Speculators are wary of Chinese export restrictions on rare earth minerals. Here's why their near-control of the market poses a risk to the United States.
The United States is facing a wave of speculation over a possible Chinese trade war retaliation that may hit hard with restrictions on the export of rare earth minerals.
On Monday, Google announced that it would limit services it provides to Chinese telecommunication giant Huawei following a White House order one week earlier tightening restrictions on the state-supported company’s access to US technology.
Following the announcement, Chinese President Xi Jinping visited a rare earth mineral plant that provoked a flurry of speculation and a surge in the company’s share prices.
Many saw it as a not-so-subtle reminder that China has the upper hand in rare earth minerals, and could shut off the global supply, something it has already done before.
So what’s the big deal?
The Trump administration has long been concerned over the absence of domestic rare-earth supplies which are the basis of a modern economy and robust military.
In 2018, the US Geological Survey identified 35 minerals critical to the economy and national security.
Rare earth minerals form components for smartphones, screens, batteries, screens, turbines, and are even more critical to drones, missiles, advanced weapons sensors, radars, stealth technology, lasers, electromagnetic guns and jamming technology.
Some examples include neodymium, which is used in hybrid cars; lanthanum, used in camera lenses and lighting; praseodymium used in aircraft engines; gadolinium used in X-rays and MRIs; and europium, which is used in nuclear reactors.
The US relies on imports for more than half of them.
Rare earth minerals make up a good portion of these critical minerals, with China producing more than 90 percent of the world’s supply over the last 10 years, according to US government figures.
In 2011, Chinese export quotas led to a price surge making some of these elements more valuable than gold.
What’s significant about Google’s decision?
Huawei has been the target of an international US-led campaign that claims its applications and devices are compromised and used regularly for corporate espionage. According to a report by the Foundation for Defense of Democracies, nearly 90 percent of cyber corporate espionage comes from China, costing the country nearly $300 billion annually.
But the contention runs deeper. US security experts are concerned that the technological gap that ensured the United State’s strategic lead is shrinking, as Chinese hackers steal technology and know-how, reverse engineer designs and possibly improve on them.
While targeting the White House’s latest decision may mitigate hacks in the US, it also serves a buffer against Chinese international expansion.
Huawei’s phones come preloaded with Google applications like Google Play, as well as Gmail and YouTube, ensuring that it can sell them to international markets with high demand for an advanced smartphone that has a less expensive price tag than its Apple and Samsung counterparts.
What’s so special about rare earth minerals?
In this game of trade hardball, Xi visited a rare earth mineral plant, provoking investor speculation and fear over the possible cut-off of the strategic minerals as a response to the Google decision, which would be devastating to the United States technology and defence sector.
China has been dealt a strong geopolitical hand, and while it may not be cutting off rare earth minerals yet, it’s not afraid to show that all options are on the table.
A Global Times editorial writes: “US need for rare earths an ace on Beijing’s hand.”
The publication is owned by the People’s Daily, which is the official newspaper of the Central Committee of the Communist Party of China.
“Without a reliable domestic supply, the US must rely on rare earths from China to supply industries of strategic importance,” writes the editorial’s author Hu Weijia.
"It will take many years if the US wants to rebuild its rare-earth industry and increase its domestic supply to reduce its dependence on China's minerals," writes Weijia.
"That's long enough for China to win a trade war against the US, during which time China's monopoly on the production of rare earths will help Beijing control the lifeblood of the US high-technology sector."
While the comments may be seen as part of a more vocal stance taken by the Xinping government for the benefit of the Chinese populace, Weija has a point.
Why can’t the US just mine their own rare earth minerals?
The United States’ only rare earth mining facility is located in Mountain Pass, California, which shut down in 2002 after Chinese rare earth minerals undercut the market, and again after bankruptcy in 2015. It was then purchased by an American consortium funded by the Chinese Shenghe Resources Holding two years later.
It resumed production in 2018, and ships all its products to China for refining.
Why hasn’t the US set up their own rare earth mining plant?
There’s a reason most rare earth minerals are produced in China.
The entire process is “expensive, difficult, and dangerous,” says former rare earth trader Tim Worstall speaking to The Verge.
Rare earths are also a byproduct of other mining operations. In China, the biggest rare earth mineral plant mines iron ore, producing the rare minerals on the side.
David S Abraham describes the strenuous, delicate and gruelling process it takes to extract rare earth minerals in his book The Elements of Power.
According to Abraham the raw material has to be dissolved in acids multiple times, filtered, and dissolved again.
This process takes place hundreds of times for each mining area, which has to be re-calibrated according to the soil and minerals used.
To add to its difficulty, the process is radioactive and produces chemical byproducts with severe consequences for the environment.
What happens next?
But even amidst the escalation, there is still room to negotiate.
In spite of Google’s latest decision, most of the United States’ latest tariffs have not yet gone into effect as they only apply to goods that have left China for the US after tariffs were announced.
With a three-week ocean voyage, their impact will be felt in June. Meanwhile, China's new tariffs are set to go into effect on June 1.
With the escalating pressure on both sides, there may still be time to salvage it all.