Prioritizing rare earths for defense instead of clean energy wins support for a domestic supply chain to ensure combat readiness --- reducing dependence on China checks military aggression

The U.S. government, of course, has its own part to play. First, strategic planners must honestly distinguish rare earth demand for defense and other strategic purposes from non-strategic demand. While both strategic and non-strategic demand must be balanced in order to stabilize supply, delivery delays for defense purposes carry significant implications for combat readiness, especially in an era of heightened major-power tension. It is also crucial that the U.S. government ensure its strategic stockpiles of REE are filled to aid in these efforts.

Conclusion

The recent merger that created the China Rare Earth Group is a major development for the global rare earth industry. It is the most recent chapter in the Chinese government’s efforts to quell an industry that has been unruly at times. Given that Chinese efforts to directly control exports have been blocked by bodies like the WTO, officials are now opting for domestically oriented policies to manage the industry. The merger of China’s largest rare earths operators is the most recent iteration of decades of forced industrial consolidation meant to cut down on inefficiencies and increase central oversight. These internally facing policies, which carry significant consequences for global REE industries, are more difficult to challenge in international dispute systems than their externally-facing precursors.

Through the reorganization, Chinese regulators can better enforce central policies and mitigate friction with local officials who often encourage and permit rare earth production counter to central regulations. From China’s perspective, consolidation is a means to produce rare earths in a more sustainable fashion by deploying more uniform production and environmental practices, as well as reducing speculative capital flows that increase domestic rare earth prices in China. Greater oversight from the SASAC over the China Rare Earth Group creates more leverage for Beijing’s officials to influence prices by further bifurcating the domestic and international prices of rare earth products and stabilizing the former. It is also likely that demand will increase, propelled by China’s goals to increase alternative energy and defense capacity. Thus, we anticipate this merger will not be the last and that China’s leaders will eventually fold the remaining three northern rare earth SOEs into their own mega-conglomerate, absent any significant deviations in industrial ideology.

Two geopolitical dynamics properly contextualize the risks associated with China’s REE dominance: 1) Chinese tensions with the U.S. and its allies over trade and 2) Chinese positioning on Taiwan.[81] Given China’s REE dominance as a stable global supplier, would Chinese officials self-sabotage during periods of relative peace, pushing Western countries to develop alternatives proactively? Indeed, despite aggressive posturing and threats from Chinese officials and tabloids, China has yet to restrict REE exports as leverage in its trade war with the United States. Aggression toward Taiwan would likely be a completely different story, especially if the U.S. provides military equipment or combat support to Taiwan. With more centralized state oversight and a leadership structure more amenable to central coordination, the China Rare Earth Group increases the state’s ability to influence and possibly even restrict rare earth exports for political reasons.

Whether China would weaponize their leverage over rare earth supply chains in direct conflicts with the U.S. and/or its allies is a matter of speculation and debate. However, one thing is for sure: In such an event, the U.S. must minimize China’s ability to limit sanctions and other collective global responses against potential coercive action. Taking the invasion of Ukraine as an example, Russia’s VSMPO-Avisma’s strong positioning as the leading global aerospace-grade titanium supplier caused several EU member states to oppose sanctions on the company, despite its role in maintaining Moscow’s force posture.[82] In order to respond adequately to Chinese military belligerence, the U.S. must ensure that China’s consolidated rare earth industry does not grant Beijing undue influence over an international response. The U.S. and its allies must act accordingly to divorce their strategic industries from Chinese rare earths.

As a result of these dynamics, U.S. government officials are under pressure to take significant steps. They must mitigate short- and medium-term supply risks from potential disruptions in Chinese supply and simultaneously take a long-term approach to developing a domestic rare earths ecosystem. The former relies more on filling strategic stockpiles, securing alternative supplies from allied countries like Australia and decreasing product reliance on rare earths from an engineering standpoint where possible. The latter involves a more holistic approach of bolstering several nodes along rare earths value chains simultaneously (so they can be connected once fully operational) and involving foreign capital in these efforts when the opportunities present. Private-sector and government funding from allies like Australia, Japan and South Korea can be used to develop “friendly” rare earth supply chains with more secure supply. However, the United States’ sole reliance on allies to correct domestic industrial deficiencies in rare earths would not provide the more robust REE supply chains that are envisioned.

Through congressional authority and executive branch vehicles, the U.S. government can continue to focus on commercializing American rare earths from extraction to downstream manufacturing. R&D funding could focus on several key issues including more efficient and sustainable extraction from commercial and environmental standpoints and more flexible processing to accommodate broad ranges of mineral feedstocks. Here, developments in continuous ion exchange (CIX), RapidSX (and advancement beyond traditional solvent extraction methods) and other separation processes are encouraging, given rare earth deposits typically coincide with deposits of other critical minerals.[83] Through tax breaks and other cost-assistive policies, the U.S. government can also better commercialize domestic rare earth production and chip away at China’s dominance and their non-market approaches to managing the rare earth industry.

A nuanced approach to tariffs may also be in order. China’s trade manipulation (in the form of VAT export rebates that fluctuate based on state industrial priorities) makes non-Chinese rare earth producers less cost effective. Tariffs imposed via Section 203 or 301 investigations can mitigate this gap, but doing so would likely paralyze U.S. industries that are highly dependent on rare earths, especially in the technology sector.[84] The recent determination by the Department of Commerce (DOC), pursuant to a 270-day Section 232 investigation, found that NdFeB imports from China present significant national security risks. However, because of virtually nonexistent domestic NdFeB supply and other holes in the value chain, the DOC’s hands were tied, and they did not institute tariffs on imports. As supply disruptions from China come closer to becoming a reality, it will become increasingly important to regain this element of trade leverage as well as supply independence, in the event of a stoppage in Chinese NdFeB exports. Instituting tariffs on NdFeB imports from China would only be viable once rare earth ecosystems in the U.S. and allied countries mature considerably. Whatever the policy choices may be, regulators in the U.S. must portray a sense of stability and focus in order to increase investor confidence in its burgeoning rare earth industry.

Ultimately, U.S. government and industry decision-makers will face the challenge of winning U.S. voter and taxpayer support for more assertive raw materials supply chain strategies and policies. To make the case, political actors and industry representatives must provide clear definitions of needs and priorities and, as we suggested earlier, be prepared to abandon some non-strategic aspirations, in particular non-defense uses including, perhaps, those linked to alternative energy mandates and subsidies. In the end, it is not certain that voters will accept the burden of “de-risking” a broad swath of raw materials and technology-oriented industrial policies. Defense planners, in particular, must be ready to deal with those outcomes.