Rare Earths: China’s Not So Secret Weapon. But Will They Use It?
Rare Earths
China’s Not So Secret Weapon. But Will They Use It?
By Omar Bekdash
“The Middle East has oil, China has rare earths,” Deng Xiaoping, China’s former president, quipped in 1992.[i] While Deng, the architect of China’s economic miracle, has long since passed away, his statement still rings true today. Although most people are aware of the abundance of oil in Arab lands, far fewer know about China’s dominance in the rare earth metal industry, which revolves around the extraction and refinement of rare heavy metals. In Deng’s time, such rare earths were used in the circuitry of everything from TVs to traffic lights. In today’s computerized world, their demand has only grown: metals such as Lanthanum, Neodymium, and Europium are necessary components of the computer chips and transistors that power every computer and smartphone on the planet. China is endowed with 40% of the world’s rare earth reserves.[ii] However, even more impressive is its dominance in extracting, refining, and manufacturing useful rare earth products, accounting for roughly 90% of the rare earth components that eventually go into computer chips.[iii]
The Trade War
China dominates the rare earth industry. Many fear that it could leverage its monopoly over rare earths against the United States, similar to how Arab countries placed an oil embargo on the US for supporting Israel in the 1973 Yom Kippur War. An embargo, though unlikely, is not totally inconceivable. China is keen to end the trade war against the United States that began in 2018, which has severely hampered growth for China’s export-oriented economy. One way China could end the conflict is to force the US to back down by instituting a crushing embargo on rare earth trade.
Tensions between the two superpowers have not yet reached such an extreme, but it seems to be heading in that direction. So far, the United States has placed tariffs on $360 billion worth of Chinese goods; China has responded by placing tariffs on $110 billion worth of American goods.[iv] The Chinese economy is on track to grow by only 6% this year—much less than the 6.6% growth rate measured last year. In fact, it is the lowest rate of growth China has experienced since 1992.[v] Meanwhile, due to expansionary fiscal policy, a credit crunch has started to hit as growth rates decline. Housing prices continue to climb steadily, forming what many see as a bubble waiting to pop. Inflation is at a six-year high. By contrast, the American economy has grown at an average pace of nearly 2% this quarter. The American economy has proven more resilient to the trade war than China’s, giving Donald Trump more leeway to raise even more tariffs on China without risking a recession.[vi] Indeed, the United States has threatened to place tariffs on virtually every Chinese product if trade talks do not progress by the end of this year.
All of this spells bad news for the Chinese Communist Party (CPC), which operates on an unspoken social contract with its citizens: the CPC delivers prosperity, and in return, the people acknowledge the party’s authority. Earlier this year, Xi Jinping unexpectedly summoned party leaders to warn them of the danger—including recession and social unrest—that could occur if the trade issues with America are not resolved.[vii] China either wants a return to pre-tariff status quo or a trade deal with the United States. If China agrees to a trade deal, they would want to avoid making painful concessions, such as putting an end to currency manipulation and intellectual property theft.
Here, China’s dominance of rare earths comes into the picture, giving them a potential card to play in the trade war. If China constricts the supply of rare earths to the United States, it could force the United States to cut tariffs or agree to a favorable trade deal for China. At the same time, a number of Western powers, led by the United States, have attempted to break China’s monopoly on rare earth elements by looking at different sources around the world to mine the rare earths.
A Cautionary Tale in Japan
The idea that China would leverage their dominance in the rare earth industry is not merely a possibility: it has happened before. In 2010, when tensions in the South China Sea were simmering, Japan detained a Chinese fisherman who had accidentally entered Japanese waters. Furious, Chinese officials refused to sell their rare earth metals to Japan.[viii] Japan released the fisherman just 4 days after the embargo began. Japan buckled so easily because they simply could not afford a protracted embargo with China. According to the Harvard Law Review, the incident immediately threatened Japan’s automotive industry, which constitutes a quarter of Japanese exports.[ix] After months of high-stakes negotiations, China lifted the embargo, but not before it showed the world just how crushing an effect it could have on Japan’s economy.
Japan is now much more prepared to weather such a disruption in rare earth supply. Not long after the embargo was lifted, the Japanese government lent money to Lynas, an Australian mining company with refineries in Malaysia, so as to initiate preferential trading between them.[x] Today, Lynas meets a third of Japan’s demand for rare earths. Following the Japanese scare, the United States has also tried to help other nations, like Malaysia, Australia and Canada, develop their rare earth metal industries.
The United States: Trying to Steal China’s Jewel from Its Crown
Under the Trump administration, the US has taken steps to break China’s dominance in the rare earth industry. In early 2019, as trade tensions with China soared, President Trump and Prime Minister Trudeau discussed a possible joint project between the Canadian and American militaries that would seek to develop the rare earth metal industry in North America.[xi] In May 2019, with encouragement from the Trump administration, the US reopened its sole rare earth mine in California, which is expected to start producing rare earth metals in 2020.[xii] If production is successful, the Mountain Pass Mine in California could comprise 10% of worldwide mining production, which would give the United States considerably greater self-sufficiency.[xiii]
Perhaps the Trump administration’s most creative attempt to increase American self-sufficiency is Trump’s insistence on buying Greenland. Most partisan news reporters and politicians have written off Trump’s plan as another random and incoherent foreign policy decision, but in reality Trump may have simply recognized Greenland’s resource potential. Greenland is believed to have vast stores of rare earths; according to the developer Greenland Minerals Ltd, the Kvanefjeld Plateau in southern Greenland holds more than a billion tons of rare mineral resources.[xiv] Of course, the Chinese have also taken note of Greenland’s potential: Chinese producer Shenghe Resources Holding Co. is already Greenland Minerals’ largest shareholder.
