'Don't say we didn't warn you!': China threatens its trade war 'nuclear option'

Beijing has dropped a bombshell in its escalating trade war with the United States. With one shot, it could shoot-down the entire F-35 stealth fighter production program. It could cripple Silicon Valley. It could send Apple into administration.

"United States, don't underestimate China's ability to strike back," the official mouthpiece of the ruling Chinese Communist Party, the People's Daily , writes.

And it's all about dirt.

President Donald Trump speaks to US servicemen at US Navy multipurpose amphibious assault ship USS Wasp at the US Navy's Yokosuka base in Yokosuka, south of Tokyo. Photo / AP

China has, by far, the worlds' greatest reserves of rare earths — the mineral sands that contain the exotic elements crucial in much high-performance modern technology.

Circuit boards. Batteries. Sensors. Thrusters. All need metals of specific conductivity, heat resistance, weight, strength …

"Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery," the People's Daily declared rhetorically. "Don't say we didn't warn you!"

And the threat, which economic analysts are calling Beijing's 'nuclear option', is very real.

BEIJING'S 'NUCLEAR' OPTION

The equally nationalistic Chinese newspaper Global T imes warned that China has plenty of ways to retaliate against the US, including the threat of cutting off supplies of rare earths.

Rare earths are a group of 17 chemical elements which have properties key for the production of everything from satellites to jet engines.

China last year produced 78 per cent of the world's rare earths, according to researchers at Bank of America Merrill Lynch. The US relies upon it for up to 80 per cent of its imports.

The threat to use China's rich supply as leverage in the conflict has contributed to sharp losses in US stocks and sliding long-term bond yields.

But the impact of such an export freeze would have military as well as economic implications.

"Rare earths are essential to the production, sustainment, and operation of US military equipment," a 2016 US Government Accountability Office report detailed. "Reliable access to the necessary material, regardless of the overall level of defence demand, is a bedrock requirement for DOD."

An Arleigh Burke-class guided-missile destroyer needs 2500kg of rare earths for its construction. A Virginia-class nuclear-powered attack submarine needs 4200kg. Photo / Getty Images

An Arleigh Burke-class guided-missile destroyer needs 2500kg of rare earths for its construction. A Virginia-class nuclear-powered attack submarine needs 4200kg. Each F-35 Stealth Fighter built consumes some 400kg.

Little wonder that, today, the Pentagon sent a report to the White House and Congress asking for an urgent examination of the increased production of such minerals within US borders to reduce dependence on China.

"If the US fails to exercise restraint, it will see that "China is far from running out of cards, and we have the will and determination to fight the US to the end," the paper's editorial said.

An official of China's top economic planning agency did not rule out using rare earths as a countermeasure against "the US's unwarranted suppression."

President Xi Jinping visited rare earth-related businesses in southeastern Jiangxi province earlier this month. He called rare earths "an important strategic resource" while stressing the importance of owning independent core technologies, the state-run China Daily reported.

China has used rare earths as a cudgel before. Five years ago, the World Trade Organisation slapped down China's attempt to restrict the export of rare earths, rejecting its claim that it just wanted to protect the environment and conserve supplies. Instead, the move appeared to be aimed at hurting Japan with which Beijing was having a diplomatic tiff.

MINERAL MISFIRE?

"The US side wants to use the products made by China's exported rare earths to counter and suppress China's development," the People's Daily declared earlier this week. "The Chinese people will never accept this!"

The threat to use China's rich supply as leverage in the conflict has contributed to sharp losses in US stocks and sliding long-term bond yields. Photo / 123RF

But Scott Kennedy, director of the project on the Chinese economy at the Center for Strategic and International Studies, said the Chinese may end up harming their own interests if they try to weaponize rare earths again.

First, users of rare earths have stockpiled the minerals for a "rainy day."

Second, they also have figured out how to "use less rare earth to achieve the same results" in such products as lasers and magnets.

And third, different minerals and chemicals are increasingly being used as rare earth substitutes.

Chinese President Xi Jinping waves as he leaves after a news conference on the outskirts of Beijing. Photo / AP

Kennedy predicts that once investors have "realised the threat wasn't as dire, markets would bounce back."

Still, he isn't optimistic about the U.S.-China trade negotiations, which broke off May 10 after an 11th round of talks failed toproduce an agreement. US officials accused the Chinese of reneging on agreements they'd made in earlier rounds.

TRADING BLOWS

For months, the world's two biggest economies have been locked in a standoff over allegations that China deploys predatory tactics — including stealing trade secrets and forcing foreign companies to hand over technology — in a drive to supplant US technological dominance.

The Trump administration has imposed 25 per cent tariffs on $US250 billion in Chinese imports and is planning to tax the $US300 billion in imports that have so far been spared. And it escalated the stakes this month by putting the Chinese telecom giant Huawei on a blacklist that effectively bars US companies from supplying it with computer chips, software and other components without government approval.

The US argues Huawei is legally beholden to China's ruling Communist Party, which could order it to spy on their behalf. Washington has offered no evidence that the Huawei has done that, however.

The trade spat, however, shows no sign of lessening.

"The Chinese first are going to have to signal they will talk," Mr Kennedy said. Then they will have to go back to where they stood before they back-pedaled on earlier concessions. "I don't see any body language from the Chinese that they're about to do that," Kennedy said.