China and the World

Missile attack

US defence giant may face China rare earths ban


Lockheed: sanctioned by Beijing

It says something about the strained mood in Sino-US relations that discussion of how to deploy the US military in defence of Taiwan is no longer limited to obscure military journals.

Even the business press thinks that it’s worth debating, with Forbes magazine running a series this month on what might happen in a confrontation between the two countries over the Taiwan Strait.

One of the articles concentrates on the crucial role of Taiwanese troops on Penghu (an archipelago 30 miles west from the main island) in resisting the mainland Chinese invasion for long enough to allow American bombers to strike back.

Another makes the point that the People’s Liberation Army will be fighting at a disadvantage to its opponent because its airforce lacks mid-air refuelling capacity, surrendering large parts of the region’s skies to American planes.

Tensions over Taiwan were reverberating through China’s foreign ministry again last week, when it announced sanctions against American giant Lockheed Martin for its role in a $620 million upgrade of a Taiwanese missile system that has just been approved in Washington.

“To safeguard the country’s interests, China has decided to take necessary steps and put sanctions on the main contractor for this sale, Lockheed Martin,” a spokesman said.

But is that a signal that Beijing is going to take a more aggressive stance towards companies that do business with the Taiwanese in ways that it dislikes? Not necessarily. Commentary on Lockheed’s case has highlighted that there isn’t any mention of the form that the sanctions might take. Additionally, Lockheed doesn’t do much business in China and the only Chinese-owned firm in its supply chain is easily replaced. That adds to speculation that Beijing has picked it out for censure because it is a less likely candidate to trigger a fuller row with Washington.

The sanctions may be meant more as a warning to others to avoid doing business with Taiwan in a similar manner. Yet previous threats to sanction companies like General Dynamics and Honeywell for arms sales to Taiwan don’t seem to have been acted on.

Ten years ago Boeing also took a broadside from Beijing for selling defence-related equipment to the Taiwanese. But there was no block on sales of Boeing’s planes and parts to Chinese airlines, probably on fears that a determined embargo would have repercussions for exports of American aerospace components in general.

The scenario is similar for Beijing’s more recent compilation of a list of ‘unreliable’ commercial partners from the US, which was given major billing by the country’s state media more than a year ago.

The intention was obvious enough: to respond to Washington’s restrictions on sales of American technology to a number of Chinese firms, most notably Huawei. Yet 12 months later it still isn’t clear which companies, if any, are on the Chinese ‘hit list’ or how their commercial operations might be affected as a result. Instead, the Chinese media has contented itself with debating the likely candidates, with Apple, Cisco, Qualcomm and Boeing all getting regular mention.

This month’s censure means that Lockheed is the first firm since the start of the China-US trade war to be directly designated for sanctions. The Global Times has also been doing its best to make the potential punishment sound as painful as possible, including the choking off of sales of Chinese rare earths (over which China has a virtual monopoly) used in the production of advanced weapons like Predator drones and Tomahawk cruise missiles. We first wrote about China’s hold on the rare earths market over a decade ago (see WiC13) and they soon became the focal point of a diplomatic conflict with Japan, following a clash over disputed islands in the East China Sea (called the Senkakus by Japan and the Diaoyus by the Chinese). Exports of the minerals to Japan were suspended for 59 days, triggering dramatic spikes in prices across all markets (see WiC81). The Chinese are still the dominant force in rare earths mining and processing – to the point at which the Pentagon has been pushing for public funding of $1.75 billion to boost rival production.

If Beijing decides to maximise the pain from its sanctions a rare earths embargo could complicate Lockheed’s operations – though enforcement could be tricky.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.