese 
government has expanded the 

134
00:08:36,400 --> 00:08:40,600
scope of these licenses to cover
more than 700 different 

135
00:08:40,600 --> 00:08:44,920
products, including rare earth 
manufacturing equipment and 

136
00:08:44,920 --> 00:08:49,440
other critical inputs. 
Licenses are typically issued 

137
00:08:49,440 --> 00:08:53,000
for six months and require 
detailed disclosures about the 

138
00:08:53,000 --> 00:08:56,320
buyer, the intended use, and the
final product that will be 

139
00:08:56,320 --> 00:08:59,040
built. 
In some cases, exporters are 

140
00:08:59,040 --> 00:09:02,840
asked to collect technical 
documentation or proprietary 

141
00:09:02,840 --> 00:09:06,240
information from their customers
as part of the license 

142
00:09:06,240 --> 00:09:10,160
application process. 
The licensing process gives 

143
00:09:10,160 --> 00:09:13,240
Beijing a window into foreign 
supply chains. 

144
00:09:13,520 --> 00:09:17,160
By collecting data on how and 
where rare earths are used, 

145
00:09:17,360 --> 00:09:21,080
Chinese authorities can track 
demand patterns, identify 

146
00:09:21,080 --> 00:09:24,680
potential stockpiling, and 
monitor for buyers who might be 

147
00:09:24,680 --> 00:09:28,920
reselling the materials. 
The licensing system also allows

148
00:09:28,920 --> 00:09:32,920
for selective enforcement on a 
customer by customer basis. 

149
00:09:33,520 --> 00:09:37,680
Licenses can be delayed or 
quietly withheld, creating 

150
00:09:37,680 --> 00:09:41,320
uncertainty for buyers without 
the need for formal bonds. 

151
00:09:41,560 --> 00:09:45,160
In recent months, German firms 
have received more approvals 

152
00:09:45,160 --> 00:09:48,320
than their American 
counterparts, and Indian buyers 

153
00:09:48,320 --> 00:09:52,960
have faced even longer delays. 
The structure of the licensing 

154
00:09:52,960 --> 00:09:57,040
regime reflects a broader shift 
in China's approach to trade. 

155
00:09:57,240 --> 00:10:00,800
It mimics the example set by the
United States with the Foreign 

156
00:10:00,800 --> 00:10:06,040
Direct Product Rule, AUS export 
control regulation that extends 

157
00:10:06,040 --> 00:10:10,360
the reach of US restrictions to 
items made abroad if they are 

158
00:10:10,360 --> 00:10:14,080
the direct product of US 
technology, software or 

159
00:10:14,080 --> 00:10:17,600
equipment. 
Beijing has adopted this logic, 

160
00:10:17,720 --> 00:10:21,840
applying restrictions to goods 
produced outside of China if 

161
00:10:21,840 --> 00:10:24,920
they rely on Chinese inputs or 
know how. 

162
00:10:25,400 --> 00:10:29,760
If the United States was cut off
by China, other nations might 

163
00:10:29,760 --> 00:10:33,600
hesitate to re export to 
American buyers, not just to 

164
00:10:33,600 --> 00:10:37,280
avoid jeopardizing their own 
access, but also because recent 

165
00:10:37,440 --> 00:10:40,480
U.S. trade aggression has 
strained diplomatic and 

166
00:10:40,480 --> 00:10:43,080
commercial relationships with 
the rest of the world. 

167
00:10:43,280 --> 00:10:47,200
In a moment of scarcity, 
Washington may find that fewer 

168
00:10:47,200 --> 00:10:50,920
of its historical allies are 
willing to take a big economic 

169
00:10:50,920 --> 00:10:53,760
risk. 
Risks on its behalf heavy rare 

170
00:10:53,760 --> 00:10:57,040
earth have received particular 
attention from the Chinese 

171
00:10:57,040 --> 00:10:59,360
government in the recent trade 
disputes. 

