US-China trade war sideswipes Europe’s carmakers

Donald Trump's trade war against China is dragging in an unexpected victim: Europe's car industry.

The back-and-forth retaliation between Washington and Beijing has prompted China to halt exports of key raw materials. That's forcing some production lines in Europe to close as they run out of rare earth magnets used in everything from brakes to power steering in electric and traditional combustion engine vehicles.

They are also used in a vast range of industries, including defense.

"Supply chains are running empty, and the risk is significantly increasing by the day, by the hour," said Mathias Zink, CEO of German auto supplier Schaeffler.

In April, Beijing imposed export controls on seven rare earth minerals.

While the move was a response to tariffs imposed by the U.S. president, the controls apply to all countries and require firms to apply for a license for each shipment.

Each application takes a month or longer to process, forcing bigger companies like Schaeffler to air-freight the magnets to Europe and other markets instead of waiting the four to six weeks for a container ship to arrive.

But that comes at a considerable cost — a fivefold increase by Zink's estimate — and is an option that excludes small and medium-sized suppliers.

The applications also require an inordinate amount of paperwork from companies, including proprietary information.

"We have a very strong Chinese operation. But even for us, it's an unprecedented effort on documentation," Zink said.

Yet China did not have to impose the export controls across the board and could have limited the measure to a single country, as Beijing did in 2010 when it stopped exporting all rare earth minerals to Japan over a territorial dispute.

By going global, it intentionally targeted Europe, said Juliana Bouchaud, a senior analyst at the Rhodium Group.

Its leverage and retaliation against the EU for its various trade investigations, such as the one on made-in-China EVs, led to new duties of up to 35 percent and market-access restrictions on things like medical device makers, Bouchaud said.

Those disputes won't end anytime soon, particularly in the run-up to an EU-China summit in July where Beijing is expected to press Brussels to make a deal.

The materials are also used in defense products, and Beijing justifies its ban by saying it needs to safeguard its national security.

The export controls are meant to keep Brussels from cozying up to the Trump administration as the EU looks to make a deal after the mercurial president slapped the bloc with 50 percent tariffs.

"This is China's way of building pressure to avoid any alignment with the U.S.," said Bouchard. "It's a pretty powerful lever that's triggered a lot of concern in Europe."

EU trade chief Maroš Šefčovič raised the "alarming situation" with his Chinese counterpart Weng Wentao during a meeting in Paris this week.

"We are working hard to drive progress ahead of the leaders' summit in July, which I trust will create fresh momentum to reshape our economic and trade relations," he said during his opening speech at the Brussels Economic Security Forum summit.

The summit coincided with an announcement of 13 projects selected as part of the EU's Critical Raw Materials Act, which is meant to reduce the bloc's dependency on China. No more than 65 percent of some raw materials can come from a single country under the law.

“Export bans obviously do tend to strengthen our will to diversify further,” said Industry Commissioner Stéphane Séjourné.

That does little to help the sector now, however. China controls 90 percent of the rare earth mineral market, leaving suppliers and automakers at Beijing's mercy.