China's Changing Economic Leverage


"REE export ban suggests Beijing's using trade muscle in troubling new ways."

Beijing's decision earlier this year to stop shipments of rare earth elements (REEs) to Japan as part of 'a territorial dispute' raised concerns about the strategic implications of China's growing economic strength. Until now, Beijing has worked hard to separate economics from politics on the world stage as part of a strategy to minimize global unease with its rise. That it is now willing to use an economic lever in a political matter suggests that approach is changing in ways that could cause trouble for the rest of the world and China itself.

While China has manipulated trade flows for strategic aims in the past, this episode contains some troubling new elements. . .the rare earth case is different from earlier instances in three critical ways:
  1. The incident demonstrates Beijing's list of "core national interests" does not remain fixed. Many experts would now agree that the South China Sea has joined the core-interest list. After the Senkaku incident, the international community is asked to accept those islands as yet another core interest. Some recent Chinese news articles suggest the Korean peninsula could also become a "core interest."

  2. REE embargo much more aggressive than any economic sanctions China's employed to date. There's no way Tokyo could have predicted that a territorial dispute over some islands would lead to a cutoff of strategic metal supply to Japan.óboth the cause of the sanctions and scale of Beijing's response are surprising.

  3. The REE dispute is the first time Chinese sanctions have generated a significant level of countermoves from major trading partners to weaken China's economic leverage over them. This suggests that China's new strategy could lead to trade wars in a way that earlier economic responses never did.
The effects of China's attitude shift toward economic sanctions may not be evident immediately, but they should raise some serious questions on both sides moving forward.

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