(MENAFN- Asia Times) 'The Middle East has oil, and China has rare earths,' Chinese leader Deng Xiaoping noted in 1987
Rare earth elements are a class of 17 metals essential to the technology, transportation, energy, defense, and aerospace industries. These are used for high-powered magnets and precision parts in devices ranging from batteries, solar panels and wind turbines to smartphones, lasers and jet engines.
The People's Republic of China (PRC) came to dominate global supply chains for these valuable inputs during the Deng era of foreign policy, which was characterized by the adage that's often translated as“Hide your strength, bide your time.”
Subsidized state-owned enterprises were empowered to drive competitors out of the rare earths mining and processing businesses, giving the PRC a virtual monopoly by the late 1990s.
The wider world only came to appreciate the strategic implications of this concentration in 2010, when a maritime dispute between the PRC and Japan triggered a total halt of rare earths exports from the former to the latter.
Although trade resumed after the incident, the episode highlighted both the vulnerabilities that the dependency permitted and the PRC's willingness to exploit those for political leverage.
Japan was subsequently motivated to begin investing in alternative suppliers abroad, while the United States moved to jumpstart its own shuttered domestic capacity . State of the market
Thirteen years later, the green shoots of new market entrants display a small but meaningful movement toward diversifying the world's rare earths supply. The United States and Australia have demonstrated political resolve to break the PRC's hold on the market.
japan and india are also attempting to establish domestic industries but the barriers to entry remain formidable. The industries of mining and ore refinement are notoriously lengthy and capital-intensive – doubly so in countries with complex licensing and ecological surveying requisites.
The PRC still dominates the entire vertical industry and can flood global markets with cheap material, as it has done before with steel and with solar panels . In 2022, it mined 58% of all rare earths elements, refined 89% of all raw ore, and manufactured 92% of rare earths-based components worldwide.
There is no other global industry so concentrated in the hands of the Chinese Communist Party, nor with such asymmetric downstream impact, as rare earths – so the United States and others should pursue further diversification with unique urgency. The United States: Reviving heavy industry
Beijing's 2010 dispute with Tokyo was one of several assertive foreign policy maneuvers that set off alarm bells in Washington and precipitated the Obama administration's“pivot to asia .”
As the swiftness of the PRC's rise continued to outpace expectations during the Trump years, American political appetite shifted from defending hegemony in Asia, to addressing vulnerabilities at home – including the outsourcing of mining industries for rare earth elements, among other minerals such as lithium, nickel, and graphite.
The global bottleneck for midstream industry segments, including refining, is so severe that the few American rare earths miners in operation send their raw ore to China for processing before it returns to the United States as permanent magnets for use in f-35s , tesla model 3s , and the like.
Elon Musk's Tesla Model 3. Photo: Tesla
In conjunction with an overarching strategy to address this weakness by revitalizing domestic supply chains for critical minerals, the US government is supporting the buildout of processing facilities in California and Texas for two rare earths juggernauts-in-the-making: mp materials , an American company, and lynas rare earths , an Australian firm.
Additionally, the Biden administration's recent Inflation Reduction Act provided tax incentives for critical mineral businesses and supercharged the Department of Energy's loan programs office and the defense production act. that will allow the executive branch to bolster industrial development on an ad hoc basis.
The United States should continue focusing grants towards venture past the proof-of-concept stage in rare earths refining and magnet manufacturing, so that they can then access the Department of Energy's lending resources to scale quickly. China: tightening the reins
The media often characterize the PRC's rare earths dominance as the“trump card” of wolf warrior diplomacy, but Xi Jinping likely understands that the implicit threat of applying this leverage outweighs the cost-benefit of its actual use.
The international environment of today is far less forgiving than that of 2010, and a rare earths embargo applied tomorrow on a nation like Japan or the United States would easily spark a bellicose trade dispute and push a tsunami of funding toward emerging competitors.
However, there exists a dangerous window during the next several years, when the PRC's influence over the global industry is diminishing but still overwhelming enough to put importing nations in a bind. In this sense, Beijing could still use its“trump card” over a critical political moment – something that would become even more tempting once its monopoly's decline started to seem inevitable.
Beijing's cognizance of this scenario is reflected in its recent merger of three state-owned mining giants into the China Rare Earth Group. This massive consolidation allows the party to more easily control the market and develop synergies to bring costs even lower, which will hamper foreign upstarts.
Realist conclusions in a global market-based system
In the long run, monopolistic behavior will be solved by the interconnected markets on which modern society is built.
The strategic calculus and narratives between great powers may be swiftly changing, but the fundamental rules of the game remain. The more likely the world perceives the weaponization of the rare earths industry by Beijing, the more pressure will be applied on the two competitive market forces already working towards solutions.
The first is the potential for new market entrants. Rising Chinese export tariffs and spiking prices signal opportunity. canada , india , and the united kingdom have all recently announced their intent to develop their first domestic refineries for rare earth elements, with national security interests undoubtedly providing propulsion.
Relatively small investments now could pay off big by shaking up market dynamics later this decade, so the United States could seed promising ventures abroad, and consider this high-profile sector an opportunity to build up“friendshoring” partnerships with alternate producers.
The second is the threat of substitutes. Necessity is the mother of invention-and if substitutes can replace rare earths in end-use products, then supply fears may be sidestepped. The embedded risks of the elements have already been driving manufacturers like toyota and volkswagen to redesign their electric motors' magnets to use less rare earths material – or use alternative (and less efficient) magnet metals.
Rare earth elements mining. Photo: VCG
The US energy , defense and commerce departments have been pursuing alternatives, but governments should also consider rewarding companies that find innovative ways of designing their products without rare earth elements in the style of bug bounties . Even without implementing substitutes, establishing backup options builds supply chain resilience and saps the power of a monopoly.
tetrataenite is one promising breakthrough in magnetic alternatives. Until recently, this nickel-iron alloy was only observed in meteorite samples, but last year it was successfully replicated in a University of Cambridge laboratory . Experts say it has an outside chance at upending the entire rare earths industry in the years to come.
Aside from pressing into the two competitive market forces of new entrants and substitution, the United States should continue subsidizing the rapid development of its rare earths supply chains-particularly the midstream layers: ore processing, mineral refining, and alloying.
The faster it can do so, the narrower the window will be for Xi Jinping to play hardball during the waning years of China's monopoly, and the less likely that opportunity will coincide with an attempted invasion of Taiwan.
The economic downturn, domestic discontent and international scrutiny resulting from Beijing's stringent Covid-19 lockdown policies have left Xi's political capital temporarily spent as he works to patch up relations and entice businesses back to the PRC.
To break the global refining monopoly without sparking a larger geopolitical firestorm, an inflection point in broadening supply diversification needs to be achieved soon.
Brandt Mabuni ( ) is a resident WSD-Handa Fellow at Pacific Forum.
This article was originally published by pacific forum . It is republished with permission.