Blocking Rare-Earth Exports Is Self-Destructive Option for China

May 29, 2019 Updated: May 29, 2019

News Analysis

WASHINGTON—China may take the drastic step of restricting exports of rare-earth elements to strike back at the United States, as the trade war between the world’s two biggest economies continues to intensify. However, Beijing’s use of these strategic metals as a policy weapon against Washington has devastating consequences and may backfire, according to experts.

While Beijing has so far not explicitly said it would limit rare-earth exports to the United States, state-owned Chinese newspapers have warned that Beijing would seriously consider the option.

Rare earths are a group of 17 elements used in the production of critical components of key technologies, such as electric vehicles, smartphones, wind turbines, satellites, missiles, and semiconductor chips. The metals are also crucial for the defense sector as they are used in precision-guided weapons, communications equipment, jet engines, batteries, and other defense electronics.

The United States was the largest producer of rare-earth elements until the 1980s. However, many plants were closed during the past few decades because of costs and environmental concerns, as well as competition from China. Currently, the United States is fully dependent on imports of rare earths, and the vast majority comes from China.

Speculation that China could use its dominance in rare-earth metals is a “huge threat” to the United States, according to Richard Trzupek, an analyst at the Heartland Institute, a Chicago-based think tank.

“The politicians and policymakers have largely had deaf ears about it,” he said.

If China decides to cut off rare earths, it would have a devastating effect on both sides, according to Trzupek. And a total embargo would throw down the gauntlet to the entire industrialized world, he argued.

“It’s hard for me to believe that they would be mad enough to take that big step,” he said, adding that it would have a negative effect on the Chinese economy.

In the past few days, China’s state media outlets, including the Global Times and People’s Daily, have strongly implied that China could use rare earths as a policy weapon in the trade war with Washington.

“Will rare earths become a counter-weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery,” People’s Daily stated in a commentary.

“Based on what I know, China is seriously considering restricting rare-earth exports to the United States. China may also take other countermeasures in the future,” Hu Xijin, editor-in-chief of the Chinese tabloid Global Times, wrote on his Twitter account on May 28.

Veiled Threat

Speculation began when Chinese leader Xi Jinping on May 20 visited a Chinese rare-earth mining company in Ganzhou City, which is known for its rich deposits of rare-earth minerals. Xi’s visit has been considered a veiled threat aimed at the United States.

Beijing has used rare earths as a retaliatory tactic before, but ended up shooting itself in the foot.

In 2010, Beijing cut off rare-earth exports after a Chinese fishing boat collided with two Japan Coast Guard ships in the East China Sea. The export ban sent the prices for raw materials through the roof. The huge price spike worked against Beijing, as it encouraged a surge of illegal production in China; it also motivated new production in countries such as Australia and destroyed demand for Chinese rare-earth metals.

In 2012, Japan, the United States, and the European Union complained to the World Trade Organization (WTO) about China’s restrictions on rare-earth exports. Two years later, the WTO ruled against China.

“It is a potential friction point in our bilateral relationship,” said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank.

“The depth of mistrust is growing. So, it’s something that should be closely monitored,” he added. But he doesn’t expect the Chinese regime would institute harsh export controls a second time, after losing the case at the WTO a few years ago.

The U.S. Defense Department submitted on May 29 a report to Congress on rare-earth minerals, according to Reuters. The Pentagon didn’t explain details of the report but it said the document was tied to a federal program designed to boost domestic production capabilities through economic incentives.

In December 2017, President Donald Trump issued an executive order to executive departments and agencies to develop a strategy to ensure secure and reliable supplies of critical minerals.

The United States lost its ability to produce rare-earth metals during the past few decades, mainly because of increased environmental opposition to mining, Trzupek said, adding that it would take years to rebuild that capability.

“The permitting process in the United States is so complex and so open to obstructions,” he said.

“If you are mining rare earths and you want to change your process a little bit, then you have to apply for a permit, and environmental groups who oppose to any kind of mining will break their back to oppose that,” he explained. “So it gets more expensive because you’re using older technology.”

“So eventually, economically it makes no sense for a mine operator or a refiner to continue to do business in this country. They just can’t compete anymore,” he said.

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