The Chinese government has signaled that it's losing patience in its escalating trade war with the U.S. – and may be willing to pull the trigger on one of the most devastating economic weapons at its disposal.
From mining to refining to manufacturing, China over four decades has amassed an utterly dominant, multi-level global monopoly on so-called "rare earth" minerals, more than a dozen obscure but vitally important elements used in everything from smartphone camera lenses to electric vehicles, long-range missiles and the chemical compounds used to break down petroleum in U.S. oil refineries.
China produces as much as 90% of the world's rare earths, and it accounts for 80% of the U.S. market alone. The U.S., meanwhile, has seen its domestic production dwindle to near zero.
Experts have warned for decades about the imbalance. And after another round of tit-for-tat tariff hikes, Beijing indicated that it may now clamp down on rare earth exports, potentially upending consumer markets and starving the U.S. military of a vital ingredient for its weapons.
Since the start of trade tensions between the U.S. and China in 2017, the Chinese government has refrained from slashing exports of raw rare earth minerals and refined products. Beijing in October
issued a warning shot, declaring in its twice-yearly announcement of export quotas that it would reduce domestic production of raw earths yet ultimately held off, instead instituting tariffs on other products
.
The latest warnings, though, come just weeks ahead of China's next expected announcement of its export quotas for rare earth minerals and products – which experts say would be an ideal time for officials to slash production while claiming, as it did in a similar action less than a decade ago, that it was
merely experiencing shipping delays.
"It is the perfect timing for them to do something," says David Anonychuk, managing director of M.Plan International, a consulting firm for rare earths mining companies and investors. "There's not a lot the U.S. can do because it doesn't control its own destiny, both from a production and a refining point of view. So China is definitely in the driver's seat however it wants to apply pressure to the U.S."
China's control of the market is considerable even beyond its overwhelming market share: While the country is home to the vast majority of the planet's rare earth reserves, its refining, production and manufacturing capacity further along the supply chain is far more crucial. Rare earths, despite their name, can be found around the world, including in the U.S., but processing the materials demands extensive expertise and infrastructure that China has spent years developing – and, by at least one U.S. government estimate, would take more than a decade to build in America.
"You have 15 elements that come together out of the ground every time. So you have essentially 15 completely separate markets that have separate applications that are really complex, expensive to process. And to get up to speed and understand the markets and understand the supply chain and establish relationships in the industry takes a very long time," says Clint Cox, president of The Anchor House, a rare earth minerals research and consulting firm. With these factors and other challenges, he continues, "it becomes difficult to have any country feel like they can compete or establish a supply chain outside of China."
Beijing has weaponized its rare earth minerals before: After a diplomatic row that occurred when a Chinese fishing trawler collided with two Japanese Coast Guard ships off the disputed Senkaku Islands in September 2010, the Chinese government effectively stopped exporting rare earth products to Japan in retaliation for the incident.
Prices for refined rare earth products soon soared by as much as 3,000%. A mining sector that had once had only 20 companies soon saw 400 speculators mushroom around the globe, each seeking to capitalize on the limited supply and high prices, and all but one ultimately going belly up, unable to weaken China's stranglehold on the market. The World Trade Organization eventually ruled against China the following year, ostensibly spurring Beijing to adjust the quota.
"It became very clear that this was something China could use to great effect with great leverage," Cox says. "Governments, companies, everyone had a chance to right this problem and fix supply-chain vulnerabilities."
The U.S. and other nations, however, did little to address the vulnerabilities uncovered by Japan-China imbroglio. American regulators and lawmakers
by then had long since allowed the country's largest rare earth mining and processing firms to relocate to China, home not only to enormous rare earth deposits but also bountiful cheap labor and electricity.
The U.S. and members of the European Union, by contrast, have largely allowed markets to dictate where mining and refining capacity have gone. There is presently a single active rare earths mine in the U.S.: Mountain Pass in Southern California, which holds relatively low-value deposits and in recent years has experienced start-and-stop operations.
Companies could, in theory, open additional mines, but a Reagan-era law – designed to prevent nuclear proliferation – imposes hefty costs for transporting and storing rare earths, making mining operations even more expensive than those in China. And without a reliable domestic supply, even if the U.S. were to invest in new processing facilities, they wouldn't have any raw material to refine – China, experts say, wouldn't relinquish its stranglehold over the raw materials market.
Japan's government, following the 2010 crisis, invested in and subsidized new rare earth mining and processing projects outside of China, seeing it as a strategic investment in the country's national interest. The country still relies on China for about three-quarters of its raw materials supply – but, experts say, it's a start.
"Lessons really could've been learned from that. The reaction from the Japanese government and the Japanese industry was to solidify a stable source of rare earths," says David Merriman, manager of the Battery and Electric Vehicle Materials Division at Roskill, a London-based market research and consulting firm. "The U.S. didn't react in the same way. ... But maybe some alarm bells should've been ringing."