While most Americans are familiar with the Japanese bombing of Pearl Harbor in 1941, the causes leading up to the surprise attack are much less understood. Japan’s rapidly expanding global ambitions were threatened when the United States, for geopolitical reasons, imposed export restrictions on a critical raw material that the Empire was unable to domestically and autonomously source: oil. Out of desperation, Japan felt compelled to secure a crucial supply chain through proactive violence. The global consequences were devastating.
Today, the resource has changed, but the conditions are alarmingly similar – except this time it is the U.S. facing potentially crippling restrictions. Rare earth metals, or simply “rare earths,” are the essential, irreplaceable materials powering most of modern technology and, since 1985, China has systematically gained near complete control over the global supply chain. In the U.S., free-market capitalism has long supported this industry’s competitive outsourcing to China and the government is only recently beginning to acknowledge the dangerous strategic implications.
In 2017, U.S. President Donald Trump issued an Executive Order outlining a “Strategy To Ensure Secure and Reliable Supplies of Critical Minerals,” labeling them “vital to the nation’s security and economic prosperity.” Vulnerabilities in these supply chains were further realized when COVID-19 and the unprecedented response measures exposed the costly gambles of industrial outsourcing and the unintended consequences of globalization. In 2020, Senator Ted Cruz introduced the “ORE Act” to support and incentivize the development of domestic rare earth capacities and, during his first month in office, President Joe Biden included the industry among only three others in a 100-day Supply Chain Review.
Unfortunately, the proposed legislation has stalled in committee and the Department of Defense (DoD) has only made a few, comparatively small, investments in the industry. Unlike oil, there has been a relatively uninterrupted flow of cheap materials and products from China and thus rare earths are not enough of a priority for a short-sighted political environment.
The future of U.S. security is tied directly to rare earth resource security. Failing to secure the resources needed to keep pace with technological innovation means a failure to remain globally competitive. China has had decades to develop this industrial capacity and safeguard it from global free-market challengers. At this point, private industry alone will not be able to correct this imbalance. Without robust, creative, proactive government intervention, the U.S. risks being placed in the same desperate situation that Japan faced 80 years ago.
“The Middle East Has Oil. China Has Rare Earths.” (Deng Xiaoping, 1987)
Rare earths have become a fundamental part of modern life. Cell phones, computers, televisions, and cars are among the indispensable products powered by the strong internal magnets manufactured from rare earths. Modern medical devices, communication systems, and a sustainable, “green” energy transition are entirely dependent on successful exploitation of this non-renewable resource and, as can be easily inferred, rare earths are vital for the development of military technology.
To introduce a more familiar comparison, OPEC controls 41 percent of oil production and, with that, has wielded tremendous geopolitical power for decades. This dependency compelled the United States to aggressively support the development of alternative supply chains. Today, despite China controlling approximately 60 percent of rare earth ore, producing 85 percent of the oxides, and accounting for more than 95 percent of the rare earth manufacturing, there is no comparable response.
With growing tensions in Southeast Asia, an ongoing trade war, and mounting global pressure to combat climate change with “green” technology, the potential for a global crisis is rising. In such a situation, beyond diplomatic and economic measures, military supremacy and deterrence are essential for the United States to continue defending its interests.
To complicate matters, the ability for the U.S. to maintain any militarily competitive edge over China is largely dependent on the same vulnerable supply chain. Precision-guided weapons, stealth technology, drones, and satellites are among the key strategic defense elements that rely on rare earths. Each F-35 aircraft, shared by 14 allied nations and considered instrumental for future warfare, contains 920 pounds of rare earth material. China has already demonstrated the ability to directly affect this development.
In 2020, in response to a U.S. defense deal with Taiwan, China threatened to cut off the supply of rare earths to three U.S. defense manufacturers – including F-35 producer Lockheed Martin. While it ultimately failed to materialize, this reaction demonstrated the power of the Chinese monopoly and the costly potential consequences for the United States and its allies. It also served as a warning to any country that might indirectly challenge China’s foreign policy and an incentive for all to secure an independent and reliable rare earth supply chain.
China’s Road to Monopoly
Approximately 40 percent of the rare earth reserves currently being exploited are in Chinese mines. Although the remaining majority lies elsewhere, China has also become the leading importer of both ore and concentrates. However, having the raw material is just one part of the process.
Unlike other industrial nations, the Chinese government has been able to align and subsidize the rare earth industry according to long-term strategic plans. Over time, this created the highly competitive settings necessary for its firms to obtain an economic advantage over global competitors, while enduring any short-term financial losses.
