PWH Undergraduate Essay Prize Disrupting China’s Rare Earth Element Hegemony

The rare earth elements (REEs) are a group of 17 elements used in a variety of technological applications, from consumer goods to advanced military technologies.[1] Over the past several decades, control over the mining and production of REEs has shifted from the United States to the People’s Republic of China, which has presented the West with new concerns over access to these highly valuable elements. This paper examines the past and present policies that led to the state of Chinese REE dominance and the path forward to diversifying production and improving global access.

Despite what their name implies, REEs are not actually “rare.” However, REEs are highly dispersed and mixed with other elements, which makes minable REE deposits rare to find.[2] Once mineable REE deposits are found, lengthy mining and refinement processes follow. Because different types of REEs share such similar properties, they require complicated chemical and physical processes to separate them from one another. Ultimately, REE production is a highly environmentally intense process, as large REE mines take up thousands of acres of land, use extensive energy and water resources, and produce radioactive waste.[3]

Although China today dominates global REE production, this was not always the case. Until 1980, approximately 99 percent of the world’s heavy rare earths were produced in the U.S. as a byproduct from mining other elements.[4] However, due to increased regulatory standards in the United States starting in the 1980s, the U.S. quickly ceded its market share to China.[5] Companies moved operations to China, seeking to cut costs due to China’s relaxed environmental regulations, generous state subsidies, and cheap labor. This resulted in a substantial transfer of REE production technology and intellectual property to China. In the years to come, China would also direct significant resources of its own towards growing its REE production capability. It established five rare earths research laboratories (the U.S. has only one), and, by 1997, it surpassed the U.S. and every other country in its number of REE patents.[6] China’s ownership of the largest share of REE reserves in the world (37%), combined with its dominance over the world’s REE research and technology, helped it control nearly the entire REE value chain. As of 2019, China produced 90 percent of the world’s REEs.[7]

With China’s monopoly over REEs comes potential problems for the rest of the world. China has a history of using its REE dominance as a geopolitical weapon, and as long as this dominance remains, it will remain a threat. In 2010, after an incident between a Chinese ship and the Japanese coast guard, China paused all exports of REEs to Japan for almost two months.[8] While similar incidents since then have been rare, the threat has always been looming. In 2020, China threatened to sanction U.S. firms Lockheed Martin, Boeing, and Raytheon for selling arms to Taiwan. The following year, China also explored the prospects of limiting REE exports to the U.S. in the event of a diplomatic dispute.[9]

In light of the world’s dependence on Chinese REEs, hundreds of new ventures were formed with the goal of diversifying the world supply. Unfortunately, these had little success—from 2010 to 2020, there have been over 400 failed REE ventures.[10]  There are two main issues in developing successful REE ventures outside of China. First, developing REEs requires mastery of the entire value chain from mining, to REE separation, to further refinement processes. As Senator Marco Rubio writes, “The United States will remain vulnerable if just one piece—from mining to refining, all the way to the production of parts needed by end users—is reliant on China.”[11] Because each step of the REE production process is so costly and requires such advanced technology, it has been extremely difficult and resource-intensive for firms to rebuild the entire REE value chain from scratch.

The second part of the problem is that China holds complete control over the global price of REEs. By increasing the volume of REE exports, China can drive down the price to crash the market and remove any prospects of profitability for foreign competitors. Although costly for China in the short term, this strategy of “limit pricing” is a surefire method of driving out competitors.[12] Additionally, REE production is less costly in China than in Western nations due to less stringent environmental standards, which has further enabled China to price below Western entrants.[13] With China holding complete control over the REE market, it will take more than conventional policies like subsidies for Western firms to compete with China. Such approaches are a “market solution for a non-market problem,” says James Kennedy, the founder of ThREE Consulting, an REE consultancy.[14]

In recognizing America’s precarious situation, the nation’s top leaders have sounded alarms that the United States needs to rebuild its REE supply chains as soon as possible. In 2020, President Donald Trump issued an executive order that declared a national emergency in the mining industry and called on the Department of the Interior to develop a program to address the issue.[15] President Joseph Biden also signed an executive order in 2021 to strengthen American rare earth supply chains and, in 2022, issued an investment of $35 million into REE mining and refinement operations.

Although the United States has now come to terms with the dangers of Chinese REE dominance, an “America First” approach that aims to take back global REE dominance is not a satisfactory solution. First, simply funneling money into domestic REE production is not enough to work. America lacks the resources and technological know-how to rival China’s REE production in a short timeframe. Jen-Yi Chen, associate professor of operations and supply chain management at Cleveland State University, says that completely decoupling with China in REE procurement “would be too costly and not sustainable, as we are not that resource-rich.”[16] Indeed, China dedicated significant funding and resources for several decades to achieve its current scientific prowess on REEs. The United States must be realistic in developing a strategy that catches up on decades of lost progress.

Second, now is not the time for global superpowers to fight one another for REE dominance. In a time when countries need to collaborate to reduce the environmental impact of REE production and to provide equitable REE access to developing nations, an all-out battle between China and the U.S. for REE dominance takes away from the pressing issues at hand. Embracing protectionist policies in fear of supply chain vulnerabilities is counterproductive and hinders the potential for a multilateral solution. Additionally, in the race to take control over REEs, developing countries must be regarded as an equal stakeholder. A more responsible solution for the United States to diversify REE procurement would entail creating an international partnership with friendly nations that would foster collaboration in developing the full REE value chain and regulating global REE procurement practices.

