Rare Earths: Next Element in the Trade War?

When Chinese President Xi Jinping toured a rare-earth processor a week after the Trump administration blacklisted Huawei in May, he highlighted the importance of rare earths in global supply chains—a statement widely interpreted as a threat to restrict Chinese exports to the United States. Since then, Chinese government organizations and state media have indicated that China is prepared to follow through on that threat as economic tensions between the world’s two largest economies continue to escalate. With the trade war having moved beyond tariffs and into issues such as currency, rare earths could be the next salvo in the conflict.

Q1: What are rare earths and what are they used for?

A1: Rare-earth elements are a group of 17 metals that includes the 15 lanthanides of the periodic table as well as yttrium and scandium, which possess similar chemical properties. As an input for a variety of advanced industries, rare earths play an integral role in the modern economy. Together, these elements are found in everything from LED displays to weapons systems. For example, europium and terbium are a key component found in televisions, while neodymium and samarium are used to guide precision missiles and smart bombs.

Q2: How are rare earths produced and where are they found?

A2: Although their name indicates otherwise, rare earths are not actually a scarce resource. According to the U.S. Geological Survey, they are “relatively abundant in the Earth’s crust.” They are “rare” because they are not found on their own, but rather as constituent parts of larger minerals, making extraction an expensive endeavor. Before rare-earth elements can be used for commercial or military purposes, they need to undergo several stages of complex, environmentally damaging, and expensive processing. Rare-earth oxides are mined from deposits in places like Bayan Obo in China or Mount Weld in Australia before individual elements are separated chemically, often at different facilities. The processed metals are then bought by firms that use them as components in high-tech devices.

China is the leading player at all stages of rare-earth production, with its dominance increasing as production moves downstream. China holds the world’s largest rare-earth reserves, an estimated 37 percent of the global total. Vietnam and Brazil each have around 18 percent share of global reserves, and the United States has 1.17 percent. Chinese firms control more than 85 percent of the costly processing stage of the supply chain and produced more than 70 percent of the world’s rare-earth-metal supply in 2018. However, this is down from a staggering 97 percent in 2009, as other players have entered (or reentered) the market. Australia and the United States, the second and third largest suppliers last year, produced around 12 percent and 9 percent of global rare-earth elements, respectively.

Q3: What role do rare earths play in global affairs?

A3: From the 1960s to the 1980s, the United States was the world’s leading producer of rare-earth elements, but between 2014 and 2017, it imported 80 percent of its supply from China. This drastic shift was not a coincidence but rather the consequence of a concerted effort by the Chinese government to “strategically” flood the global rare-earth market, according to the U.S. Department of Defense. State support coupled with lower labor costs and less stringent environmental standards enabled China’s rare-earth rise. Former Chinese leader Deng Xiaoping famously said in 1987 that while “the Middle East has oil, China has rare earths,” foreshadowing China’s willingness to use its leverage over the industry’s supply chain.

China has weaponized rare earths before. In 2010, Beijing cut exports to Japan after a Chinese fishing trawler collided with a Japanese coast guard vessel near disputed islands. Afterward, Japan took steps to diversify its supply of rare earths by investing in research and development domestically and by funding ventures in India and Australia. By 2017, Vietnam was Japan’s largest supplier of rare earths.

As part of the trade war with the United States, China imposed a 25 percent tariff earlier this year on imports of commodities extracted by MP Materials, the lone U.S. producer of rare earths and the operator of the Mountain Pass Mine in California. Last week, China’s rare-earth industry association said it was prepared to weaponize the metals in order to pass on higher costs to U.S. consumers.

Q4: How can the United States respond?

A4: In the weeks after President Xi toured the rare-earth facility in Jiangxi, the Department of Commerce released a report outlining six calls to action and vowing that the United States would “take unprecedented action” to secure “critical mineral” supplies, including all 17 rare-earth elements. Recommendations included accelerating the regulatory approval process for mining permits, increasing research and development, growing domestic supply, developing knowledge of rare earths, and expanding trade with allies.

President Trump has asked the Department of Defense to increase production of rare-earth magnets, a move that was followed up by Australia’s defense ministry announcing that it too would boost production to secure supplies for itself and its allies. The issue has also taken hold on Capitol Hill, with senators proposing a bill that would increase research funding to determine if rare earths can be extracted from coal, as well as legislation that would support U.S. firms by allowing them to form a cooperative shielded from antitrust laws. Analysts have suggested that Washington fund research into rare-earth alternatives, as Japan did after its own dispute with China.

Mining companies are already preparing for the metals to play a role in the trade war. MP Materials will become the only rare-earth processor in the United States next year when it opens a processing facility at Mountain Pass. By 2022, more mines and processing facilities are expected to open domestically. Lynas Corp, a major Australian rare-earth producer, signed a memorandum of understanding with U.S.-based Blue Line Corp to build a processing facility in Texas. Also, Texas Mineral Resources Corp wants to develop the Round Top rare-earth deposit in West Texas and is lobbying Washington to require that defense contractors source rare earths only from U.S. facilities. Establishing a domestic rare-earth supply is just one element of a plan to better insulate the United States from China’s control over this critical market.

Grace Hearty is deputy director of the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. Mayaz Alam is research intern with the Simon Chair in Political Economy. Mikaela Zallen, Simon Chair research intern, also contributed to this Critical Questions piece.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Grace Hearty

Mayaz Alam