China is at the very top of global supply chains essential to the mining, refining, packaging, shipment, and sale of rare earth metals used for semiconductors, electric vehicles, and other growing industries. The only way to prevent Beijing’s total consolidation of this dominance is for consumer industries to change their trading relationships and instead source from the United States, Australia, and other democratic nations, even if they must sometimes pay more, panelists said at a hearing hosted by the U.S–China Economic and Security Review Commission on June 9.
The hearing, titled “U.S.–China Competition in Global Supply Chains,” featured extensive testimony on how China’s control of global markets is likely to grow as demand continues to rise for semiconductors, computers, fiber optics, electric cars, medical and pharmaceutical devices, and numerous other products. China’s dominance already extends far, the panelists stated.
“Today, China holds the commanding position in the global rare earth supply chains, from mining to processing to end uses,” said Kristin Vekasi, a professor of political science at the University of Maine.
“China currently controls 50 percent to 60 percent of global rare earth mining, 80 percent to 90 percent of the market in the intermediate processing stage where the elements are separated and refined into metals and alloys, and at least 60 percent to 70 percent in downstream manufacturing for products like permanent magnets.”
She stated that since current trends are highly favorable to China’s continued control, it’s unlikely that the regime in Beijing will cede ground to geopolitical rivals anytime soon.
“It’s estimated that in coming decades, demand for rare earths will increase by an order of four to eight at least, especially for rare earths that are used in permanent magnets like neodymium. Increases in demand are largely due to green technologies” such as electric motors and wind turbines, Vekasi said.
Growing Concern
Supply-chain resiliency is a “top of mind” issue for the U.S. government, according to Deborah Rosenblum, a nuclear expert and assistant secretary of defense for industrial base policy. She said that efforts are underway at many levels of government to understand, and alleviate, the United States’ myriad supply-chain vulnerabilities.She described the current situation as, in large part, a function of the prevailing economic tendencies in the West over the past 70-odd years.
“Since the end of World War II, the dominant economic theory has been trade liberalization, [leading to] to rise of Japan in the 1970s and 1980s as well as the opening of China in 1979,” Rosenblum said.
As part of these trends, suppliers have sought ways to lower costs, and manufacturers have chased the more efficient allocation of capital to drive down labor costs, she said.
“The overall result is the complex global supply chains. The growth of China’s manufacturing prowess is not by accident,” she said.
The strategy of the Chinese Communist Party (CCP) is particularly evident in the defense sector, in which the Chinese military and the firms that contract with it have vigorously made use of their dominance in global supply chains.
Manufacturing in China accounts for about 25 percent of the world’s total manufacturing output, Rosenblum noted.
Abetting China’s technological edge is the flouting of intellectual property laws and the theft or co-opting of an estimated $500 billion worth of intellectual property every year by Chinese firms, Rosenblum added.
One area of the technological race in which China surges far ahead of the United States—making use of its dominance of rare earths metals—is in military technology, and the related field of patents. In 2019, the United States produced only 369 military patents, while China registered 544, Rosenblum pointed out.
“China also demonstrates particular patent leadership in areas related to emissions,” she said.
Hence, it’s no surprise that firms pioneering increasingly more sophisticated military devices and equipment are likely to be based in China.
“China has now positioned itself to hold seven of the world’s 15 leading defense firms,” Rosenblum said.
This scenario is hard to imagine without the markets for extraction and processing of rare earth metals being so heavily skewed in Beijing’s favor. Rosenblum says it’s no coincidence that 18 of 37 defense-related minerals are concentrated in China, with 14 others heavily concentrated in countries closely integrated with China’s supply chains through entrenched political and economic relationships, such as Russia, Brazil, and other nations participating in Beijing’s Belt and Raod Initiative—a trillion-dollar infrastructure investment program designed to broaden the Chinese regime’s political and economic influence.
Meanwhile, only five of the defense-related minerals are found largely in the United States, Canada, and Australia, she noted.
Adjusting the Focus of Industries
Changing the dynamic and protecting the security of democratic powers will require an effort on the part of those companies that are the end marketers of products made using rare earth metals, says Jan-Peter Kleinhans, director of technology and geopolitics at Stiftung Neue Verantwortung, a public policy think tank in Berlin.Kleinhans sees a role for government, particularly when it comes to promoting a better understanding of how things work.
“We need to invest in the government’s capabilities to understand, assess, and identify choke points in global supply chains, to ensure that, 10 to 15 years down the road, U.S. companies still have a competitive edge when it comes to designing chips,” he said.
Having acknowledged this, Kleinhans blamed the lopsided supply structure that benefits Beijing largely on “poor purchasing decisions.” He argued that any strategy for moving value chains and reshoring manufacturing in a manner that lessens China’s dominance and fosters more independence and competitiveness for the United States and its allies must include what he called “the end consumer industries.” The corporations that make up these sectors must be willing to source products from supply chains outside China’s orbit, even if doing so doesn’t serve their immediate economic interest, he said.
“The automotive industry, the smartphone industries, the end consumer industries have to be willing to pay more, to procure chips from allied nations, and my impression is that there’s currently very little discussion about that,” he said.
Rosenblum made a case for more aggressive use of the Defense Production Act, which she called “an invaluable tool” in the development of alternative sources of rare earth metals. The law authorizes the U.S. president to ask businesses to give priority to contracts deemed instrumental for national defense. The Department of Defense must also encourage private industry to exercise greater diligence around the subcontractors it uses and avoid any nexus of Chinese involvement; such an effort is already underway in the armed forces, Rosenblum said.
“We are doing this with the services. We are working with them to determine where the subcontractors are.”
