When Xi Jinping, the Chinese leader, highlighted the strategic importance of ‘rare earths’ during his factory visit in Ganzhou, a southeastern industrial city in 2019, not many realized the significance. Today, it seems prescient, as China’s control over the supply chain of these seventeen crucial elements has positioned it strongly in its ongoing trade conflict with the U.S.
The significance of these elements cannot be overstated. Rare earths are at the core of modern technology, powering devices from smartphones to electric cars. The commodities have become a lever in the trade dispute, where Trump’s tariffs are poorly matched against China’s dominance in the rare earths sector.
Rare earths are commonly found across the globe, even more so than gold. However, their complex, expensive, and ecologically damaging extraction process is what leads to China’s dominance. Despite only owning 61% of global rare earth production, its control over processing stands at a staggering 92%.
Ironically, China began to flex its muscle in this sector by restricting exports of seven different rare earth minerals in retaliation to Trump’s original 34% tariffs on Chinese goods. New regulations necessitated all companies to seek official permission before exporting these seven minerals and any related products, a key example being magnets.
These magnets made from rare earths play pivotal roles in various industries, enabling the production of smaller yet more efficient generators and motors. From defense systems to healthcare, these elements have become essential for the operation of fighter jets, nuclear submarines, smartphones, vehicle engines, and MRI machines.
An economist opined, ‘China’s strategic and surgical export controls are a perfect example of their incredible economic power.’ Creating a daunting challenge for American industries, Beijing’s move was met with immediate response from Trump, who ordered an investigation into possible tariffs on critical minerals, taking into account the repercussions on America’s security and resilience.
In the aftermath of the first Trump administration, the United States launched efforts to enhance its own domestic supply chain of rare earths. Several U.S. companies in the rare earth industry reported plans for the expansion of production capacities and material sourcing from allied nations. However, the fulfillment of these plans is likely to take substantial time, not to mention the colossal industry demands already faced by the U.S.
China’s export controls are already causing stumbles. Deliveries of rare earth magnets destined for five American and European companies have been stopped since the new rules took effect. The abrupt implementation of the new rules took many by surprise, causing confusion and a scramble for clarification on how to secure the required export licenses.
One CEO from a rare earth company highlighted the export controls’ emphasis on ‘heavy’ rare earths, which are 98% controlled by China. This gives China the power to regulate the delivery of these vital materials to key American industries. The CEO added, ‘This implies that these exports are practically under suspension. Even though the U.S. doesn’t have a large backstock of these materials, we are now at China’s mercy.’
A director of a Singapore-based mineral and metal supply chain firm noted that the new norms not only affect individual materials but also products containing these materials, even in minimum quantities. He also predicted some delays as companies try to understand and navigate these new regulations.
China’s rise to the pinnacle of rare earth extraction began in the 1950s, but it was the 1970s that saw real momentum. Leveraging its cheap labor and less stringent environmental norms, China adopted foreign technologies, leading to a significant increase in their production capacities. The strategic importance of these minerals was gradually recognized, with China dominating the global supply chain today.
There were times when American firms were producing these essential magnets, but they were eventually outcompeted by cheaper Chinese alternatives. As a response, the U.S. Department of Defense awarded over $439 million to initiate domestic supply chains for rare earth elements. The goal is to develop a sustainable, mine-to-magnet supply chain capable of meeting all U.S. defense requirements by 2027.
Amidst all the frictions, some American companies see a golden opportunity to expedite domestic production and move towards a stronger supply chain independent of China. As an excellent example, a Massachusetts-based start-up claims to have developed a technology that allows refining of rare earth minerals into metals and alloys sans waste and emissions.
USA Rare Earth, another company making significant strides, is establishing a magnet plant in Texas, planning to produce an impressive 5,000 tons of rare earth magnets annually. They also own a deposit with high quantities of heavy rare earths in West Texas, but the challenge lies in developing the technology to extract minerals efficiently.
In conclusion, the latest twist in the U.S.-China trade war has geared American firms to work on the challenging task of rebuilding the domestic industry for extracting and processing of these key minerals, the solution for winning the technology race against China.