New Delhi: Supply chain resilience, economic diversification and de-risking — these are the buzzwords that world leaders are using as they look to shore up their supply chains and guard against weaponisation of trade.
Whether the G7 communique on 20 May, the supply chain negotiations by the Indo-Pacific Economic Framework for Prosperity on 28 May or the Indo-US joint statement on 22 June, leaders have been making statements about making their supply chains more resilient, efficient and transparent.
And then, on 22 June, the US announced India’s membership to the Mineral Security Partnership (MSP) — an ambitious initiative on critical minerals that are crucial for modern technology.
Experts ThePrint spoke to say these actions have gained momentum mainly due to the supply chain disruptions caused by Covid-19 and the weaponisation of trade by countries that control such chains.
One such country, according to these experts, is China, which has a monopoly over rare earth elements (REEs). A group of 15 elements in the periodic table known as the Lanthanide series, REEs are crucial to many emerging technologies and have not only civil but also military applications.
China is home to 35 percent of REE reserves.
“China has, in the past, weaponised its leverage on supply chains to make countries toe their line,” Sriparna Pathak, an associate professor of China Studies at the O.P. Jindal Global University, said. “In 2010, during the Senkaku Islands dispute with Japan, China withheld the export of rare earth minerals, thereby impacting Japan’s high-tech production lines.”
She was referring to a diplomatic standoff in September 2010, when the Japanese government detained the captain of a Chinese fishing trawler after his vessel collided with two Japanese coast guard boats when he was trying to fish in waters that are controlled by Japan but claimed by China, according to a report in The New York Times on 10 September, 2010. In response, the Chinese government blocked the exports of REEs — imperative for the production of “hybrid vehicles, wind turbines and guided missiles”, the report said.
This discussion is particularly significant in light of a more recent development — on 1 July, a Chinese law on foreign relations giving the government legal backing to take “restrictive measures against acts that endanger its sovereignty, national security and development interests” came into effect.
“The Law on Foreign Relations gives the Chinese government a legal framework for retaliatory policies, including weaponisation of trade,” Gunjan Singh, an assistant professor at the O.P. Jindal Global University who specialises in Chinese foreign policy, told ThePrint.
But what is weaponisation of trade? And what does the “economic resilience of supply chains”mean? Here’s a breakdown.
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Weaponisation of trade
According to Singh, weaponisation of trade has always been Beijing’s default trade policy.
Weaponisation of trade occurs when a country uses its trade leverage over another nation and coerces the other country to take actions for a specific outcome.
“Once China has any [trade] leverage over a country, it expects that country to toe its political line. For example, (in 2021) Lithuania faced Chinese economic sanctions due to the announcement that it would host a Taiwanese Representative Office. Australia, Mongolia and Japan are a few other countries that have faced economic retaliation from China,” said Pathak.
In a research paper published in 2018 for IndraStra Global, a US-based strategic services company, she highlighted how, in 2016, China imposed punitive fees on Mongolia for commodity exports in response to the latter hosting the Dalai Lama, whose spiritual authority over Tibet is not recognised by Beijing.
In 2022, China blocked the imports of citrus, fish and other foods from Taiwan — which the former refuses to recognise as a sovereign nation — in retaliation for a visit there by the then Speaker of the US House of Representatives, Nancy Pelosi.
In 2020, Beijing banned the import of wine, barley, timber, coal and lobsters from Australia, in response to Canberra’s call for an inquiry into the origins of the Covid-19 pandemic, according to The Economist.
Countries also use non-tariff measures to weaponise trade in other countries.
For instance, Chinese rules made exports of Indian basmati rice difficult despite a 2016 agreement, although exports from Pakistan continued uninterrupted, Pathak said.
On 3 July 2023, the Chinese government also curbed the export of gallium and germanium — two critical minerals that are used in the production of semiconductors and military equipment. This, according to the BBC, was done in retaliation to the US’ efforts to curb China’s access to some advanced microprocessors.
There has been a growing push to move away from the US dollar for trade, and if there’s one country that stands to gain from this, it’s China. According to Pathak, the push for de-dollarisation and the internationalisation of the renminbi yuan would increase the country’s economic influence and “thereby increase its leverage for the weaponisation of trade”.
But there’s also been global pushback.
In a statement issued this May, the Quad countries — India, Australia, Japan and the US — outlined their vision for a world free from “coercion” where countries can “determine their futures”.
The statement came on the sidelines of a G7 meeting, which also said in a statement that it would oppose “any unilateral attempt to change the status quo by force or coercion”.
The G7 members are Canada, France, Germany, Italy, Japan, the UK and the US.
Economic diversification
One way to combat weaponisation of trade, according to experts, is to create alternative supply chains. “One of the collaborative approaches to this is the Mineral Security Partnership (MSP), for example,” said Pathak.
The MSP comprises 13 members — India, Australia, Canada, Finland, France, Germany, Italy, Japan, the Republic of Korea (South Korea), Sweden, UK, US, and the European Union (EU). Its goal, according to a media note published by the US Department of State, is “to ensure that critical minerals are produced, processed, and recycled in a manner that supports the ability of countries to realise the full economic development benefit of their geological endowments”.
Among the various uses that critical minerals and REEs are put to is semiconductors.
“Semiconductors are important for any industry that uses microchips,” Group Captain Ajey Lele (Retd), a former Indian Air Force officer and a consultant with the Manohar Parrikar Institute for Defence Studies and Analyses, told ThePrint.
According to Pathak, 70 percent of global extraction, production and supply of RREs and critical minerals comes from China.
“China is lucky because nature has given it an abundance of rare earth minerals. Moreover, the Chinese government has invested heavily in the production and development facilities of these critical minerals,” Lele added.
While almost every country has some quantities of rare earth minerals, they are not always in extractable quantities, Pathak said. It’s here that the scramble to make alternative supply chains becomes clearer.
“The break in supply chains during Covid-19 and the threat of China flexing its control over the supply chains of rare earth minerals has forced countries to look at alternatives, especially as they are critical for the development of technology,” said Gunjan Singh.
Also Read: Australia, India to seek closer economic ties, critical minerals cooperation
Fragmentation of global trade
Like China, countries cite national security concerns to justify blanket protections against trade. According to experts, there’s also a growing trend of nationalism and anti-globalisation among countries.
But such measures are not always economically sound. Instead,
Biswajit Nag, a professor of economics at Indian Institute of Foreign Trade, suggests that countries should have to draw up a list of 5-10 products that are critical for national security.
“Measures against 8,000 products from any one country raises the costs of the product and reduces global trade,” he added.
As part of India’s G20 presidency, Nag, along with trade economist Mia Mikic and trade policy expert Sherry Stephenson, published a paper highlighting how ‘friend-shoring’, a growing trade practice where supply chain networks are focused on countries regarded as political and economic allies, could negatively impact global trade and thereby be counterproductive to its stated aims.
Published by the Observer Research Foundation in June as part of Think20, an official engagement group of the G20, the paper questioned the economic costs of ‘friend-shoring’ and how such a policy would further reduce the legitimacy of multilateral trading institutions such as the World Trade Organization.
“The understanding of the term ‘supply-chain resilience’ is getting mixed up with the politics and policies under national security,” Nag added.
(Edited by Uttara Ramaswamy)
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