172
00:10:59,640 --> 00:11:04,000
These elements are particularly 
valuable and extremely difficult

173
00:11:04,000 --> 00:11:06,920
to substitute due to their 
unique properties. 

174
00:11:07,120 --> 00:11:10,600
One of the uses of these 
elements is as an additive in 

175
00:11:10,600 --> 00:11:14,200
powerful magnets, where they 
enhance thermal stability, 

176
00:11:14,360 --> 00:11:17,200
allowing magnets to maintain 
their strength at high 

177
00:11:17,200 --> 00:11:20,640
temperatures and essential 
property in certain defence 

178
00:11:20,640 --> 00:11:25,480
applications, space applications
and in energy technologies. 

179
00:11:25,920 --> 00:11:29,360
The Chinese government has gone 
to great lengths to restrict the

180
00:11:29,360 --> 00:11:31,920
spread of technical expertise, 
too. 

181
00:11:32,240 --> 00:11:36,280
In 2023, they banned the export 
of railroad processing 

182
00:11:36,280 --> 00:11:39,400
technology, and according to 
reports from the Wall Street 

183
00:11:39,400 --> 00:11:42,880
Journal and Reuters, China's 
Ministry of Commerce began 

184
00:11:42,880 --> 00:11:47,400
requiring railroad firms to 
register technical staff and 

185
00:11:47,400 --> 00:11:50,520
collect their passports, 
effectively limiting their 

186
00:11:50,520 --> 00:11:54,240
ability to to travel abroad even
for personal reasons like 

187
00:11:54,240 --> 00:11:57,480
holidays. 
The policy targets workers 

188
00:11:57,480 --> 00:12:00,680
involved in rare earth 
processing and in magnet 

189
00:12:00,680 --> 00:12:04,040
manufacturing. 
The goal is to prevent leaks of 

190
00:12:04,040 --> 00:12:08,040
sensitive technical knowledge 
and maintain China's strategic 

191
00:12:08,040 --> 00:12:10,520
advantage in railroad 
technologies. 

192
00:12:10,840 --> 00:12:15,400
The licensing regime is opaque 
by design, giving China the 

193
00:12:15,400 --> 00:12:18,960
ability to exert pressure 
without the diplomatic cost of a

194
00:12:18,960 --> 00:12:22,400
formal embargo. 
China's use of rare earths as a 

195
00:12:22,400 --> 00:12:26,400
trade weapon is nothing new. 
In 2010, during a maritime 

196
00:12:26,400 --> 00:12:30,280
dispute with Japan, Beijing 
quietly cut off rare earth 

197
00:12:30,280 --> 00:12:32,600
exports to Japanese 
manufacturers. 

198
00:12:32,880 --> 00:12:35,320
The move caused immediate 
disruption. 

199
00:12:35,640 --> 00:12:39,000
Japanese firms, caught off 
guard, were forced to halt 

200
00:12:39,000 --> 00:12:42,360
production lines. 
The Japanese government caved in

201
00:12:42,360 --> 00:12:45,240
and released the Chinese 
fishermen that had been arrested

202
00:12:45,240 --> 00:12:49,280
as part of the dispute, and 
China resumed shipment shortly 

203
00:12:49,280 --> 00:12:52,160
after. 
The episode left a lasting 

204
00:12:52,160 --> 00:12:55,760
impression on Japanese firms, 
who had up until that point 

205
00:12:55,760 --> 00:12:59,040
relied on, just in time, 
manufacturing techniques. 

206
00:12:59,520 --> 00:13:04,000
Japan began stockpiling rare 
earths, investing in alternative

207
00:13:04,000 --> 00:13:07,640
sources, and redesigning 
products to reduce reliance on 

208
00:13:07,640 --> 00:13:10,800
Chinese materials. 
According to The Economist, 

209
00:13:11,000 --> 00:13:16,200
Japan's dependence on Chinese 
rare earths has fallen from 90% 

210
00:13:16,200 --> 00:13:22,320
in 2010 to around 60% today. 
Japanese auto manufacturers 

211
00:13:22,480 --> 00:13:26,120
developed electric motors for 
their hybrid cars that didn't 

212
00:13:26,120 --> 00:13:30,640
require rare earth magnets. 
The 2010 Japanese embargo 

213
00:13:30,640 --> 00:13:34,240
triggered a formal complaint at 
the World Trade Organization. 

