Rare earth elements (REEs) are essential components in smartphones, electric vehicles and renewable energy systems, yet are scarce and difficult to access.
China has long pursued its objective of controlling these essential metals, prompting international trade disputes with major rare earth importers like Japan, the EU and South Korea.
China dominates mining and refining of nickel, cobalt and rare earth elements due to lower labor costs and less regard for environmental impacts. China's control over resource supply chains increases their vulnerability against disruption from physical events, trade restrictions or other developments occurring in major producing nations.
US dependence on rare earth metals to fuel its technology sector has exposed it to Beijing's political leverage over global markets. While Treasury Secretary is encouraging diversification of supply for these essential minerals, breaking free of China's control may require drastic shifts in investment strategies across Western governments and private companies.
China President Xi Jinping made an unprecedented public visit to a rare earths company on January 23, emphasizing Beijing's pledge to achieve "dominant world status" in this field. Chinese state media has also highlighted the strategic significance of rare earths industry.
Beijing's control over the global rare earth market makes it an effective political weapon. For instance, in 2010 they restricted exports to Japan as part of a move intended to resolve an ongoing territorial dispute over Senkaku Islands.
China has shown its dominance of the rare earths market repeatedly since then, using production quota adjustments and floods of raw material imports to undercut competitors and drive prices upward. Their strategy has proven successful; China currently leads in terms of both REE production and imports.
REEs are essential in manufacturing many of the advanced technologies driving China's economic rise, such as green energy, electric vehicles and mobile communication networks. China has adopted a mercantilist approach to their industry which uses it as an important leverage point against Western powers during trade disputes and diplomatic negotiations.
To counter China's monopoly and create a more diverse global supply chain, the United States should promote equity investments in rare earths by supporting new mining techniques. This would allow it to move beyond dependence on foreign producers while eliminating any single point of failure during national emergencies.
Rare earth elements--17 minerals with magnetic and conductive properties essential to making smart phones, tablets and digital TVs--are unevenly distributed throughout the world. While some rare earth elements are mined by the United States for processing in China, other raw materials must then be sent there for refining and processing. China has increased its production dominance through export restrictions, state subsidies and industry consolidation; such measures could cause long-lasting economic disruption if territorial disputes, war or any other unexpected event forces Beijing to restrict exports further and restrict their supply more compared with expected.
Chinese rare earths industries have been consolidated, making it easier for Beijing to exert control over prices, creating major concerns among Western companies that use the mineral in products like batteries and electric vehicles. Beijing has used domestic production quota adjustments and price subsidies to alter rare earth prices; additionally it has strategically flooded global markets to drive out competitors and deter new market entrants.
As tensions between China and the US escalate, Beijing has indicated it will use rare earth elements as political leverage. According to reports, Beijing's top economic planning agency this week threatened to restrict REE exports if Washington uses REEs as bargaining chips during their trade dispute.
US government policy has taken steps to strengthen supply chain resilience. In February, Biden administration awarded MP Materials with a US$35 million contract for producing heavy rare earth elements in the US - freeing it from dependence on China for such minerals.
Rare earth elements (REEs) can be found throughout Earth's crust in abundance, yet finding concentrations sufficient for commercial mining operations can be extremely challenging. Due to high upfront capital requirements and environmental impacts associated with mining operations, making the venture risky. International firms, including some from the US, have increasingly turned towards outsourcing REE mining and processing activities to China where inexpensive labor costs and more relaxed environmental regulations make mining cheaper - now accounting for 58 percent of global REE reserves as well as 78 percent of mining, refining, and processing activities globally.
Western concerns regarding China's dominance in rare earth production traditionally focused on their use in military applications like radar and sonar systems. More recently, however, Beijing's implementation of export controls for rare earths as an economic weapon against Japan over Senkaku Islands (Diaoyu in Chinese) have raised the stakes on rare earths' role within global economic systems.
As a response to this newfound concern, the US has intensified efforts with Japan, Australia and South Korea on developing an REE supply chain capable of withstanding near-term disruptions while remaining resilient against potential threats to global prosperity. This effort will promote investments in mining technologies for producing REEs in northern Australia, thus helping ensure this industry remains an internationally competitive force rather than becoming another Chinese monopoly.
But this strategy will take time. The capital investment needed to build a rare earth mine can be immense and finding locations accepting of the significant environmental impacts is often challenging. Building up processing and refining capacity also takes time and patience; investing in international REE companies that lead diversification efforts is therefore imperative.
China's rare earths industry consolidation initiative was part of an ambitious plan unveiled by Beijing in 2016. For this goal to be realized, Chinese companies require capital. Industry consolidation makes this easier since larger firms can attract larger investors while also being able to negotiate favorable loan terms from state-owned banks.
China's desire to maintain its hold over rare earth elements (REEs) means the US may struggle to rally its allies around a common response strategy and rally them behind one. Japan and Australia should also work on joint economic partnerships that foster exploration and refining facilities across Asia, Australia and America -- in order to guarantee enough REEs for high tech products such as semiconductor chips and electric vehicle batteries.
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China has recognized the political advantage in their REE industry's dominance. After their territorial dispute with Japan in 2010, for instance, their government restricted rare earth exports to that nation and regularly adjusted production quotas when needed to subdue rivals or discourage new market entrants. They have amassed a reserve of raw materials which they can use to control prices and manipulate supply.
To reduce these risks, China has taken steps to consolidate the industry through supporting six large state-owned companies (China Minmetals, Baotou Steel, Chinalco, Xiamen Tungsten and Ganzhou Rare Earths). Not only has this strategy improved operational cost competitiveness; it has also allowed these large state-owned firms to acquire smaller operations or illegal mines that will strengthen overall REE ownership. Unfortunately, this consolidation has increased international concerns around supply chain security as it restricts China's response in an unexpected disruption.
Durch abolishing export quotas and taxes, China has allowed illegal material into the global market illegally - this has caused prices to decrease further and decreased resilience of the global REE supply chain, further spurring US and other governments' desire to develop their own REE processing capacities and lessen their reliance on Chinese suppliers.
Investing in foreign mining and refining firms that diversify supply chains may help balance China's dominance. But to make these investments worthwhile, governments must also invest in research and development initiatives such as reducing extraction costs, less pollutive refining/processing processes and developing technologies capable of turning REEs into useful products. These investments will not only enable countries to reduce their reliance on China, but they will also allow them to form long-term trading partnerships with those able to make such investments. Furthermore, their presence gives more nations a stronger voice in global policy discussions regarding critical minerals - an aspect which may prove vital in creating more resilient global supply chains.