Rare earth shenanigans
Rare earth materials are again in the news! From WSJ last week:
China’s Commerce Ministry said Thursday that foreign suppliers must obtain approval from Beijing to export some products with certain rare-earth materials originating from China if they account for 0.1% or more of the good’s total value. Goods produced with certain technologies from China are also subject to the export controls. Both restrictions apply to products manufactured outside of China.
A significant development in the new policy is its “extraterritorial” reach. It does seem China is essentially borrowing a page from the US semiconductor policy even though they may only have a knife in a gunfight!
You may already be aware that the term “rare earths” is a misnomer. This group of 17 chemically similar elements is relatively abundant in the Earth’s crust. The “rarity” stems from several factors: a) Rare-earth elements (REE) are typically dispersed and rarely found in concentrated, economically viable deposits; b) the extraction process is complex and often environmentally intensive; and c) separating and refining REEs from their ores is a sophisticated and capital-intensive process that requires specialized technology and expertise.
It is in this processing stage that China has established a near-monopoly, controlling ~85-90% of the global capacity for refining rare earths and manufacturing downstream products like permanent magnets.
While that may seem damning for the US at first glance, US actually imported only $170 million REEs in 2024 which itself was down 11% from 2023 imports! Of course, even if REEs are insignificant input materials, they can be critical element of the value of the end products.
I listened to a couple of podcasts yesterday to gauge how concerned we should be about China’s ability to create a long-term damage in the US supply chain through this policy. Javier Blas on Odd Lots podcast back in April 2025 seems to have largely brushed away concerns around REEs as mostly a nothingburger. He posited that China’s monopoly isn’t necessarily hinged on some special skillset or control over the value chain, rather its mostly due to lack of interest of anyone else to be in this business. So, if China enacts policies that bar the US to access China’s REEs, the prices of REEs will rise and people will be interested in figuring out how to do it domestically or in other US friendly countries. From the podcast:
About 80-85% of the world’s rare earth metals come from China. It’s a question of digging them out of the ground and then processing. The big difficult part is processing because it’s very polluting and it’s a reason why all the processing has moved from everywhere else in the planet into China because no one wanted to deal with how nasty the process is. And here is also the other question. If you want to do rare earth metals processing in particular outside China, what you need is much higher prices. If anything, the problem today with rare earth metals and if we want to develop an industry of rare earth metals outside China is that prices are too low. We need much higher prices and then everyone will do rare earth metals.
As mentioned earlier, US only imported $170 million REEs in 2024, so even if prices go up by 10x, that’s going to be quite manageable in the medium to long-term.
ChinaTalk also had an “emergency” episode on China’s rare-earth restrictions. Chris Miller, the author of the seminal book “Chip War”, thinks these restrictions may not have much teeth on semiconductors but it will likely have larger impact on other parts of the economy. From Chris Miller:
The interesting dynamic to me is that if you look at the use of rare earths in the chipmaking process, they’re predominantly — at least magnets are — used in the machines that make chips, where magnets are indeed required. Although many of these companies have done a fair amount of stockpiling, it’s not the case that if you stop selling magnets, the chip industry grinds to a halt. Maybe it gets more complicated to build new tools for expansion.
The other direct chip industry impact that the regulations called out was non-magnets — other rare earths that are used in some of the materials and consumables. They specifically mentioned sputtering targets, for example. It’s really unclear how strong of a position China has here. We’ve just never run the experiment in real life. It’s possible that China can really limit production of these items, but we’re also talking about really small volumes. It’s also possible that if China does implement the controls, there are ways to source from other companies or source secretly in ways that China can’t detect.
All that’s to say, if China actually carries the controls out, it might not be as immediately impactful in the chip industry as China hopes, with a pretty wide uncertainty interval. But we should probably turn to the question of what it means for the rest of the economy if China carries them out, because that’s where you would have probably pretty disruptive impacts.
We could shut down much of China’s chip production domestically because they require a larger share of materials and consumables than we require from them.
But what we saw in April was that China bet it could respond in a different sphere. We impose tariffs, they impose magnet controls. That had a big impact on the automotive sector, for example. My worry is less about the semiconductor-specific dynamics and more about what happens if China follows through with this. What’s the impact on the rest of the manufacturing base in the United States, which, as we know, does need magnets and other materials that are mostly sourced from China?
In April and May, we found that the White House was very sensitive to any disruptions in the auto supply chain — not surprisingly. That, to me, is where the uncertainty lies. What happens if these controls ricochet through other segments of the economy where it’s less clear that the US has this position of escalation dominance? Then you end up with a standoff: the US threatening to escalate in one sphere, China threatening to escalate across the manufacturing base. Who feels most compelled to back down? Who feels most able to bear economic cost?
I don’t know the answer to that, but I worry about it.
The other key dynamic here is that the Chinese now clearly believe — and the rest of the world has increasingly bought into the thesis — that they have a durable long-term position in their dominance over rare earth mining, but especially refining. One way to look at this is: what’s easier to replicate, a rare earth processing facility and mining for heavy rare earths, or an EUV tool? We’re betting on the latter. Big steps that would show China’s making the wrong bet if it’s betting on processing facilities — and help the rest of the world realize that this is not a real credible threat over the long run — would shape how the rest of the world responds to this.
The last point is the key. It is the same risk US was/is running in their semiconductor policy on China. If China indeed becomes independent of western chip supply chain due to chips restrictions imposed by the US, that may turn out to be a huge boon for them in the long-term. Of course, that is exponentially harder and may take years (a decade or two?) for China to get there. However, since China is making the same regulatory posture in REEs and it is highly likely to be considerably easier for western countries to actually be able to mine and process REEs domestically and become independent of China here, China may be making the same mistake…a lot faster and they may quickly lose this leverage in a couple of years permanently. From Chris Miller again:
One other point on the Chinese side — if they threaten it but don’t implement it because we’ve got some retaliatory threat that we then negotiate and both pause — but this is still hanging in the background, it might actually be a pretty dangerous strategy for China. If they’ve got this sword of Damocles hanging over everyone, people look at it and begin building their own rare earth processing facilities. We find out that after a couple of years, this actually degrades pretty rapidly.
It seems like a risky thing for China to threaten and not actually use. If we’re right that this degrades pretty quickly in terms of its durability as a choke point, then this might be something that, if you threaten it and don’t use it, it actually ends up going away.
US, of course, already responded to China’s policy by imposing additional 100% tariff on imports from China and a new export controls on “critical software products”. Perhaps by next week, the two countries will have an entirely different posture and these may prove to be all just negotiating tactics for a “grand bargaining”. Even if that happens, it would be prudent for the US government to make sure China doesn’t get to use REE as any sort of leverage going forward; hence, they should and must look into domestic mining, processing, and refining of REEs. It would actually make a lot of sense to impose an absurd level of tariffs on any REE import from China regardless of the outcomes of the trade talks!
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