Business as usual with China is not the way to go — and hasn’t been for quite some time.

Among the news items about rare earths last week was the disclosure that the U.S. Defense Department had taken a stake in MP Materials, which owns what is currently this country’s only rare earths mine. It also has a magnet plant in Texas. Proceeds from the investment will go to expand the company’s processing capacity. That matters. One pillar of China’s dominant position in this market is its ability to process rare earths, a multistage operation that begins by “separating” them from the rock within which they are contained.c

Last week’s deal will mean that the U.S. government becomes the largest shareholder in the company, a step (I hope) designed to speed up the “re-shoring” of the mining and processing of rare earths, minerals without which the U.S. economy and, importantly, the defense sector would be in trouble. In the short term, continuing to outsource such a critical business to China (where production is cheaper) might make economic sense (if China risk is mispriced), but, in the long term, it would be nuts. China is not our friend.

CNBC:

When asked whether the Pentagon is considering similar investments in other U.S. mining companies, the defense official said it is looking at opportunities to strengthen domestic critical mineral production.

“Rebuilding the critical minerals and rare earth magnet sectors of the U.S. industrial base won’t happen overnight, but DoD is taking immediate action to streamline processes and identify opportunities to strengthen critical minerals production,” official said in a statement.

Rare earths are used in weapons such as the F-35 warplane, drones and submarines among other other military platforms. . . .

MP Materials CEO James Litinsky told CNBC last week that he views the public-private partnership with the Defense Department as a model for other companies in industries that are important for national security but struggle to compete against the state-backed enterprises in China.

CNBC notes that Interior Secretary Doug Burgum had said in April that the government might take such stakes to break U.S. dependence on China in this area.

As a reminder, Adam Smith recognized that economic efficiency must take second place to strategic necessity, writing that “defense . . . is of much more importance than opulence.”

And, so far as economics go, companies that rely on China for key “cheap” raw materials should start properly pricing in the risk of China’s potentially cutting off or rationing the supply of such materials. If they did, the cost of Chinese product would no longer look like such a bargain.

But, if the U.S. is to rebuild its position in rare earths and other critical minerals, the government will have to relax its control too: it will have to speed up the permitting of new mines and processing facilities.

Meanwhile, there are signs that private sector repricing of China risk in this area is underway.

Also from CNBC:

Apple and miner MP Materials announced a $500 million deal Tuesday for rare earth magnets and the development of a recycling facility that will reinforce the iPhone maker’s U.S. supply chain.

MP Materials stock climbed 24%. Shares of Apple were marginally higher.

As part of the agreement, Apple will buy rare earth magnets created at the company’s facility in Fort Worth, Texas. Both companies will combine on a new rare earth recycling line in Mountain Pass, California. MP Materials plans to start shipping magnets in 2027.

Faster, please.

Business as usual with China is not the way to go — and hasn’t been for quite some time.