The Fight over Rare Earth Minerals

The fight between China and the United States has gone to the next level. Up until now, the United States had been flexing its muscles, trying to beat China into submission. However, backed up in a corner, China has also decided to respond ferociously. The country has decided to escalate the trade war by threatening to ban the export of rare earth minerals to America if an agreement is not reached.

In dollar terms, the import of rare earth minerals is not significant. However, these minerals are used to power a wide range of products which have applications across different industries. In this article, we will have a closer look at how rare earth minerals are likely to have a negative impact on the economy of the United States. This will help us understand why they are being used by the Chinese as a source of leverage.

The Importance of Rare Earth Minerals

Rare earth minerals have multiple applications across a wide range of industries. For instance, they are extensively used to make glass. Without these rare earth minerals, companies would find it difficult to manufacture lenses which are used in cameras. These lenses are also used in mobile phone cameras. As a result, giant companies like Apple will also be affected adversely if China decides to stop selling these products to American entities. Rare earth minerals are also used in the manufacture of electric vehicles. This is the reason why companies like Tesla may also face an adverse impact.

Rare earth metals are also used in other industries such as automobiles, oil refining, and electronics. Each of these industries provides large scale employment to the American populace. Hence, when these companies suffer an adverse economic event, the people of America will also suffer an adverse economic event!

Lastly, rare earth minerals are also extensively used in America’s defense systems. The radars and lasers which power America’s defense system will not be able to function at optimal capacity if the supply of rare earth minerals is disrupted.

China’s Dominance in the Rare Earth Minerals Market

Although America and its companies use large quantities of rare earth minerals, they produce very little themselves.

About 80% of the rare earth minerals used by the United States are imported.

China is the dominant trade partner that supplies most of these minerals to the United States.

Estimates suggest that China alone supplies close to three-quarters of all the rare earth minerals which are imported by the United States.

Other countries like France, India and Japan only supply close to 3% each! This too is material which was ultimately sourced in China. Hence, it would not be incorrect to say that China is the dominant player in the world market when it comes to rare earth minerals.

If China were to declare an embargo, American entities would have a hard time building an alternate supply chain. Also, it is completely believable that China would stop supplying these products to America. This would not be the first time that China would do such a thing.

China has already restricted the supply of these materials to Japan once. This was done because of some territorial dispute. However, the impact was not really as big as it would be on American industries.

A wide variety of American companies would stand to lose trillions of dollars if this ban were to come into effect.

The Reasons behind China’s Dominance

China has carefully cultivated its dominance in the rare earth minerals industry. This was done in order to deter America in the event of a trade war. It is true that China is the biggest source of rare earth minerals in the world.

However, China has also made it impossible for other countries to become major suppliers. Instead of making huge profits from the sale of rare earth minerals, China has been doling out subsidies on these products for years. Since China was making a loss selling these products, other countries did not find this segment appealing enough to make inroads.

Had China not been providing subsidies and losing money for all these years, it wouldn’t really have leverage over the United States today! It is important to realize that this bargaining power is not a stroke of luck and has not come overnight.

Now, even if America tries to find other suppliers, it will not be able to do so immediately. The American government has asked for a report from the Pentagon to ensure that the reliance on Chinese minerals is reduced over the long term. This is being done to ensure that America’s strategic defense interests are not jeopardized.

Can America become Self Reliant?

The Chinese threats have startled many economic and defense analysts in the United States. They want to ensure that the American defense systems are self-reliant. As a result, they want to start processing these minerals within the United States itself. It is certainly possible.

Before the 1980s, America was the largest exporter of these minerals. It could revive its facilities if required. However, producing these minerals would be expensive and might take a toll on the environment as well.

America might try to shift its supply chain to other countries like Malaysia. However, Malaysia too is mulling a reduction in the production of rare earth minerals since they cause too much pollution.

The bottom line is that the rare earth minerals threat has given an upper hand to the Chinese government. It will be interesting to see how the United States deals with this threat.