MNI: Rare Earths Deadlock As EU Elevates China Economic Risk

Talks between the European Union and China to loosen restrictions on rare earth exports are making little progress, policy advisors in Beijing told MNI, as EU officials said Brussels has decided to elevate the danger posed by China to its key industries to a fixed subject for discussion at regular meetings of the bloc’s finance ministers.

While technical-level talks continue between the two sides, China has made only limited concessions to the EU, which also hopes to move towards derisking its supply-chain exposure to the Asian giant. China is not currently prioritising a drive for the EU to lower tariffs imposed on its electric vehicles, but advisors told MNI that more access to rare earths was only likely to come in return for further opening of European markets.

The EU needs to make concessions such as reducing restrictions on Chinese investment, especially those targeting state-owned enterprises, and lifting sanctions on Chinese companies and products in return for rare earths exports for civilian purposes, a former Chinese official said. Chinese advisors noted also that the EU has fewer mechanisms for applying pressure on Beijing than the U.S., and pointed to China’s stance on the Russia-Ukraine war as another impediment to a deal.

The Netherlands on Wednesday suspended an order that gave it powers over Chinese-owned semiconductor manufacturer Nexperia, a move which it had taken following U.S. warnings the company could be put on a trade blacklist and which prompted Bejing to block chip supplies to automotive makers. (See MNI INTERVIEW: China To Seek Long-Term US Deal -Senior Advisor)

China’s Ministry of Commerce welcomed the Dutch move, but said it was “still a long way from a complete resolution.”

An EU source noted that the Dutch had in practical terms backed down.

“Formally, suspension is not final, but for the Dutch it was face saving and the Chinese have accepted it. The reading of China’s statement is a warning for future,” the source said.

RARE EARTHS HOPE

Another EU official told MNI that the European Commission still expects an agreement on rare earths, but added that Brussels is also preparing for a negative scenario, with possible counter-measures targeting such areas as aviation parts, older deep ultra-violet lithography machines and specialty steels.

At the same time, last week’s eurozone finance minister meeting agreed to elevate the China trade threat to a "structural" item in their regular monthly discussions on the economic situation, with Italian Finance Minister Giancarlo Giorgetti in particular stressing damage done to the automotive and other industries, EU officials said.

The ministers also called on the European Commission to provide the Eurogroup with a report twice a year on trade with China.

"It was a big change from just a few quarters ago when there was much greater reluctance to talk about industrial policy and what to do about the China threat,” one official said.

Despite the opposition by the European Parliament to a Comprehensive Agreement on Investment in 2021, both China and the EU still have incentives to restart trade and investment talks, said Zhao Yongsheng, a research fellow of the Institute of Regional and International Studies at the University of International Business and Economics.

The EU needs Chinese capital and technology not only in the area of electric vehicles, but also to renew its traditional and tech-based infrastructures, Zhao said.