Many consider China’s vast portfolio of U.S. Treasuries as their not-so-secret weapon in the ongoing trade war. And it some ways, that is certainly true. China could decide to liquidate much or all of its U.S. bond holdings in response to rising tariffs and use other tactics, like currency devaluation.
China State Media Hints at Embargo
Besides, the Chinese Communist Party (CCP) has another, more tangible ace up its sleeve. As unbelievable as it sounds, China holds a near global monopoly on the supply —or more accurately, the processing capacity—of rare earth elements (REE).Should China decide to impose an embargo against the sale of REEs to the United States, the American economy and the U.S. military would be scrambling to replace them, at least in the short run.
China Made This Play Before
If China does stop selling REEs to the United States, it wouldn’t be the first time they’ve played that card. In 2006, China began limiting its exports of REEs, reducing them by 40 percent until 2010. The reduction caused the prices of non-China-sourced REEs to skyrocket. China also took advantage of its market dominance and stopped selling to Japan in retribution for a maritime incident.How Did We Get Here?
But how has the U.S. allowed itself to be put in such bind? Wouldn’t it make sense to have secured an American or at least a friendly source of these REEs on which so much of our military preparedness and our economy are reliant? Shouldn’t that have been a priority, say, decades ago?Rare Earth Elements Aren’t so Rare After All
Fortunately, REEs aren’t rare at all. In fact, they’re actually quite plentiful around the world, even in the United States. The 17 elements that are categorized as REEs have magnetic and conductive aspects and are typically unearthed as a result of mining operations, but most are present in only small amounts. There are few, if any, specific “rare earth mines.”An REE Shortage Crisis?
But the costs of allowing China to gain the upper hand in the world’s supply of REEs are now becoming clear. If China does in fact restrict REE sales to the United States in the near future, it would certainly impact both the consumer product markets and the military.The key question is, how long it would take to bridge the supply gap and find alternatives?
One mitigating factor is Australian-based Lynas, the world’s only major rare-earth producer outside of China. It has partnered with Texas-based Blue Line to establish U.S. operations by 2021. However, the United States still lacks any REE processing capacity, representing a critical and ongoing vulnerability in its military capabilities.
But the news isn’t all bad. The Mountain Pass mine in California is currently being prepared to ramp up REE processing operations by 2020. Coincidentally, Mountain Pass was previously owned by Molycorp, which had invested over $1.5 billion in the processing project, before being forced out of business by China in 2015.