214
00:13:34,480 --> 00:13:38,360
the United States, the European 
Union, and Japan jointly 

215
00:13:38,360 --> 00:13:40,800
challenged China's export 
restrictions. 

216
00:13:41,000 --> 00:13:45,920
In 2014, the WTO ruled against 
China, stating that it's 

217
00:13:45,920 --> 00:13:48,840
policies violated international 
trade rules. 

218
00:13:49,080 --> 00:13:53,280
Beijing agreed to to remove all 
quotas, but by then the message 

219
00:13:53,280 --> 00:13:56,160
had been delivered. 
China was willing to use its 

220
00:13:56,160 --> 00:13:59,360
control of rare earth as a 
geopolitical tool. 

221
00:13:59,880 --> 00:14:05,760
In 1987, China's former leader 
Deng Xiaoping famously said that

222
00:14:05,760 --> 00:14:09,040
while the Middle East has oil, 
China has rare earths, 

223
00:14:09,200 --> 00:14:12,320
foreshadowing China's 
willingness to use its leverage 

224
00:14:12,320 --> 00:14:14,840
over the supply chain of vital 
components. 

225
00:14:15,120 --> 00:14:19,520
In 2019, a week after the Trump 
administration had blacklisted 

226
00:14:19,520 --> 00:14:24,520
Huawei, Xi Jinping toured a rare
earth processor in China and 

227
00:14:24,520 --> 00:14:28,040
highlighted the importance of 
rare earths in global supply 

228
00:14:28,040 --> 00:14:31,040
chains. 
This was widely interpreted as a

229
00:14:31,040 --> 00:14:34,600
threat to restrict Chinese 
exports to the United States. 

230
00:14:34,880 --> 00:14:38,720
Chinese state media followed 
with editorials warning that 

231
00:14:38,720 --> 00:14:41,760
China could cut off supplies if 
pushed too far. 

232
00:14:42,000 --> 00:14:45,160
One headline read. 
Don't say we didn't warn you. 

233
00:14:45,960 --> 00:14:50,240
In Chinese political discourse, 
rare earths are often described 

234
00:14:50,240 --> 00:14:53,560
as being both a strategic 
resource and a national 

235
00:14:53,560 --> 00:14:56,240
treasure. 
The Financial Times has reported

236
00:14:56,240 --> 00:15:00,600
that Beijing views rare earths 
as both a sword and a shield, a 

237
00:15:00,600 --> 00:15:03,360
means of defense and a tool of 
coercion. 

238
00:15:03,640 --> 00:15:07,000
The term Assassin's Mace has 
also appeared in official 

239
00:15:07,000 --> 00:15:11,440
rhetoric referring to asymmetric
trade capabilities designed to 

240
00:15:11,440 --> 00:15:14,600
counter more technologically 
advanced adversaries. 

241
00:15:14,880 --> 00:15:18,400
These signals are not just for 
foreign audiences. 

242
00:15:18,640 --> 00:15:20,920
They serve a domestic purpose, 
too. 

243
00:15:21,200 --> 00:15:24,640
The trade war has allowed XI to 
frame China's economic 

244
00:15:24,640 --> 00:15:27,760
challenges as the result of 
foreign hostility. 

245
00:15:27,920 --> 00:15:31,400
This narrative has helped 
consolidate political support at

246
00:15:31,400 --> 00:15:34,760
home, even as the country 
grapples with deflation, a 

247
00:15:34,760 --> 00:15:37,160
property crisis and slowing 
growth. 

248
00:15:37,560 --> 00:15:41,200
Rare words in this context are 
more than a bargaining chip. 

249
00:15:41,400 --> 00:15:44,680
They're a symbol of national 
strength and a reminder that 

250
00:15:44,680 --> 00:15:47,520
China is prepared to fight on 
its own terms. 

