The Association of China Rare Earth Industry, which represents almost 300 miners, processors and manufacturers, issued a statement yesterday, citing an August 5 meeting. “US consumers must shoulder the cost from US-imposed tariffs,” the association said.

China’s rare earth producers, who control the lion’s share of the world’s output of the elements, said they are ready to use their dominance of the industry as a weapon in the country’s year long trade war with their customers in the United States.

Chinese producers will pass any tariffs on their exports to customers, in a move that would almost certainly add to the cost of the magnets, motors, light-emitting diodes and hundreds of other devices, according to an industry guild that represents almost 300 miners, processors and manufacturers of rare earth-based products.

The industry “resolutely supports the nation’s counter measures against US import tariffs on Chinese products,” the Association of China Rare Earth Industry said in a statement yesterday citing the consensus from an August 5 meeting. “US consumers must shoulder the costs from US-imposed tariffs.”

The statement by the state-dominated industry is the clearest sign that China is ready to turn its rare earth deposits into a trade weapon, after a year of negotiations to untangle a complex web of tit-for-tat tariffs ended in impasse.

US President Donald Trump upped the ante on August 1 when he tweeted that he would slap a 10 per cent tariff on US$300 billion of Chinese products effective September 1, excluding rare earths.

China produces over 80 per cent of the world’s rare earths, and a major portion of processed products that are found in most smartphones, electric vehicles, wind turbines and military equipment from radars to sensors.

The US imports most of the rare earths it uses from China. Washington DC last year put Chinese rare earth materials on its proposed product list for tariffs but later took them out.

This isn’t the first attempt by Chinese producers to turn their industry dominance into a trade or diplomatic weapon.

China banned exports to Japan after a 2010 territorial dispute, which resulted in a complaint to the World Trade Organisation (WTO) and a push by Japanese industry to develop substitutes and alternatives, ultimately hurting Chinese producers.

“The second round of nationwide environmental compliance inspection has already started, posing a big test for miners and processors,” Citic Securities chief cyclical industries analyst Ao Chung said in a report on Monday.

“The rise in compliance costs could further squeeze out non-compliant capacities, tightening rare earth supply.”

This could result in higher product prices, benefiting companies that are in compliance, Chung noted, adding the prospect of more US tariffs raises the urgency of more policies favourable to the rare earth industry.

The statement by the rare earth guild weighed on the stock prices of producers, even as the China and Hong Kong equity markets advanced amid stronger trade data.

China Rare Earth Holdings fell by as much as 3.6 per cent in an advancing market to HK$0.53 in Hong Kong. China Minmetals Rare Earth fell by as much as 5.7 per cent in Shenzhen to 14.80 yuan while China Northern Rare Earth Group (600111 CH) declined 3.9 per cent to 11.83 yuan in Shanghai.

In view of the trade war with the US, Chinese producers should also diversify their exports and actively participate in opportunities stemming from Beijing’s Belt and Road Initiative, the industry guild said.

The BRI aims to foster closer economic partnerships with Southeast, South and Central Asia, the Middle East, Africa and Europe, initially through infrastructure construction.

The industry body emphasised that its members need to continue to push for “supply side structural reform and better serve the domestic market” so as to maintain China’s lead in the global rare earth industry.

The reform refers to the elimination of inefficient, outdated and environmentally damaging mining and processing methods.

To make it easier to achieve this, Beijing in recent years has forced the previously fragmented industry to consolidate into six groups led by state owned companies.