Growing tensions between the United States and China have
highlighted the West's increasing dependence on China for rare
The group of 16 metallic elements are used in the
manufacture of a wide range of consumer and industrial
products, but also are indispensable for many defense
applications as well as new green technologies, particularly
China accounts for more than 90 percent of the world's
output of rare earths, and the fact that the West in general
and the U.S. in particular are beholden to China for such
strategically important metals creates some remarkable
First, it is ironic that the West's green technologies
depend on ore supplied from high-polluting Chinese mines where
workers are exposed to toxic pollutants such that the incidence
of cancer is very much higher than elsewhere in China. Second,
the West is developing electric vehicles as a means of reducing
its dependence on foreign oil, but the chosen route makes it
even more dependent on China, a country some consider hostile.
The third and possibly biggest irony is that U.S. defense is
dependent on components that can only be produced in China with
Chinese raw materials, but with technologies developed in the
U.S. and funded by the Pentagon.
These ironies have not been lost on China's neighbors, Japan
and South Korea, where their governments have announced
strategies for ensuring uninterrupted supplies of rare earths.
Their concerns have been raised by China's policy of using
export quotas to systematically reduce the volume of rare earth
shipments. China's decision to limit its rare earth exports is
consistent with its long-standing policy of consolidating its
industries around fewer but larger players that are financially
more viable and environmentally more sustainable than the many
small players that characterize much of its industry. This is
especially so in rare earths.
A consequence of China's decision to restrict exports is
that it encourages foreign consumers of rare earths to relocate
their manufacturing facilities to China, where they believe
they will have an uninterrupted supply of raw materials. For
the Chinese, this migration creates much-needed employment as
well as transferring value-adding technologies not currently
available in China. The United States has been hit particularly
hard by the relocation of its high-performance magnet
production to China.
Rare earths are critical ingredients in the manufacture of
the high-performance magnets at the heart of many U.S. defense
systems, and the loss of a domestic magnet capability has led
to calls for Washington to take action to avert a perceived
looming rare earths supply crisis. While hopes run high that
some strategic priority will be accorded to the rare earths
sector, analysts are well aware that it was government inaction
in the past that enabled the nation's high-performance magnet
capability to be bundled up and shipped off to China.
In the early 1990s the United States was the dominant
producer of rare earth magnets and the industry was based on
technologies pioneered by the Pentagon. The leading producer,
Magnequench, a General Motors Corp. subsidiary, saw no value in
further development so it sold its technology and associated
manufacturing operations to a Chinese group that subsequently
dismantled the plant and bundled it off to China.
The White House could have used the Exon-Florio Amendment to
the U.S. Defense Production Act to prevent the transfer of
Magnequench's facility to China. Exon-Florio permits the
President to block any investment deemed a threat to national
security. Similarly, the Berry Amendment requires that
specialty metals, and specifically high-performance magnets,
incorporated into products delivered under Defense contracts be
melted in the United States or a "qualifying nation." China,
which at the time had been described by President George W.
Bush as a "strategic competitor," is not classified as a
Contemporary reports imply that influential groups lobbied
Bush to withhold his veto, and with no opposition from the
government the plant was dismantled and shipped to China while
450 skilled U.S. workers lost their jobs in a modern high-tech
industry where America was the clear global leader.
U.S. dependence on China for rare earths has encouraged the
emergence of a vocal group lobbying for preferential treatment
for local rare earth producers and consumers. The risk is that
such committed constituencies-an alliance of so-called "panda
bashers" who fear China's growing influence and investors
petitioning government assistance-could sway policy in the
wrong direction. Policy makers should be cautious as such
partisan groups could do as much harm as the free-market
devotees who lobbied in support of Magnequench's sale.
In formulating their response, policy makers need to be
aware that China's monopoly on rare earths is not geologically
predetermined as there are significant deposits elsewhere,
including in the United States but particularly in Canada and
Australia. Most of these deposits are owned by publicly traded
companies, but because of sustained low prices there has been
no incentive for investors to develop the properties.
Understanding that with a stronger price for concentrates
the rare earths supply constraint is a downstream manufacturing
problem and not an upstream resource issue is fundamental to
developing appropriate support polices. Funding new mines will
not improve the rare earths supply chain, whereas encouragement
of downstream fabricators will. Fabrication is more about
manufacturing than mining, and the sustained erosion of U.S.
manufacturing capabilities since the time of President Reagan
demonstrates that governments of all persuasions have yet to
devise strategies that can successfully stem the manufacturing
migration to China.
Policy makers also need to be aware that output from new
non-Chinese mines would need to be shipped to China, where
almost all of the world's rare earth products are now
manufactured. Complicating the policy process are situations
like Magnequench, where equipment and core technologies have
relocated to China, making it difficult to challenge its
dominance. This challenge will only get harder as more
manufacturers migrate to China, giving local rare earth
producers even greater opportunity to collaborate with global
end-users in the development of the applications that will
sustain ever-growing demand for rare earths.
With these constraints, how should policy makers react?
First, it is clear that it is in the nation's interest to have
a viable rare earths industry, and if this is to happen then
there is a need for some government support. Second, because of
the geological abundance of rare earths there is no need to
encourage new mines so public money should be directed
downstream to foster fabrication and assembly capabilities. And
finally, because governments are notoriously poor at picking
winners, the development of national champions will require
innovative policies. Indeed, the challenge for policy makers is
to be as innovative as the entrepreneurs they should be
A possible solution to the policy dilemma is for the
government to purchase rare earths concentrate and toll it
through a refiner or fabricator. A tender to supply concentrate
to the government should be attractive to potential investors
in new mines as the winning supplier could use the supply
agreement to support finance for the mine's construction. This
approach also would help the downstream sector, which is
handicapped because it currently does not have a reliable
supply of rare earths.
While U.S. policy needs to encompass other aspects,
especially encouragement for further research, the concept of
tolling government-purchased concentrate has the necessary
elements of a sustainable industry policy.
Michael Komesaroff is founder of Urandaline Investment, an
independent consulting company specializing in
capital-intensive commodity businesses. He also is Executive in
Residence at the School of International Affairs at
Pennsylvania State University.