[Source: Reuters]

China has signalled for more than 15 years that it was looking to weaponise areas of the global supply chain, a strategy modelled on longstanding American export controls that Beijing views as aimed at stalling its rise.

The scramble in recent weeks to secure export licences for rare earths, capped by Thursday’s telephone call between U.S. and Chinese leaders Donald Trump and Xi Jinping, shows China has devised a better, more precisely targeted weapon for a trade war.

Industry executives and analysts say that while China is showing signs of approving more exports of the key elements, it will not dismantle its new system.

Modelled on the United States’ own, Beijing’s export licence system gives it unprecedented insight into supplier chokepoints in areas ranging from motors for electric vehicles to flight-control systems for guided missiles.

“China originally took inspiration for these export control methods from the comprehensive U.S. sanctions regime,” said Zhu Junwei, a scholar at the Grandview Institution, a Beijing-based think tank focused on international relations.

“China has been trying to build its own export control systems since then, to be used as a last resort.”

After Thursday’s call, Trump said both leaders had been “straightening out some of the points, having to do mostly with rare earth magnets and some other things”.

He did not say whether China committed to speeding up licences for exports of rare earth magnets, after Washington curbed exports of chip design software and jet engines to Beijing in response to its perceived slow-rolling on licences.

China holds a near-monopoly on rare earth magnets, a crucial component in EV motors.

In April, it added some of the most sophisticated types to an export control list in its trade war with the United States, forcing all exporters to apply to Beijing for licences.

That put a once-obscure department of China’s commerce ministry, with a staff of about 60, in charge of a chokepoint for global manufacturing.

The ministry did not immediately respond to Reuters’ questions sent by fax.

Several European auto suppliers shut down production lines this week after running out of supplies.

While China’s April curbs coincided with a broader package of retaliation against Washington’s tariffs, the measures apply globally.

“Beijing has a degree of plausible deniability – no one can prove China is doing this on purpose,” said Noah Barkin, senior adviser at Rhodium Group, a China-focused U.S. thinktank.

“But the rate of approvals is a pretty clear signal that China is sending a message, exerting pressure to prevent trade negotiations with the U.S. leading to additional technology control.”

China mines about 70% of the world’s rare earths but has a virtual monopoly on refining and processing.

Even if the pace of export approvals quickens as Trump suggested, the new system gives Beijing unprecedented glimpses of how companies in a supply chain deploy the rare earths it processes, European and U.S. executives have warned.

Other governments are denied that insight because of the complexity of supply chain operations.

For example, hundreds of Japanese suppliers are believed to need China to approve export licences for rare earth magnets in coming weeks to avert production disruptions, said a person who has lobbied on their behalf with Beijing.

“It’s sharpening China’s scalpel,” said a U.S.-based executive at a company seeking to piece together an alternative supply chain who sought anonymity.

“It’s not a way to oversee the export of magnets, but a way to gain influence and advantage over America.”

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