251
00:15:48,040 --> 00:15:52,040
The railroad stand off may have 
started as a dispute between the

252
00:15:52,040 --> 00:15:56,120
United States and China, but its
effects have rippled far beyond 

253
00:15:56,120 --> 00:16:00,120
Washington and Beijing. 
Europe, India, Japan and other 

254
00:16:00,120 --> 00:16:03,040
manufacturing economies have 
found themselves caught in the 

255
00:16:03,040 --> 00:16:06,240
crossfire. 
In early October, the Dutch 

256
00:16:06,240 --> 00:16:09,640
government took temporary 
control of a Chinese owned chip 

257
00:16:09,640 --> 00:16:13,640
maker based in the Netherlands 
called Nexperia, citing 

258
00:16:13,640 --> 00:16:16,800
governance concerns and national
security risks. 

259
00:16:17,120 --> 00:16:20,640
The CEO was accused of 
misappropriating over $200 

260
00:16:20,640 --> 00:16:24,960
million of company funds to 
benefit another company he owned

261
00:16:24,960 --> 00:16:28,240
in China, and Dutch officials 
were concerned that the 

262
00:16:28,240 --> 00:16:31,680
companies operations and 
intellectual property were being

263
00:16:31,680 --> 00:16:35,520
shifted to China. 
And Experia's chips are widely 

264
00:16:35,520 --> 00:16:39,760
used across Europe's industrial 
base in cars, medical devices, 

265
00:16:39,760 --> 00:16:44,560
and defense systems. 
According to local reports, 49% 

266
00:16:44,560 --> 00:16:49,880
of European auto companies, 86% 
of medical device firms, and the

267
00:16:49,880 --> 00:16:53,400
entire European mechanical, 
engineering and defense sectors 

268
00:16:53,600 --> 00:16:58,600
rely on Nexperia's components. 
Since the dispute began, the 

269
00:16:58,600 --> 00:17:01,880
company is reported to have 
struggled to secure railroad 

270
00:17:01,880 --> 00:17:05,520
supplies from China, and the 
resulting shortages have started

271
00:17:05,520 --> 00:17:09,640
to affect production. 
China's control over rare earths

272
00:17:09,640 --> 00:17:12,520
is just one part of its broader 
trade strategy. 

273
00:17:12,800 --> 00:17:16,359
Over the past year, Beijing has 
been quietly stockpiling 

274
00:17:16,359 --> 00:17:20,480
industrial inputs, including 
oil, natural gas, iron ore, 

275
00:17:20,480 --> 00:17:24,520
bauxite, and copper, according 
to The Economist, these 

276
00:17:24,520 --> 00:17:29,600
purchases accelerated in early 
2024 in anticipation of a 

277
00:17:29,600 --> 00:17:33,000
possible Trump victory. 
Even as China's industrial 

278
00:17:33,000 --> 00:17:36,040
output slowed, metal imports 
surged. 

279
00:17:36,240 --> 00:17:40,560
The goal appears to be strategic
insulation to ensure that in the

280
00:17:40,560 --> 00:17:44,240
event of renewed trade 
hostilities, China can continue 

281
00:17:44,240 --> 00:17:47,840
to operate without relying too 
much on foreign suppliers. 

282
00:17:48,400 --> 00:17:53,440
This stockpiling strategy has 
cost large purchases, drive up 

283
00:17:53,440 --> 00:17:57,640
prices and tie up capital, but 
Beijing seems willing to absorb 

284
00:17:57,640 --> 00:18:00,440
these costs in exchange for 
greater resilience. 

285
00:18:00,720 --> 00:18:04,200
At the same time, China has been
diversifying its sources of 

286
00:18:04,200 --> 00:18:08,280
supply, buying oil and gas from 
Russia, investing in African 

287
00:18:08,280 --> 00:18:12,200
mining projects and building out
domestic refining capacity. 

