Taiwan conflict becoming increasingly likely --- dependence on China allows it to manipulate rare earth supplies during conflict to try and gain leverage

The COVID-19 pandemic during 2020 and Russia’s invasion of Ukraine in February 2022 highlighted fragilities in global commodity supply chains and trade flows. These events also peeled away layers overlying growing tensions among competing world powers and shifting balances of power and influence. They serve as sobering reminders that relying on dominant suppliers and revisionist actors for vital commodities can create significant pitfalls. In particular, rising trade and geopolitical security tensions with China could threaten REE supply, potentially influencing up to $1 trillion of goods.[6]

The world experienced a wakeup call on the consequences of China withholding REE supply in 2010, an event we address later. Chinese officials would be unlikely to restrict rare earth supplies for purely political reasons during times of relative peace. A 2014 World Trade Organization (WTO) ruling limits their ability to reduce exports while maintaining domestic production. Additionally, supply disruptions would weaken their dominant position as the West develops alternatives. However, in the event of military confrontation between the U.S. and China, increasingly likely given hot spots like Taiwan, the Chinese could be inclined to limit rare earth exports given their end uses in defense technologies and other strategic goods. With the newly consolidated rare earth industry and the sovereign-owned China Rare Earth Group at the helm, Chinese officials are now better equipped to institute and enforce production and export restrictions, manipulating prices in a manner beneficial to their priorities.

China’s 2021 REE industry reorganization is the most recent chapter in the industry’s rather turbulent regulatory history — and likely not the last. Consolidation to a structure dominated by a small handful of firms has been a decades-long priority of the central government. Reducing production and pricing inefficiencies, standardizing mining practices for improved social and environmental sustainability, and increasing the state’s ability to enforce regulations were the primary motivations of the reorganization. Highly pervasive illegal mining, supported by bureaucratic friction between the central and local governments, remains a key issue for Chinese central planning. Many of their central priorities (especially in realms of technological competition and decarbonization) are highly dependent on stable rare earth prices and supplies to meet rising domestic demand. As such, the merger is a signal of Beijing’s resolve to chop off dead wood and overhaul an industry with key players that regularly go rogue.