Can the West Shake Its Dependence on China’s Rare Earths?

The Taiwan Strait crisis in early August once again highlighted the question of Western economic levers as possible punitive measures should China escalate its offensive pressure on Taiwan. Despite the recent provocations, it appears that, for now, both Beijing and Washington remain wary of engaging in military conflict over Taiwan. And after taking into account the surprising ferocity of Western sanctions following Russia’s invasion of Ukraine, punitive economic measures appear as the most obvious answer should China escalate its military engagement further.

In fact, the focus of Washington seems to be increasingly on whether, and how, it can decrease its supply-chain dependency on China. Besides the ongoing trade war between the two, the United States has long targeted Chinese technology due to its worries over potential weaponization of 5G networks. In a sign this sentiment is now spreading into other sectors, the Biden administration recently expanded its restrictive measures on Chinese businesses (such as adding new firms to the Entity List) and announced measures that suggest a growing push to decrease U.S. vulnerability to Chinese import disruptions – particularly on rare earth elements (REEs).

China’s REE Dominance

REEs, such as neodymium, yttrium, and terbium, are crucial materials commonly present in smartphones, wind turbines, and electric vehicles. As of today, China controls around 80 percent of the production of rare earths.

Half a century ago, the U.S. Mountain Pass Mine was the leading producer of rare earths. But concerns around environmental costs associated with radioactive waste disposal related to REE production pushed a lot of production to China, where companies enjoyed lax environmental regulations. In addition, Beijing had focused on developing the rare earth industry since the 1950s with Baotou processing site for materials coming from the Obo mine being a flagship of Sino-Soviet cooperation.

China’s rare earth mining quota output rose – for a fifth year in row –  by a hefty 25 percent earlier in August. That should not be a surprise. The world is hungry for REEs, as global focus on EVs and other REE-reliant industries is rising. But the Western reliance on China’s REEs is increasingly at the center of U.S. discussion on supply chains decoupling. This has been shown not only by recent legislative efforts (the new CHIPS and Science Act and the Inflation Reduction Act) but also drill testing plans by Dateline Resources at Colosseum Mine, near the Mountain Pass Mine (the only REE operating mine in the U.S.) and governmental plans to tackle the U.S. weakness in the midstream processing of REEs by opening a Lynas-operated facility in Texas by 2025.

Weaponization of the REE Sector

China’s continuing dominance of the REE sector seriously impacts the West’s ability to find autonomous solutions to support its own defense industry, let alone impose economic sanctions on Beijing. Although the Western industrial complex has been reliant on China for REE exports for years, the issue only began to prompt security concerns in 2010, after China halted exports of REE materials to Japan amid ongoing diplomatic tensions. Still, little has been done since then when it comes to China’s monopoly over REEs. Quite the opposite, Beijing has even further strengthened its grip over the sector by increasing its investment into crucial mining projects across Africa.

That said, this seems to be changing following recent tensions around Taiwan. This is most likely due to the Western military industry’s reliance on China’s REEs, which probably keeps Pentagon staff up at night. REEs are needed to manufacture fighter jets, submarines, and cruise missiles, meaning that Western military supply chains are highly vulnerable to Chinese decisions to limit REEs exports. With no alternative to feed military apparatuses so far, North American producers of critical minerals estimate that should confrontation occur, China could cut short the supply of critical minerals to the U.S. in an event of war, and exhaust the U.S. stock of minerals necessary for its defense apparatus in less than 90 days.

With this in mind, China took aim at the sector earlier in the year when it said it will restrict access of two U.S. defense companies to its REE exports. Their reliance on the Chinese sector in this regard was directly quoted by the media and was weaponized as retaliation for U.S. arm sales to Taiwan. It is thus reasonable to assume that China fully realizes the potential impact such an embargo would have on Western military apparatus; NATO’s dependency on rare earths from China seems to be even bigger than its dependency on energy from Russia.

REE Decoupling: An Unrealistic Timeline?

Western military industries’ dependence on Chinese rare earths will not vanish overnight. The path toward (partial) autonomy involves a blend of three factors: lawmaking, international alliances, and streamlined permitting processes. Indeed, the U.S. Departments of Defense and Energy, along with mining majors, are currently forging programs to build a domestic supply chain of critical minerals in response to the bipartisan infrastructure law, the CHIPS+ Act, and the Inflation Reduction Act.

In addition, the DoD plans on financing a Lynas separation plan in Hondo, Texas, to tackle industry weaknesses in the midstream processing of REEs: the extraction, separation, and purification technologies. The facility could produce up to 5,000 t/a of the rare metals.

However there still appears to be a lack of pragmatism in the Biden administration’s understanding of the issue. There is a gap between legal initiatives to favor REE production and the time it takes to get a mine in production in the United States. The average time for the Bureau of Land Management to issue a permit for a hard rock project is around two years, before the development and construction stages that can take up to a decade. In addition, there also seems to be a disparity between the U.S. government and the private sector, which still continues to make new major deals with Chinese producers. Ford only recently announced a major deal with Chinese CATL to supply lithium iron phosphate batteries starting in 2023.

Lengthy permitting processes, among other things, will likely hinder Washington’s – and the West’s – agility when responding to the next Taiwan crisis, giving Beijing the upper hand. For years to come China will be able to retaliate to any intervention in a Taiwan contingency by sanctioning U.S. military contractors dependent on REEs, a card Beijing has shown it does not hesitate to play when tensions are high. All this suggests that the clock is ticking in Beijing’s favor.