288
00:18:12,840 --> 00:18:16,720
China's economy has been under 
strain for quite some time. 

289
00:18:17,000 --> 00:18:20,280
The property market is in a 
deep, prolonged slump, now 

290
00:18:20,280 --> 00:18:23,920
entering its fifth year. 
Deflation has taken hold, with 

291
00:18:23,920 --> 00:18:28,440
falling prices reflecting weak 
consumer demand and overcapacity

292
00:18:28,440 --> 00:18:32,120
in key sectors. 
Youth unemployment remains high,

293
00:18:32,320 --> 00:18:36,240
and business confidence has been
dented by regulatory crackdowns 

294
00:18:36,240 --> 00:18:40,960
and sluggish domestic spending. 
Despite these pressures, the 

295
00:18:40,960 --> 00:18:44,160
confrontation with the United 
States has strengthened XI 

296
00:18:44,160 --> 00:18:48,400
Jinping's position at home. 
The trade wars provided a 

297
00:18:48,400 --> 00:18:52,040
convenient external enemy. 
The narrative of foreign 

298
00:18:52,040 --> 00:18:55,920
encirclement has allowed the 
Communist Party to rally public 

299
00:18:55,920 --> 00:18:59,320
support and to justify tighter 
political control. 

300
00:18:59,560 --> 00:19:03,240
It's also reinforced Beijing's 
push for self-sufficiency, 

301
00:19:03,440 --> 00:19:08,160
expanded industrial policy, and 
accelerated efforts to reduce 

302
00:19:08,160 --> 00:19:11,040
reliance on foreign technology 
and materials. 

303
00:19:11,560 --> 00:19:15,440
China's confidence is not 
entirely unfounded either. 

304
00:19:15,680 --> 00:19:20,040
Its exports have remained strong
despite US tariffs, its stock 

305
00:19:20,040 --> 00:19:24,240
market has outperformed US 
indices in dollar adjusted terms

306
00:19:24,480 --> 00:19:29,040
and its domestic tech sector has
made visible progress, including

307
00:19:29,040 --> 00:19:31,760
the recent DeepSeek AI 
breakthrough. 

308
00:19:32,560 --> 00:19:36,360
Trump stocks in Malaysia, Japan 
and South Korea over the first 

309
00:19:36,360 --> 00:19:40,240
four days of his Asia trip were 
an exercise in flattering the 

310
00:19:40,240 --> 00:19:44,160
American president. 
South Korea gifted him a golden 

311
00:19:44,160 --> 00:19:47,440
crown and a medal. 
Japanese Prime Minister gave him

312
00:19:47,480 --> 00:19:51,680
a golden golf ball and told him 
that she had recommended him for

313
00:19:51,680 --> 00:19:55,040
a Nobel Prize. 
Trump's meeting with She was 

314
00:19:55,040 --> 00:19:58,760
described by the BBC as a 
meeting of equals on a global 

315
00:19:58,760 --> 00:20:02,720
stage where the stakes for both 
nations were enormous. 

316
00:20:03,480 --> 00:20:07,960
She felt no need to flatter 
Trump with gifts, military bands

317
00:20:07,960 --> 00:20:11,280
and honor guards. 
Beijing appears to believe it 

318
00:20:11,280 --> 00:20:14,840
can weather the trade war with 
the United States, and whether 

319
00:20:14,840 --> 00:20:18,600
that confidence is justified or 
not remains to be seen. 

320
00:20:18,840 --> 00:20:23,520
China's control over rare earth 
does give it leverage, but not 

321
00:20:23,520 --> 00:20:26,320
without limits. 
The global response to its 

322
00:20:26,320 --> 00:20:30,240
export restrictions has already 
begun to erode the foundations 

323
00:20:30,240 --> 00:20:33,560
of that dominance. 
Japan's experience after to the 

324
00:20:33,560 --> 00:20:37,800
2010 embargo is instructive. 
Caught off guard by the sudden 

325
00:20:37,800 --> 00:20:42,080
cut off, Japanese manufacturers 
rushed to redesign products to 

326
00:20:42,080 --> 00:20:44,400
reduce their reliance on rare 
earths. 

