New weapons of the trade war. Chinese state media was rife with warnings on Wednesday that Beijing may retaliate against U.S. moves to restrict tech exports by trying to exploit U.S. dependency on rare earth minerals mined and processed in China. This came a day after a spokesman for the National Development and Reform Commission, China’s state planner, made a similar threat. Some 80 percent of U.S. imports of rare earth metals like scandium and yttrium – which are critical to myriad high-tech electronics, industrial and military applications – come from China, which is home to around one-third of the world’s reserves and currently accounts for around 90 percent of global supply. As we’ve written before, this would be only a short-term weapon for China, and a risky one at that. Rare earths aren’t really all that rare; China has just come to dominate supply by, among other things, undercutting competitors on price. If China cuts off the U.S. (like it briefly did Japan in 2010), shuttered mining and processing operations elsewhere will become more viable. The market will eventually adjust, and China will end up worse off. Still, the process of spinning up production at wide enough scale to offset Chinese supplies could take years, and the metals will likely remain more expensive even then. In other words, a Chinese ban would be highly disruptive and costly. With Beijing generally short on leverage on trade and tech – and with growing Chinese domestic demand expected to lead to the diversification of global supplies in the coming years anyway – it makes sense to play this card now.
Cooperation in the Indo-Pacific. In an effort to counter China’s growing influence in the Indo-Pacific, India, Japan and Sri Lanka announced that they will work to together to expand the Port of Colombo. The project will involve increasing the port’s container volume and building a facility that will allow larger container ships to enter. The Port of Colombo sits on Sri Lanka’s western coast, while the Port of Hambantota, a key part of China’s Belt and Road Initiative, is on the south coast. Japan and India have been increasing maritime and naval cooperation recently to limit Chinese expansion through the Indian Ocean, conducting joint naval exercises last week in the Andaman Sea. Pakistan, too, appears to be increasing its focus on Indian Ocean naval capabilities. Its Senate Standing Committee on Defense Production said on Monday that the Gwadar port, in which China is investing heavily as part of its BRI project, would be an ideal location to build a modern shipyard, identifying 750 acres of land where it could be developed. China is also seeking additional security guarantees from Pakistan for its infrastructure projects following terror attacks that occurred there two weeks ago.
Joblessness rises. For the first time in more than five years, Germany’s monthly unemployment rate rose in May. The increase of 60,000 unemployed people was enough to push the official unemployment rate to 5 percent from 4.9 percent, but roughly two-thirds of that was due to a reclassification of some people in the stats. As a result, it’s probably too soon to sound the alarm, but combined with Tuesday’s GfK survey showing a drop in consumer confidence and the Ifo Institute’s finding last week that business sentiment was at its lowest level since 2014, it’s worth monitoring.
Italy asks for help. Italian Deputy Prime Minister Matteo Salvini has called on the European Central Bank to guarantee Italian government debt to keep bond yields low. Of course, as the third-largest economy in the European Union and the second-most heavily indebted, it’s highly unlikely that the ECB would be willing to make such a move to lighten Italy’s load, especially as the country’s budget deficit has already come under EU scrutiny. It’s also a request that’s unlikely to inspire much confidence in the Italian economy.
Washington opens the door to Eritrea. The United States has removed Eritrea from its list of countries that don’t fully cooperate with U.S. counterterror efforts, further paving the way for improved ties between Eritrea and the rest of the world. Last year, Eritrea signed a peace agreement with Ethiopia, a country with which it fought a bloody war two decades ago. The warming of relations between the two countries opens the door for more external investment along Eritrea’s coast as countries look for alternative bases to the increasingly overcrowded ports in Djibouti.
- Russia’s Foreign Ministry summoned the Spanish ambassador to Moscow after acting Spanish Foreign Minister Josep Borrell called Russia an “old enemy.”
- French Foreign Minister Jean-Yves Le Drian told G5 Sahel countries (Burkina Faso, Chad, Mali, Mauritania and Niger) that France does not plan to keep troops permanently in Africa – France intervened in Mali in 2013 – and that local forces must assume more responsibility in security operations.
- The European Commission recommended the start of accession talks with Albania and North Macedonia. The decision requires the unanimous support of EU governments, however, and France and others are expected to block any effort to move forward at next month’s EU summit.
- Australian naval pilots flying in the South China Sea were hit by lasers and forced to land. Reportedly, the lasers came from fishing boats, but given China’s history of using non-military vessels as a sort of naval militia, it’s possible that the interference was coordinated. China denies any involvement.
- The People’s Bank of China injected $21.7 billion in short-term liquidity into the Chinese banking system to help mollify concerns about a potential credit crunch.
- Papua New Guinea’s prime minister, Peter O’Neill, has stepped down.
- A Swiss business school and think tank, the International Institute for Management and Development, named Saudi Arabia the most-improved environment for business competition in the world in 2018. Saudi Arabia rose 13 places in the school’s rankings, placing it at 26.
- The Taliban and Russia issued a joint statement calling on U.S. forces to leave Afghanistan before a peace deal can be reached.
- Colombia deployed 1,000 troops to Antioquia, Cordoba and Choco departments, which have seen a spike in fighting between drug groups and rebels.
- Turkey is conducting new operations in northern Iraq to try to cut communication and supply channels between Kurdistan Workers’ Party forces in northeastern Syria and Iraq.
- Portugal will become the first eurozone country to issue bonds on China’s bond market.