The only question about China’s dangerously dominant position in the rare earth market — which it first briefly weaponized against Japan in 2010 — is how and when it uses it. Beijing has now turned up the pressure to eleven. The consequences both economically and geopolitically could be extremely serious.
There has been plenty of talk about China’s ability to build up such a position in the supply of metals that, despite their name, are not particularly rare, even in the concentrations necessary to make their processing worthwhile. But, with occasional exceptions, such as Japan, which since 2010 has gone some way to reducing its dependence on China, that talk has led to pathetically little action. Currently, China mines 60 percent of the world’s rare earths. Moreover, on some estimates it handles over 90 percent of their processing and, downstream of that, about the same percentage of rare earth magnets, one of their most important applications.
Rare earths matter. They are critical to the functioning of a vast range of today’s technologically advanced hardware, from smart phones to transportation (especially, but not only, electric vehicles) to medical devices. Perhaps most worryingly, they are indispensable elements in high-tech military equipment, from submarines to jets to guided missiles to satellites. Between 2019 and 2022, the U.S. imported more than 95 percent of the total rare earths it consumed, much of which was from China.
Tariffs and export controls apart, an underlying cause of the current crisis is that Beijing knows that the U.S. and some other Western nations want to end their rare earth dependency on China. Beijing also knows that doing so will take time. It is already taking measures to ensure that doing so will not be easy. Nevertheless, the U.S. has no reasonable alternative. This will, for a while, be expensive, but it is a price that we will have to pay. “Defense,” wrote Adam Smith, a term that in this context can be extended to the preservation of much of our modern economy, “is of much more importance than opulence.” To be sure, a reversion to “free” trade (if that is the right phrase to describe dealings with mercantilist China) would be “cheaper,” but that would be a deceptive bargain, resting on a profound mispricing of China risk.
How far will China go? If it sharply reduces its exports of rare earth product for a prolonged period, the economic damage would be felt in China too. It could also easily elevate global tensions still further. Perhaps those are risks that Beijing, its eyes fixed firmly on Taiwan, may be prepared to run. Such opportunities, after all, do not come up every day.
More likely is that some sort of compromise will be cobbled together, with tariffs and export restrictions eased and the flow of rare earths resumed, in all cases at a rate sufficient to ensure that, at least superficially, business as usual can be resumed.
Such a settlement would be no more than a possibly very temporary reprieve. The U.S. must proceed apace with the restoration and expansion of its own rare earth sector. That will involve the use of carefully selected tariffs and other normally heretical measures, such as subsidies. As mentioned above, Adam Smith would understand.
Smith might even give a pass to the stakes that the U.S. government has begun taking in certain mineral producers and, for that matter, to its extension of certain price guarantees to those companies’ production, so long as such arrangements are structured as temporary expedients designed to get things going rather than anything more permanent. The government should sell those equity stakes as soon as circumstances allow. President Trump should not be taking lessons from Argentina’s Juan Perón, whose interventionist, corporatist vision led inexorably to corruption, cronyism, and decline.
Trump should instead learn from the way that America’s astonishingly successful rearmament after 1940 was, over the objections of New Deal troglodytes, primarily handled by the private sector. It is a good sign that, judging by comments from Treasury Secretary Scott Bessent, the administration is looking at the fruitful public and private sector cooperation that was such a hallmark of Operation Warp Speed.
It is encouraging that markets have scented the opportunity. Stocks in American rare earth companies have soared. To take another example, JP Morgan Chase has announced that it will invest up to $10 billion as part of a $1.5 trillion, ten-year plan “to facilitate, finance and invest in industries critical to national economic security and resiliency.” These will include rare earths. This is not, JP Morgan’s CEO has stressed, a philanthropic venture, but “100 percent commercial.”
Government can also help by getting out of the way. Permitting procedures for opening, extending, and reopening mines should be not only hugely accelerated but also based on a cost-benefit analysis that puts more weight on the country’s economic and geopolitical needs than on environmentalist absolutism. The same should be done to assist in the revival of domestic rare earth processing, something that should be achievable without re-creating China’s toxic wastelands. The U.S. should also take full advantage of the opportunities offered by recycling and by extracting the rare earths present in other mineral waste.
All this should have happened years ago. It must happen now.