As previously discussed, one of the largest obstacles in successfully producing REEs in the West has been the challenge of building out the entire REE value chain, from the starting stages of mining to the end stages of processing. Through an international partnership, different countries can take on different stages of the mining and refinement process based on the strengths and weaknesses of individual countries. As an example of this, the United States lacks natural reserves for several REEs, or contains some REEs in quantities unfit for mining. A strong REE value chain must include collaboration with other countries with more bountiful REE reserves, such as Brazil, India, and Australia.[17] Additionally, entities other than the United States, such as the European Union, Japan, and Australia, have already started independently working on REE projects. Pooling together existing financial resources, intellectual property, and human capital towards the development of an integrated value chain can save years of research and development time and drastically increase the chance of success. Such collaboration could also assist in developing more environmentally friendly REE production processes.

This new value chain will only be successful if firms are motivated to purchase REEs from non-Chinese producers. Hence, the U.S. and partner countries must also mandate firms from their countries to procure REE’s from sources that meet baseline environmental standards. In the short term, tax subsidies could assist firms in transitioning to REEs from such sources. In the long term, Chinese firms would likely improve their production processes to meet these standards, which would increase their REE production costs. With higher REE production costs, Chinese firms would increase prices, which would allow for entrants to compete and gain market share.

Federal mandates allow, and encourage, such collaboration among countries for defense purposes. Executive Order 13817, issued in 2017, already supports collaborative mechanisms with friendly nations, such as reciprocal defense procurement and security of supply arrangements, to ensure the United States has the greatest access to defense supplies. As an example of this form of international collaboration, the Pentagon was in talks with Australia in 2020 to process rare-earth materials for the U.S. military.22

Such international collaboration is not just helpful towards America’s goal of diversifying global REE production, but essential. America has warmed up to the idea of collaborating with partner countries, but it still has yet to completely let go of its “America-First” philosophy. In order for the West to have a chance at challenging China in its REE dominance, while also staying accountable to the environment and to developing countries, America must work together with the rest of the world.

Endnotes

[1] Wayne Morrison and Rachel Tang, “China’s Rare Earth Industry and Export Regime: Economic and Trade Implications for the United States” Congressional Research Service, April 30, 2012, https://sgp.fas.org/crs/row/R42510.pdf.

[2] Ibid.

[3] Sophia Kalantzakos, China and the Geopolitics of Rare Earths, Oxford University Press, 2021.

[4] Jamil Hizaji and James Kennedy, “How the United States Handed China Its Rare Earth Monopoly” Foreign Policy, October 27, 2020, https://foreignpolicy.com/2020/10/27/how-the-united-states-handed-china-its-rare-earth-monopoly/.

[5] James Kennedy, “China Solidifies Dominance in Rare Earth Processsing (UPDATED)” National Defense Magazine, March 3, 2021, https://www.nationaldefensemagazine.org/articles/2019/3/21/viewpoint-china-solidifies-dominance-in-rare-earth-processing.

[6] Hizaji, and Kennedy, “How the United States Handed China Its Rare Earth Monopoly.”

[7] “Does China Pose a Threat to Global Rare Earth Supply Chains?” Center for Strategic and International Studies, 17 July 17, 2020, https://chinapower.csis.org/china-rare-earths/#:~:text=As%20of%202019%2C%20China%20still,%2C%20alloys%2C%20and%20permanent%20magnets.

[8] Gustavo Ferreira and Jamie Critelli, “China’s Global Monopoly on Rare Earth Metals,” The US Army War College Quarterly, 2022, https://press.armywarcollege.edu/cgi/viewcontent.cgi?article=3129&context=parameters.

[9] Sun Yu and Demetri Sevastopulo, “China targets rare earth export curbs to hobble US defense industry” Financial Times, February 16, 2021, https://www.ft.com/content/d3ed83f4-19bc-4d16-b510-415749c032c1.

[10] Hizaji and Kennedy, “How the United States Handed China Its Rare Earth Monopoly.”

[11] Marco Rubio, “America’s Security Needs a Cooperative Rebuilding of Rare-Earth Supply Chains,” Foreign Policy, June 17, 2020, https://foreignpolicy.com/2020/06/17/marco-rubio-rare-earth-minerals-china/.

[12] Ferreira and Critelli, “China’s Global Monopoly on Rare Earth Metals.”

[13] Nabeel A Mancheri, et al. "Effect of Chinese policies on rare earth supply chain resilience," Resources, Conservation and Recycling 142 (2019): pp. 101-112, https://doi.org/10.1016/j.resconrec.2018.11.017.

[14] Keith Johnson and Robbie Grammar, “U.S. Falters in Bid to Replace Rare Earths” Foreign Policy, May 25, 2020, https://www.congress.gov/116/meeting/house/111008/documents/HHRG-116-IF18-20200916-SD014.pdf.

[15] Deanne Toto, “Trump executives order targets rare earth metals,” Recycling Today, October 6, 2020, https://www.recyclingtoday.com/article/rare-earth-recycling-opportunties/.

[16] Patsy Widakuswara, “US announces steps to bolster critical mineral supply chain,” Voice of America, February 22, 2022, https://www.voanews.com/a/us-announces-steps-to-bolster-critical-mineral-supply-chain-/6454984.html.

[17] Ferreira and Critelli, “China’s Global Monopoly on Rare Earth Metals.”