327
00:20:44,640 --> 00:20:48,560
The government invested in 
alternative sources and build up

328
00:20:48,560 --> 00:20:52,520
strategic reserves. 
Overtime, Japan's dependence on 

329
00:20:52,520 --> 00:20:56,560
Chinese railroads declined. 
The lesson was that supply 

330
00:20:56,560 --> 00:20:59,080
shocks create incentives to 
adapt. 

331
00:20:59,480 --> 00:21:03,240
That pattern is now repeating 
across Europe, North America, 

332
00:21:03,360 --> 00:21:06,880
America and parts of Asia. 
Companies are exploring ways to 

333
00:21:06,880 --> 00:21:10,440
reduce their exposure. 
Some are turning to recycling. 

334
00:21:10,640 --> 00:21:14,640
Others are redesigning electric 
motors to use fewer rare earths 

335
00:21:14,760 --> 00:21:18,640
or none at all. 
BMW and Renault, for example, 

336
00:21:18,760 --> 00:21:22,640
have developed electric vehicles
that rely on externally excited 

337
00:21:22,640 --> 00:21:25,640
motors rather than permanent 
magnet designs. 

338
00:21:26,320 --> 00:21:31,000
These motors are larger and more
complex, but they avoid the need

339
00:21:31,000 --> 00:21:34,920
for rarer magnets. 
German auto parts manufacturer 

340
00:21:34,920 --> 00:21:40,040
ZF Group have developed a magnet
free motor that matches the size

341
00:21:40,040 --> 00:21:43,960
and performance of traditional 
EV designs, and several 

342
00:21:43,960 --> 00:21:46,520
automakers are now exploring its
use. 

343
00:21:47,200 --> 00:21:51,160
Startups are also experimenting 
with new materials too. 

344
00:21:51,440 --> 00:21:55,760
Tetrateanide, a rare iron nickel
alloy once found only in 

345
00:21:55,760 --> 00:21:59,280
meteorites, can now be 
synthesized in the lab. 

346
00:21:59,600 --> 00:22:03,480
AUS based firm is now developing
magnets made from iron and 

347
00:22:03,480 --> 00:22:07,520
nitrogen, both of which are 
abundant and inexpensive. 

348
00:22:07,840 --> 00:22:11,640
These technologies are still 
experimental, but they point to 

349
00:22:11,640 --> 00:22:15,680
a future in which rare earths 
are no longer the only option. 

350
00:22:16,000 --> 00:22:19,800
Havior Blast, writing for 
Bloomberg, has argued that the 

351
00:22:19,800 --> 00:22:22,720
rare earths panic is totally 
overblown. 

352
00:22:23,000 --> 00:22:26,680
The total value of US imports of
rare earths from China is 

353
00:22:26,680 --> 00:22:31,200
relatively small, around $170 
million a year, and the 

354
00:22:31,200 --> 00:22:34,800
quantities used in military 
applications, he points out, are

355
00:22:34,800 --> 00:22:37,600
minimal. 
Blass argues that most rare 

356
00:22:37,600 --> 00:22:40,440
earths go into consumer products
like vacuum cleaners, 

357
00:22:40,440 --> 00:22:42,480
smartphones, and electric 
vehicles. 

358
00:22:42,720 --> 00:22:46,400
If prices rise, manufacturers 
will just have to adapt. 

359
00:22:46,640 --> 00:22:50,320
High price prices, as the saying
goes, are the best cure for high

360
00:22:50,320 --> 00:22:53,640
prices. 
Chinas dominance in this space 

361
00:22:53,640 --> 00:22:56,480
is real, but it's not 
unassailable. 

362
00:22:56,760 --> 00:23:00,560
The more aggressively China uses
rare earths as a weapon, the 

363
00:23:00,560 --> 00:23:03,520
more it encourages others to 
find alternatives. 

