The Geoeconomics of Critical Rare Earth Minerals

The world heavily relies on a single source for critical rare earth materials: China. This fact is evident in all stages of the rare earth value chain, from mining and production to refinement and formation into usable alloys for end use in manufacturing. Rare earths are critical components in military industries, energy efficiency, and technologies key to climate change response. Access to these resources is critical to both maintaining capacity in the American security-industrial complex and keeping an edge in next-generation green technologies.

Rare earths came into close focus by the national security community and political risk analysts in 2010–2011 after the Chinese allegedly placed an export ban on Japanese imports in the midst of a territorial dispute. Following this perceived use of economic coercion, rare earth prices were incredibly volatile, sparking global discussion about establishing sources outside of China to protect against supply chain and price risks. Galvanized by this geopolitical threat, Japan, in particular, swiftly moved to diversify, but progress on these efforts elsewhere has been slower.¹

This paper describes the mechanisms by which dominance in the rare earth industry transitioned from the United States to China in the 1990s, focusing on the role of Chinese industrial policy. Evidence from an analysis of price shifts in the 2010–2011 period and Chinese intellectual property in the sector indicates that despite shared knowledge of dependence on China, concerns about price volatility and supply chain vulnerability remain. Tracing the policies behind why the rare earth market is concentrated in China helps suggest paths to greater resilience, including diversification in production and capacity building and talent retention in post-production processes.

The nature of Chinese dominance

Chinese dominance in the global rare earth market is rooted in policy, not geography. While much has been made of China's nearmonopoly control of contemporary extraction, the truth is that rare earths are neither that rare, nor uniquely geographically concentrated in China.² Given appropriate market conditions or political motivation, rare earths could be extracted around the world. The key to China's contemporary rare earth dominance is industrial policy, marked by direct state intervention in the market, and investment in technical expertise. Chinese rare earth industrial policy is a component of economic statecraft – intentional incentives for commercial actors to "advance national strategic objectives" – but is not necessarily used coercively against other states.³ Leadership in the rare earths sector advances China's national interests in three ways: building domestic capacity along the critical mineral supply chain, attracting high-value added foreign direct investment, and building capacity in next-generation energy technologies.⁴

During his famous "southern tour" in the early 1990s, Deng Xiaoping famously said that "the Middle East has oil, and China has rare earths."⁵ This oft-quoted phrase is sometimes used to ascribe coercive elements to Chinese rare earth policy, evoking the geopolitical leverage attempted by OPEC in the 1970s.⁶ But technical differences in the rare earth production and post-production process shape the industrial policy and geopolitics of rare earths in different patterns.⁷ Chinese industrial policy has produced a competitive advantage in all stages of the rare earth extraction and refinement process, building an extensive rare earth value chain inside China through research and training investments and pricing policies that accrue intellectual property and attract foreign firms to China.⁸

Gaining and maintaining market control

China holds only an estimated 30 percent of total global rare earths.⁹ Figure 1 shows Chinese, American, and other rare earth production from 1994–2020. In 1994, China controlled only half of global production, but by the 2000s, Chinese mines produced around 90 percent of global supply. In 2017, China produced approximately 80 percent of global rare earth output, which decreased to approximately 60 percent in 2020. Over the past two years, global production has also increased.

China's large market share is a product of state policy and incremental centralization and control. Policies have included export and production quotas, investment in research, education, and development, and centralized national control of the industry. From the 1990s-2000s, the Chinese rare earth industry consisted of...