China’s Monopoly Stands Strong
All of this news has presented China with the stark truth: rare earth metals are not that rare. To be sure, China still sits on more rare earths than any other country, holding 40% of the world’s reserves. Its closest competitor is Brazil, which only holds 20%[xv]. But this is not enough for China to be totally at ease. If countries start ramping up production, then China’s relative dominance over mining will start to disappear. Still, China’s refinement and extraction processes allow them to manufacture 90% of the world’s finished rare earth products, causing massive concern to many in the West. The extraction process is intensive, brutal work, and China’s lax labor and environmental laws make it difficult for other countries to compete with their mining, extraction, and production operations.[xvi] Although China’s monopoly on mining may be coming to an end, its monopoly on refining remains strong.
Xi Jinping’s (Empty?) Threats
Perhaps this is why China has signaled that it can weaponize its monopoly on rare earth refinement against America in the trade war. In late May of 2019, just before delegations from the US and China were set to discuss a possible trade deal, Xi Jinping made a widely-publicized visit to a rare-earth magnet factory in Southeast China.[xvii] Although Xi did not explicitly threaten the United States with an embargo like it wielded against Japan, his threat was understood. Days after the visit, Hu Xijin, the editor of the Global Times, a paper commonly seen as a mouthpiece for the Chinese government, gave his take on the extent to which China might block exports of rare earths to the US: “I think the Chinese government won’t do this immediately,” Mr. Hu wrote on Twitter, “but it’s seriously evaluating the need to do so.”[xviii]
China’s hesitance to engage in such a drastic action is probably due to the US’s crucial role in the supply chain of computer electronics: the vast majority of companies that produce semiconductors are American companies, not Chinese.[xix] Thus, doing to America what they did to Japan in 2010 would also be painful for China, since they are reliant on many high-tech American exports. There is also the possibility that Donald Trump would react in an unpredictable, dangerous way if China were to escalate trade tensions that drastically. Although Xi’s May visit to the factory was widely seen as a veiled threat, nothing has come of it since; it may have just been a flailing attempt on China’s part to tell the United States to back down—but it hasn’t. It seems that Xi Jinping and the Chinese leadership cannot do much except attempt further trade negotiations with the ever-mercurial President Trump. Perhaps China realizes that although their position in the rare earths industry remains strong, it may not be strong enough.
*Illustration by Ainav Rabinowitz
[i] Rare earths give China leverage in the trade war, at a cost, The Economist, June 15, 2019 issue
[ii] Rare earths give China leverage in the trade war, at a cost, The Economist, June 15 issue
[iii] Rare earths give China leverage in the trade war, at a cost, The Economist, June 15 issue
[iv] A quick guide to the US-China trade war, The BBC, Sept
[v] Nick Leung, China Brief: The state of the economy, McKinsey & Company, March 2019 issue
[vi] US Economic Growth Slows This Year, The BBC, October 30 2019
[vii] Chris Buckely, 2019 is a Sensitive Year for China. Xi is Nervous, The New York Times, February 25, 2019
[viii] Keith Bradsher, Amid Tension, China Blocks Vital Exports to Japan, September 22, 2010.
[ix] (IN)EFFICIENT BREACH OF INTERNATIONAL TRADE LAW: THE STATE OF THE “FREE PASS” AFTER CHINA’S RARE EARTHS EXPORT EMBARGO, Harvard Law Review December 2011, Vol 125
[x] Rare earths give China leverage in the trade war, at a cost, The Economist, June 15, 2019 issue
[xi] Laura Millan Lombrana and Theophilos Argitis, U.S. and Canada Discuss Supply of Rare Earths as China Dominates, Bloomberg, September 30, 2019
[xii] David J. Lynch, China hints it will choke off U.S. ‘rare earths’ access. But it’s not that easy. The Washington Post. June 10, 2019
[xiii] David J. Lynch, China hints it will choke off U.S. ‘rare earths’ access. But it’s not that easy. The Washington Post. June 10, 2019
[xiv] Kiliii Yuyan and David Stringer, Greenland’s Rare-Earth Minerals Make It Trump’s Treasure Island, Bloomberg, September 3, 2019
[xv] Rare earths give China leverage in the trade war, at a cost, The Economist, June 15, 2019
[xvi] David J. Lynch, China hints it will choke off U.S. ‘rare earths’ access. But it’s not that easy. The Washington Post. June 10, 2019
[xvii] Keith Bradsher, China’s Supply of Minerals for iPhones and Missiles Could Be a Risky Trade Weapon. The New York Times. May 23, 2019
[xviii] Keith Bradsher, China’s Supply of Minerals for iPhones and Missiles Could Be a Risky Trade Weapon. The New York Times. May 23, 2019
[xix] Rare earths give China leverage in the trade war, at a cost, The Economist, June 15, 2019 issue