364
00:23:03,840 --> 00:23:07,560
The global response to Chinas 
railroads dominance has already 

365
00:23:07,560 --> 00:23:10,800
moved beyond rhetoric. 
Governments and companies are 

366
00:23:10,800 --> 00:23:15,040
now investing in alternatives, 
not just to diversify supply, 

367
00:23:15,200 --> 00:23:17,680
but to reduce dependence 
altogether. 

368
00:23:18,280 --> 00:23:21,760
Recycling is possibly the most 
promising solution. 

369
00:23:22,000 --> 00:23:26,280
While rare earths are not widely
recycled today, that's beginning

370
00:23:26,280 --> 00:23:29,160
to change. 
In France, a facility is being 

371
00:23:29,160 --> 00:23:33,960
built to process around 2000 
tons of magnets a year using 

372
00:23:33,960 --> 00:23:37,480
scrap from electric motors and 
manufacturing waste. 

373
00:23:38,040 --> 00:23:41,280
In Canada, a company is 
developing plants to recover 

374
00:23:41,280 --> 00:23:44,560
rare earths from E bikes, hard 
drives and other discarded 

375
00:23:44,560 --> 00:23:47,640
electronics. 
Apple, as I mentioned earlier, 

376
00:23:47,720 --> 00:23:51,840
has announced A partnership with
MP Materials to support rare 

377
00:23:51,840 --> 00:23:53,960
earth recycling at Mountain 
Pass. 

378
00:23:54,280 --> 00:23:58,280
These efforts are still small in
scale, but they represent a 

379
00:23:58,280 --> 00:24:02,920
shift in mindset from linear 
supply chains to circular ones. 

380
00:24:03,440 --> 00:24:07,240
Governments are also rethinking 
their approach to supply chain 

381
00:24:07,240 --> 00:24:10,120
security. 
Japan, as I mentioned earlier, 

382
00:24:10,240 --> 00:24:14,160
has built up strategic reserves 
and diversified it's suppliers. 

383
00:24:14,400 --> 00:24:19,760
In Frankfurt, a World War 2 era 
bunker now houses 300 tons of 

384
00:24:19,760 --> 00:24:23,120
rare earths stored by a private 
metals merchant. 

385
00:24:23,400 --> 00:24:26,760
Some of the material stored 
there is owned by manufacturers,

386
00:24:26,960 --> 00:24:30,640
but much of it is held by 
intermediaries who anticipate 

387
00:24:30,640 --> 00:24:34,280
future shortages. 
The Pentagons investment in MP 

388
00:24:34,280 --> 00:24:38,480
materials is part of a broader 
US effort to rebuild domestic 

389
00:24:38,480 --> 00:24:42,080
manufacturing, but so far 
progress has been slow. 

390
00:24:42,680 --> 00:24:46,400
The Just in Time model that 
defined global manufacturing for

391
00:24:46,400 --> 00:24:50,320
decades is now being reassessed.
Companies are beginning to 

392
00:24:50,320 --> 00:24:53,480
prioritize resilience over 
efficiency. 

393
00:24:53,760 --> 00:24:57,320
That means holding more 
inventory, building redundant 

394
00:24:57,320 --> 00:25:00,840
supply chains, and investing in 
technologies that reduce 

395
00:25:00,840 --> 00:25:05,640
exposure to geopolitical risk. 
Rare earths are now a strategic 

396
00:25:05,640 --> 00:25:09,080
variable, and the world is 
adjusting accordingly. 

397
00:25:09,800 --> 00:25:13,520
The announced agreement between 
Trump and she appears to have 

398
00:25:13,520 --> 00:25:17,040
paused the immediate crisis, but
it hasn't resolved the 

399
00:25:17,040 --> 00:25:20,680
underlying conflict. 
Rare earths remain a pressure 

400
00:25:20,680 --> 00:25:24,120
point, and they are a tool that 
China can deploy again with 

401
00:25:24,120 --> 00:25:27,520
little warning. 
The agreed deal is explicitly 

402
00:25:27,520 --> 00:25:31,600
temporary, with key provisions 
set to expire in a year. 

