In Trump's trade war, China has a powerful card to play

By: Nectar Gan and John Liu / CNN
Translation: Telegrafi.com

Less than a year after Donald Trump's first trade war with China began, Chinese leader Xi Jinping paid a high-level visit to a modest factory in Ganzhou, an industrial city surrounded by hills in the southeast of the country.

During a visit to the exhibition hall in 2019, Xi surveyed rows of ordinary blocks of gray metal and declared to a group of Communist Party officials: “Rare minerals are a vital strategic resource.”

Nearly six years later, China's dominance of the rare earths supply chain has emerged as one of the most powerful tools in a new trade war with the president of the United States. These minerals — essential for everything from iPhone-s in electric vehicles – are key components for the advanced technologies that will define the future.

And, unlike tariffs, this is an area where Trump has little room for equal retaliation.

Rare earth minerals are a group of 17 elements that are more abundant than gold and can be found in many countries, including the United States. But they are more problematic, expensive, and polluting to mine and process.

For decades, the US and other countries have been dependent on Beijing for its supply of these refined metals. According to the International Energy Agency, China accounts for 61 percent of global production of rare earth minerals and controls 92 percent of the refining process.

On April 4, after years of indirect warnings, the Chinese government imposed export restrictions on seven rare earth minerals as part of a response to Trump’s “reciprocal” 34 percent tariffs on Chinese goods. The new rules require all companies to obtain government permits to export the seven minerals and related products, including magnets.

Magnets made from rare earth minerals enable smaller, more efficient motors and generators used in smartphones, car and airplane engines, and magnetic resonance imaging machines. They are also essential components in a range of expensive weapons, from stealth F-35 fighter jets to nuclear-powered attack submarines.

"It's an indication of how China can exert tremendous economic power by being strategic ... and precise, hitting American industry precisely where it hurts the most," said Justin Wolfers, a professor of economics and public policy at the University of Michigan.

On Tuesday, Trump ordered an investigation into potential tariffs on critical minerals - a broader category of resources that also includes rare earth elements - with the aim of assessing the impact of these imports on America's security and sustainability.

"The United States' dependence on imports and the vulnerability of our supply chains increase the potential risk to national security, defense readiness, price stability, and sustainable economic well-being," Trump said in an executive order.

Since the first Trump administration, the US has been trying to catch up and build a domestic supply chain for rare earths. Three US companies in the rare earths industry told CNN that they are in the process of expanding production capacity and sourcing materials from US allies and partners.

But these efforts will take years to meet the huge demand of major American industries.

For now, the impact of Beijing's restrictions on exports is being felt immediately on the ground.

John Ormerod, founder of the rare earth magnet consulting firm, JOC, told CNN that shipments of rare earth magnets, belonging to at least five American and European companies, have been halted in China since the order went into effect.

"They were caught off guard, so there is a lot of uncertainty on their part and they need clarification from the authorities on what is required (to obtain the necessary export licenses)," he said.

Joshua Ballard, company executive director USA Rare Earth, said the export restrictions focus on rare earth minerals, which are 98 percent controlled by China. (Rare earth minerals are scarcer, harder to process and more valuable.) That means companies must now seek Beijing's approval to supply key U.S. industries with these critical materials, he added.

"Right now, these exports are being suspended outright," Ballard said. "We don't have any significant reserves of these materials here in the U.S. ... This is China's strongest move. They don't have much leverage with tariffs against us, but they definitely have the advantage here."

The new export controls target not only individual materials, but also alloys and products containing even trace amounts of rare elements, said Thomas Kruemmer, director of the Singapore-based firm that deals with the supply chain of minerals and metals, Ginger International Trade and Investment"Already, many exports are included under this licensing system," he added, noting that some delays are expected as exporters try to adapt to the new system.

According to state media, China began extracting rare earth elements in the 50s, but the industry only really began to develop in the late 70s.

During that period, China combined low labor costs and relatively low environmental standards with the adoption of foreign technologies, says Stan Trout, founder of the magnetic materials and rare earths consulting firm, Spontaneous Materials.

"Most of the technologies they brought came from the US, Japan or Europe," he said. "And, over time, I'm sure they improved them."

As rare earth production increased, Beijing gradually realized the strategic importance of these materials. “There was a realization that this could be a very important technology to master,” Trout added.

In 1992, during a visit to one of the major rare earth production centers in Inner Mongolia, Deng Xiaoping, the former Chinese leader who led the country’s economic reforms, famously said: “Just as the Middle East has oil, China has rare earths.” Today, China has realized Deng’s vision, dominating the entire supply chain for these materials.

Although labor costs in China are now higher, its control over the industry has been strengthened due to its “willingness to invest in technology, research and development, and automation” in an industry that requires very large investments, says Ormerod.

There used to be companies in the US that made magnets from rare earths, but according to Ormerod, they gradually disappeared from the market with the emergence of cheaper Chinese alternatives.

"We've lost technical knowledge, we've lost human capacity, and this is an industry with very high capital costs," he said.

It is now very difficult to compete with the "Chinese price", due to the advantages that China has from the large scale of production and from state aid that gives them even more advantage, Ormerod added.

According to a report by the US Geological Survey, published this year, between 2020 and 2023, the US relied on China for 70 percent of its imports of rare earth compounds and metals.

The latest export controls are not the first that Beijing has used to dominate the industry. In 2010, China suspended shipments of rare earth minerals to Japan for nearly two months over a territorial dispute. In late 2023, Beijing imposed a ban on the export of rare earth mining and separation technologies.

Beijing has also restricted exports of other critical minerals, which are essential to the economy and global supply chains.

Experts and industry players say China's export controls have left the rest of the world with few options. But the United States is trying to fill the void.

Since 2020, the US Department of Defense has provided over $439 million to create domestic supply chains for rare earth minerals. It has also set a goal of creating a sustainable chain – from mining to magnet production – that covers all US defense needs by 2027.

Some American companies see restricting exports from China as an opportunity to accelerate domestic production and push forward the creation of a stronger supply chain outside of China.

Nicholas Myers, CEO of the startup company, Phoenix Tailings, based in Massachusetts, said his company has developed a technology for processing rare minerals, without any waste and without polluting emissions, turning them into metals and metal alloys, with materials coming from domestic sources, as well as from Canada and Australia.

Currently, his company produces 40 tons of rare metals and alloys per year, and aims to reach 400 tons with the construction of a new plant in New Hampshire.

"It's a completely domestic process. We don't depend on anything coming from China," he said.

"The United States absolutely has the capacity to produce the rare earth metals in the timeframes that we really need. We just need to make sure that all customers and policymakers are focused on supporting this industry to grow it as quickly as possible," Myers added.

American businesses are also making strides in other parts of the supply chain.

USA Rare Earth is building a magnet manufacturing plant in Texas, with the goal of producing five thousand tons of rare earth magnets a year. According to Ballard, the CEO, the company also owns a rich deposit of heavy rare earth elements in West Texas — including all the minerals on China’s latest export control list. (The deposit is also rich in gallium, a critical material that China banned from exporting to the U.S. in December of last year.)

But the company is still working on developing processing technology to extract the minerals from the rocks, Ballard said.

"The question is: how can we do this faster? How can we unlock these resources that we have in the United States, however few they are? We need to unlock what we have and build as quickly as we can," he said.

After years of discussions, American companies may finally have the impetus they need to undertake the difficult work of rebuilding the raw materials extraction and processing industry - a key component to winning the technological race with China. /Telegraph/