An ever-expanding, global environmental consciousness has also played into China’s hands. The exploitation of rare earths remains a difficult and dirty business. Most industrial nations capable of such processes lack the willingness to do so in a manner that is both economically viable and environmentally responsible. In this regard, as with many others, China continues to successfully straddle the divide between capacity and tolerance.
With carefully accumulated technical expertise, low costs, relaxed regulations, and staunch support from the government, China is well poised to continue dominating this market. Furthermore, China has been responsible for filing more than 80 percent of new international patents related to rare earth technology, making the industry increasingly inhospitable to international competition.
The Competitors
MP Materials in California recently boasted delivering 15 percent of the global rare earth supply – but 100 percent of this “delivery” is sent to Chinese processing plants in the form of simple concentrates. The firm has an ambitious two-stage development strategy with a processing capacity set for 2022 and has even received $9.6 million from the DoD to support the project, but past failures in the U.S. rare earth industry leave many skeptical.
The Lynas Corporation, based in Australia, manages the only complete supply chain outside of China. However, with its only processing plant in Malaysia, a critical component is subject to somewhat unpredictable foreign governance. To “diversify [its] industrial footprint” Lynas is currently constructing a second processing plant in Australia and has received more than $30 million from the U.S. DoD to support processing plant construction in Texas.
Another key player to consider in this industry is Canada’s Neo Materials. While they do not operate any of their own mines, Neo possesses the only rare earth processing plant in Europe and, in conjunction with Energy Fuels, Inc., recently developed an inspiring “U.S.–European Rare Earth Supply Initiative,” which would be entirely independent from China.
But it’s not just the other rare earth firms looking to address global concerns. In 2018, Toyota introduced a magnet that included 50 percent less rare earth material and, since then, other auto manufacturers have joined this innovative strategy. As the self-proclaimed “world’s leading applied research organization,” Germany’s Frauenhofer-Gesellschaft is coordinating international efforts to explore more efficient rare earth harvesting methods and identify potential substitutes for the material.
As encouraging as some of these developments are, building a comprehensive, local “mine-to-magnet” supply chain to rival China requires several years, significant investment, and, in most cases, supportive environmental and fiscal policy. Without government intervention companies may not be able to maintain lofty ambitions while surviving initial losses against the entrenched Chinese monopoly.
Industrial Intervention
Despite its proud, capitalist history, the U.S. is not without precedent for industrial intervention. Occasionally such action has been taken to stabilize an economic sector in a time of crises or provide for a public “common good” not always accounted for in free market decision-making. But, most often, industrial intervention has been tolerated only in response to an apparent external threat.
After the Soviet Union’s launch of Sputnik, U.S. fear led to a period of massive government industrial sponsorship, bringing about a digital revolution that included the birth of the modern internet. “Operation Warp Speed” and the pursuit of a vaccine against the COVID-19 virus likewise saw tremendous levels of intervention – and very little public opposition.
With a bilateral economic situation mired in codependency and precarious security situation in the South China Sea, it is not as easy to clearly and publicly label China an external threat. Furthermore, without wide public comprehension for the relevance of this natural resource, rare earth supply chains lack the same political steam required to motivate large-scale government action.
Next Steps
The solution begins with awareness: understanding the significance of this material and the perils of a Chinese monopoly. It is the responsibility of those who know to inform the rest and for elected officials to make it a political priority.
Passing Senator Cruz’s “ORE Act” is the next best opportunity to support long-term rare earth self-sustainment. Beyond the substantial incentives for firms in the industry, the bill includes provisions for those pursuing “secondary recovery” – a process of harvesting material from recycled devices and/or industrial waste, contributing to critical national stockpiles. The legislation also updates an existing U.S. law that would further restrict the DoD’s sourcing of rare earths from “non-allied nations” (including China) and compel them to pursue other supply chain solutions.
But the U.S. will not be the only nation affected by rare earth supply restrictions and it is foolish to only consider national solutions. Beyond an investment in domestic supply chain development, the U.S. government can do more – through diplomatic and legislative efforts – to support international business, research, and innovation in order to create a system of cooperative burden-sharing and information exchange. Long-term, committed government support for the pursuit of creative solutions that extend beyond national boundaries will help mitigate risk and allow firms to withstand the short-term costs of supply chain development and innovative exploration.
China has yet to seriously flex its strategic advantage. It cannot currently afford to alienate its top trade partners, nor does it want to encourage competitive supply chain development. But that situation can change. 1941 saw an isolated Japan act with quick, decisive violence out of desperation for a critical raw material. Considering advances in modern military technology and the interconnectedness of global economies, such a reaction today would have incalculable consequences.
The United State is neither alone nor without alternatives. But, as time passes without substantial government initiative, it becomes increasingly difficult to catch up to China and less difficult to imagine similar scenarios of future desperation.