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What Exactly Is the Story with China’s Rare Earths?

A ChinaFile Conversation

On May 29, the Communist Party newspaper the People’s Daily warned of the United States’ “uncomfortable” dependence on Chinese rare earths. “Will rare earths become a counter weapon for China . . ? The answer is no mystery,” it wrote. And on May 20, China’s Chairman Xi Jinping visited a rare earths facility in southern China, signaling that Beijing may strategically restrict its exports of rare earths to the United States. China produces roughly 70 percent of the world’s output of rare earths, a set of elements vital for the manufacturing of products like smartphones, electric vehicles, and wind turbines. (Deng Xiaoping reportedly said that while the Middle East has oil, China has rare earths.)

This isn’t the first time Beijing has politicized the export of rare earths. In late 2010, amid a dispute with Japan over uninhabited islands in the East Sea, Beijing restricted the exports of rare earths to the country. (Chinese officials denied there was a ban.) What does this mean for U.S. industries, and how should American policymakers respond? And what lessons can be learned from the 2010 trade spat between China and Japan? —The Editors

Comments

The collapse of trade negotiations last month and the Commerce Department’s restrictions on U.S. suppliers of Huawei, as well as its placement on the entity list, have strengthened a view in China that the United States intends to contain China’s rise. China is gearing up for a long-term struggle with the United States over trade, technology, and economics, and wants to demonstrate that it’s ready. Noticeably, on the same trip that Xi Jinping made to JL MAG Rare-Earth Co. in Jiangxi province in mid-May, he also visited the starting point of the Long March, a foundational myth in the history of the Chinese Communist Party (C.C.P.) and symbol of the Party’s ability to withstand great hardship.

In threatening to restrict the export of rare earth metals to the United States, China is wanting to demonstrate that it has leverage over the United States and an ability to respond with commensurate countermeasures if the need arises. China knows that the United States depends on China for rare earth metals. The United States sources about 80 percent of its rare earths imports from China, and the metals have been noticeably absent from the U.S. tariffs on Chinese imports, including the pending U.S.$300 billion. In this way, Beijing wants to show that it cannot be backed into a corner, and that any attempts to pressure China will fail.

Threatening to restrict rare earths exports to the United States does send a message, but it might not be the message China wants to send. Some Chinese interlocutors in Beijing have told me a circulating theory that the United States requested Huawei CFO Meng Wanzhou’s detention to goad Beijing into overreacting. While not a mainstream view, it shows that even in China there is an understanding that these sorts of retaliations may backfire. Reactions like the arrest of the two Canadian citizens or a ban on rare earth metals exports transform China from the victim to the aggressor.

Although it is understandable why the C.C.P. wants to show that it can strike back, this reaction could prove counterproductive to China. The move is likely to further aggravate tensions, harden the lines dividing the two countries, and empower those in Washington calling for decoupling. None of this is in China’s interest.

The possibility of China halting rare earths exports to the United States is not negligible, but it is only modestly more likely than China punishing America by selling off its $1.2 trillion in U.S. treasuries, or carrying out a massive devaluation of the renminbi. China’s dominance in deposits and mining of raw rare earths isn’t as valuable as it was in 2010, and everyone—including Beijing—knows it.

When China tried to suspend shipments of rare earths to Japan in 2010, it didn’t work out well. Global prices spiked, but Chinese smugglers filled the gap, and Japan and others were able to keep up supplies at reasonable prices. China then tried to more formally restrict exports with quotas, but the United States, European Union, and Japan beat back that effort by winning a WTO case in 2014. China claimed the restrictions were needed to protect its environment, but it lost this argument because it did not simultaneously reduce domestic production. Hence, its actions were blatantly discriminatory. China did not appeal the verdict, and it subsequently removed the restrictive quotas.

Since then, the sector has moved in a direction that gives China even less leverage. Mining and processing have grown in Australia and elsewhere, including in the United States, where there is some limited mining and processing. As a result, China’s share of global production has fallen from 97 percent in 2010 to 71 percent in 2018. Equally important, in reaction to the original scare, industries that consume rare earths have found ways to conserve how much of the minerals they need in equipment, and in some instances they have developed viable substitutes for rare earths altogether. The American military’s needs for rare earths likely could be met even if China turned off the tap entirely.

Given China’s declining substantive leverage, an effort to halt rare earth exports could rile markets for a couple days, sending the stock prices of providers up and the consumers down. But before long, cooler heads would prevail as they realize the threat is more imagined than real. Moreover, given that China already lost a WTO case over the exact same issue, Beijing would be immediately isolated and condemned the world over. Knowing this, China’s leadership is unlikely to follow through on the threat the Chinese media has been dangling in front of the world this past week.