403
00:25:31,880 --> 00:25:35,440
None of the five prior meetings 
between Trump and she have 

404
00:25:35,440 --> 00:25:39,200
produced a lasting deal, and 
there's little reason to believe

405
00:25:39,200 --> 00:25:41,080
that this one will be any 
different. 

406
00:25:41,560 --> 00:25:45,520
Trump has already suggested that
it could be renegotiated 

407
00:25:45,520 --> 00:25:49,560
annually, raising the prospect 
of a permanent state of trade 

408
00:25:49,560 --> 00:25:53,120
uncertainty. 
The strategic logic behind 

409
00:25:53,120 --> 00:25:56,280
China's railroads policy is 
quite obvious. 

410
00:25:56,520 --> 00:26:00,560
For a relatively small loss in 
export revenue, Beijing can 

411
00:26:00,560 --> 00:26:03,920
inflict significant disruption 
on foreign industries. 

412
00:26:04,160 --> 00:26:07,480
The materials themselves are 
embedded in everything from 

413
00:26:07,480 --> 00:26:11,480
smartphones to satellites. 
Restricting their flow doesn't 

414
00:26:11,560 --> 00:26:15,200
just raise prices, it halts 
production, exposes 

415
00:26:15,200 --> 00:26:19,520
vulnerabilities, and forces 
uncomfortable political choices.

416
00:26:20,080 --> 00:26:23,680
The problem is that this 
strategy carries big risks. 

417
00:26:23,880 --> 00:26:27,320
The more China uses rare earths 
as leverage, the more it 

418
00:26:27,320 --> 00:26:31,640
encourages others to adapt. 
Substitution, recycling and 

419
00:26:31,640 --> 00:26:35,160
stockpiling are no longer 
theoretical responses. 

420
00:26:35,360 --> 00:26:37,680
They're active areas of 
investment. 

421
00:26:38,000 --> 00:26:40,800
Japan has already reduced its 
dependence. 

422
00:26:40,960 --> 00:26:43,600
Europe and in the United States 
are following suit. 

423
00:26:43,840 --> 00:26:46,920
If China is to think of 
railroads as it's Assassin's 

424
00:26:46,920 --> 00:26:50,080
maze, it has to be careful how 
it uses them. 

425
00:26:50,480 --> 00:26:54,840
This is quite a balancing act 
for China, as if they play this 

426
00:26:54,840 --> 00:26:58,560
hand too often it stops working,
and a small reduction in 

427
00:26:58,560 --> 00:27:02,400
dominance in this sector could 
reduce its negotiating power 

428
00:27:02,400 --> 00:27:06,080
disproportionately. 
The deeper structural issues 

429
00:27:06,080 --> 00:27:09,960
remain unresolved. 
China's industrial policy, it's 

430
00:27:09,960 --> 00:27:13,360
push for technological 
self-reliance, and its use of 

431
00:27:13,360 --> 00:27:17,240
trade as a geopolitical 
instrument are still in place. 

432
00:27:17,480 --> 00:27:21,600
the United States, for its part,
continues to wield tariffs and 

433
00:27:21,600 --> 00:27:24,560
export controls with little 
predictability. 

434
00:27:24,920 --> 00:27:28,800
The current truth might hold for
a few months, but the overall 

435
00:27:28,800 --> 00:27:33,400
relationship remains fragile and
the next disruption is only ever

436
00:27:33,400 --> 00:27:37,320
one political decision away. 
Thanks for tuning into this 

437
00:27:37,320 --> 00:27:40,440
week's podcast, with special 
thanks to my supporters on 

438
00:27:40,440 --> 00:27:44,080
Patreon whose donations make 
this podcast work. 

439
00:27:44,240 --> 00:27:47,560
If you'd like to support the 
podcast, I've left a link in the

440
00:27:47,560 --> 00:27:49,920
show notes. 
Have a great week and talk to 

441
00:27:49,920 --> 00:27:51,440
you again soon. 
Bye.