Rare earth minerals: America’s Achilles heel in competition with China

“Rare-earth elements” have recently become the latest front in the trade tensions between the United States and China. China has recently imposed sweeping restrictions on the export of these elements to other countries, especially the United States, which has angered Donald Trump.

One reason for Trump’s anger is that China’s sweeping restrictions on the export of rare earth elements threaten the US defense industry and give Xi Jinping powerful leverage in upcoming trade talks with him.

Rare earth elements are a group of 17 metallic elements on the periodic table that include scandium, yttrium, and the 15 lanthanide elements (from lanthanum to lutetium). These elements are vital to advanced industries because of their unique chemical and physical properties, such as their ability to create strong magnets or conduct light.

These materials have such a wide range of applications in key industries, especially the defense sector, that it is said that any device that turns on and off probably works with rare earth elements. The United States was the leader in producing these materials until the 1980s, but in the following years, as its mines closed, it lost the market to China, and now depends on the country for 80 percent of its needs.

China’s Ministry of Commerce announced on October 9 that it would ban the export of rare earth minerals for use in foreign militaries. These are the first restrictions that China has imposed specifically on the defense sector, said Graselin Baskaran, an expert on critical minerals at the Center for Strategic and International Studies.

Baskaran also said that this means licenses will not be issued to foreign militaries and companies that produce products for military use, which is a powerful negotiating tactic because it compromises national security.

Magnets made from rare earth elements are critical components in U.S. weapons systems such as the F-35 fighter jet, Virginia- and Columbia-class submarines, Predator drones, Tomahawk missiles, radars, and a series of direct-guided smart bombs, according to the U.S. Department of Defense. China dominates the global supply chain for rare earth elements.

According to the International Energy Agency, the country controls 60 percent of global mining and more than 90 percent of global processing. According to the U.S. Geological Survey, Washington imports about 80 percent of its needs for these materials from China.

“It’s a disgrace that we don’t have a strategic reserve of rare earths and we let China monopolize 90 percent of the processing of these materials,” Jeremy Siegel, a finance professor emeritus at the University of Pennsylvania, told CNBC. “Where were we?”

China has also imposed sweeping controls that require foreign companies to obtain export licenses if even 0.1 percent of the value of their products consists of rare earths processed in China.

Companies will also need licenses for products that rely on Chinese technologies for mining, smelting, separation, magnet manufacturing, and recycling. “If these rules are implemented rigorously and without a time limit, they will have enormous implications not only for the United States but also globally,” Wolff Research analyst Tobin Marcus said in a note on Oct. 10.

The materials are also critical to the semiconductor and automotive industries. The restrictions will affect all sectors of the US economy, but defense, semiconductors, and electric vehicles will be hit the hardest, said Alicia Garcia Herrero, an economist at French investment bank Natixis.

Defense contractors Apple, Nvidia, Intel, Tesla, Ford, and General Motors are among the most at risk, she said in a note. The Trump administration is trying to build a domestic supply chain.

The Defense Department signed an unprecedented deal in July with the largest U.S. rare earth miner, MP Materials, that included an equity investment, a price floor, and a guaranteed purchase agreement. “This will certainly accelerate America’s efforts to develop domestic rare earth resources,” Marcus said.

Shares of companies related to rare earths in the US have risen as investors expect the Trump administration to sign more deals with other mining companies.

Why is China tightening its controls?

China has cited national security interests as the reason for the new restrictions. “Rare-earth-related data-x-items have dual properties for both civilian and military applications. It is an international practice to implement export controls on them,” a spokesperson for China’s Ministry of Commerce told reporters.

The spokesperson added that “some” foreign organizations and individuals have directly or after processing transferred controlled rare-earth materials of Chinese origin to “relevant organizations and individuals, directly or indirectly, for military and other sensitive applications.”

“This has caused significant damage or potential threats to China’s national security and interests, negatively affected international peace and stability, and disrupted global non-proliferation efforts.”

The restrictions could reignite the trade war between China and the United States after months of relative calm. In response, Trump has imposed 100% tariffs on Chinese goods, effective November 1. The hefty tariffs, on top of an existing 44 percent tariff on China, effectively cut off trade between the world’s two largest economies.

“A renewed escalation of tensions could return us to a quasi-sanctions situation in the spring,” Marcus told clients.

Goldman Sachs told clients that the most likely scenario is that both sides will back down on their aggressive policies and that talks will lead to a further—and perhaps indefinite—extension of the tariff deadline reached in May.

But Beijing’s strategy is unclear, and the deadline for tariffs is just weeks away, raising the risk that a deal won’t be reached in time.