Leibowitz: Renewed trade war with China over rare earths

Rare earths have been in the news lately because of their effect on US-China trade relations, or the lack thereof. They are a group of 17 elements that share chemical properties that make them vital in the modern global economy, and for defense (or, if you prefer, war).

Many of those elements are not really “rare,” but a couple of centuries ago, when they were first identified, that was the assumption.

Today, due to the rapid development of uses in such products as military machinery (planes, missiles, drones), production machinery, computers, smart phones, and powerful compact magnets, the strategic need for rare earth metals has exploded.

To add to the critical demands for these materials, China has been working for more than 20 years to capture a chokehold on production of ores and processing them into usable products, such as magnets and electric motors.

Their efforts have succeeded.

China’s dominant supply

China accounts for about 70% of global mining of rare earth materials, and over 90% of global processing into useful commercial and military products.

China’s announcement that it was significantly tightening controls on the export of rare earth metals sent shock waves around the world. Companies seeking an export license now need to identify end uses and end users and obtain specific approval to export these materials.

President Trump’s announcement of 100% tariffs on Chinese goods was obviously an opening salvo in the renewed trade war.

Off-target counterpunch

The announced 100% tariffs are hedged about with vast uncertainties—the administration has admitted that such tariffs (on top of the tariffs already implemented or threatened) are not sustainable.

The threat must be a negotiating ploy.

 A ninety-day freeze on new tariffs is set to expire about Nov. 8, and there may be a meeting between Xi and Trump in the margins of the APEC meeting in Gyeongju, South Korea, currently scheduled for Oct. 31-Nov. 1. An effective date of Nov. 1 for more tariffs on imports from China thus seems very unlikely, but it is not impossible.

The urgency of the rare earth situation is great, but it took a long time to get this bad. About the time China was admitted to the World Trade Organization in 2001, China was already working on domination of the rare earth market. They are blessed with large reserves of rare earth metals in the ground.

But those materials have become much more important economically in the last 15-20 years. China’s efforts coincided with a mammoth expansion of demand for rare earths.

Taking aim

Domination of rare earth production from top to bottom of the supply chain was always China’s goal. Now they have accomplished it.

As noted above, China has captured more than 90% of the market for production of products that utilize rare earth elements, and more than 70% of mining of those elements by out-competing the rest of the world.

Private companies could not withstand competition from the Chinese. As a result, production that existed in the West has been shuttered, and mining operations in the US face permitting barriers to reopening.

Downstream manufacturing operations have also moved or gone out of business due to fierce competition, whether fair or foul.

To tariff or not to tariff?

Tariffs alone will not solve this problem. Imposing 100% tariffs on all Chinese exports is not likely to change China’s policies regarding rare earth trade. Rare earth elements make miniaturization possible in everything from missiles and drones to smart watches.

The magnetic properties of certain rare earths (primarily neodymium) make them vital to the national defense of advanced economies. And those economies have allowed China to create a bottleneck for these materials.

What to do about this? China has created major leverage by cornering the rare earth market. Imposing tariffs on imports from China for rare earth metals themselves is hardly effective, because the West cannot replace those imports any time soon. Imposing tariffs on other products will not encourage China to loosen its stranglehold on rare earths.

What about black gold?

In this area, especially, we need carrots as well as sticks. Can the West out-compete China in production of products using rare earth metals? Sure—but giving China the things it needs. A key product is oil and natural gas. Market prices for crude oil took a dive last week. Marginal producers are going to be in trouble.

China is the largest oil importer in the world (2023 figures of 11.3 million barrels per day). China has some oil production, but it will always depend heavily on imports. Suppose we get the West and its friends to sell oil and gas to China at the same price Russia is now charging? That would have significant geopolitical importance.

Come to lunch?

Given the fact that rare earth export restrictions caused the latest dust-up in the US-China trade war, there is a deal to be made.

Tariffs are a catchy talking point, but they will not address the mutual needs of China and the West. The answer is to identify the needs of each side and work to meet those needs.

In negotiating for mutual benefit, the world could become safer, more secure, and more prosperous. Throwing economic bombs does none of those things.

Editor’s note

This is an opinion column. The views in this article are those of an experienced trade attorney on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.