Emily de La Bruyère is a co-founder of Horizon Advisory, a US-based independent strategic consultancy focused on geopolitical, economic and technological competition, where she has led multiple China research programmes, and developed novel analysis tools and techniques. De La Bruyère is also a senior fellow at non-profit the Foundation for Defense of Democracies, with a focus on China policy.
Julian Turner (JT): What are rare earth metals, what are their main uses and why are they so valuable?
Emily de La Bruyère (EB): There are 17 rare earth elements, including cerium, dysprosium, erbium, europium, and gadolinium. Rare earths are a supply-limited feedstock across modern industry, powering everything from iPhones and electric vehicle batteries to rapid Covid-19 testing devices.
Known reserves of rare earth elements exist globally. Both the US and China possess healthy natural endowments, but today China dominates most critical rare earth elements and the processes by which they are actively mined and processed.
JT: What are the key takeaways from Horizon Advisory’s recent report into China’s dominance of the global rare earth metals market?
EB: Our report surfaces two key buckets of new findings. First, Chinese sources discuss leveraging rare earth dominance against the US for coercive ends. Beijing would do so as, or within the context of, an escalatory measure in response to geopolitical dispute. More broadly, People’s Republic of China (PRC) sources frame rare earths dominance as a strategic input in today’s great power contest.
Second, we identify in our report the scope and depth of China’s state planning in the rare earth industry. In terms of depth, the PRC has focused on rare earths for as long as it has existed. Beijing’s first rare earths project, and the industrial plans propping it up, date back to 1953. Rare earths have been key to China’s high-profile industrial plans since then, including ‘Made in China 2025’ and research that has been conducted for China Standards 2035.
In terms of scope, Beijing’s rare earths ambitions extend internationally. China does not just want to prop up, and control, its industry at home. It also wants to ensure control of global rare earth industry and supply, and with it the industry chains, actors, and countries dependent on rare earths.
JT: How has the Chinese state succeeded in securing this monopoly on rare earths?
EB: Beijing reportedly has about 70% of the world’s known rare earth reserves and accounts for 80%–90% of rare earth production. In part, this is a function of natural resource endowments. As China’s former leader Deng Xiaoping famously declared: “The Middle East has oil and China has rare earths”.
However, China’s rare earths dominance is also a function of government support for both domestic production and overseas investment. There’s a reason Beijing has an effective monopoly on rare earths refineries and processing plants; Beijing also uses regulatory arbitrage to create a permissive environment for rare earth extraction and processing, despite the environmental side effects.
Beijing also subsidises the rare earth industry. PRC research on the Inner Mongolia Autonomous Region, China’s main source of rare earths, found that the sector’s profit in 2015 amounted to less than RMB1.2bn, while state subsidies exceeded RMB1bn.
As new rare earths reserves have been discovered, Beijing has also extended this state support to investment in overseas rare earths reserves and production facilities.
“For China, the world’s largest producer of rare earths, the discovery of major rare earths mines outside China will undoubtedly have a profound impact on the future development of the rare earth industry,” says a 2016 Belt and Road research report. “Simply relying on China’s domestic rare earth mining is unrealistic. It is critical for Chinese companies to go out and seek rare earth resources”.
JT: How has Beijing sought to control the rare earths market by extending its influence abroad?
EB: The aforementioned Belt and Road report cites a 51% stake in an Australian mining company secured by East China Nonferrous Geological Prospecting Bureau in April 2011; Ganzhou Qiandong Rare Earth Group Co. Ltd’s August 2011 investment in South Africa’s extraction production line project; and Baosteel’s negotiations in May 2012 to purchase and mine rare earths in Kazakhstan.
Beijing also polices rare earths production and trade to maintain its dominance. In 2006, China implemented export quotas and controls for rare earths. In 2010, those controls – and their aggressive application vis-à-vis Japan in the Senkaku dispute – prompted the US, Japan, and the EU to jointly launch a World Trade Organisation case in 2012 against China’s trade blockade.
Beijing lost the case and an appeal. The ruling obligated it to end export quotas, but Beijing replaced those with consolidated control of its rare earths industry that allowed it, quotas or not, to retain influence over production and trade, including through tightly policed annual production ceilings.
In 2015, the PRC integrated the rare earth industry, according to the Guiding Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening the Reform of State-owned Enterprises (2015), increasing state-owned control of the strategic resources. The Ministry of Commerce’s 2019 Catalogue of Export License Management Goods clearly stipulates that special licenses are required for the export of all rare earths from China.
JT: What were the wider consequences of China’s decision to withhold supplies to Japan in 2010?
EB: China’s restriction of rare earths exports to Japan in 2010 lit a fuse, albeit a slow-burning one, of global recognition of China’s predatory and non-market economic behaviour.
Democratic and free market-oriented economies have slowly realised that the Chinese Communist Party’s reaction to Japan in 2010 was not an anomaly; that Beijing will do the same if and when they control critical supply chains and face geopolitical demand for coercion; and that Beijing does not distinguish between traditionally cooperative domains, like trade and supply chains, and its competitive global ambitions.
JT: How vulnerable is the US if China uses its market dominance as a geopolitical weapon?
EB: By common estimates, over 80% of US rare earth elements imports from 2014–2017 came from China. However, this total dependence extends well beyond that. Beijing has an effective monopoly on rare earths refineries and processing plants and even the projects in which Washington invests to shore up US capabilities are tied to China. For example, there are US companies that rely on Chinese equipment or inputs to process rare earths.
JT: What can the US government do to incentivise domestic production in response?
EB: The US should absolutely invest in all the traditional methods of incentivising domestic capacity building – granting tax relief and funding for US mining, processing, and recycling companies as well as in the development of new technologies and alternative inputs. The US should do so with trusted allies and partners who are also dependent on Beijing and at risk from its rare earths dominance.
But the US, its allies, and its partners have to do so in a protected fashion. Sources of rare earth supply have to be verified as trustworthy, reliable, and sustainable. They should not be dependent on Beijing for capital, equipment, technology, or investment. Right now, the US is not doing a good enough job at looking for second and third order dependencies and risks in the supply chain.