China's Rare Earth Dominance: A Strategic Card in Trade Tensions

Strategic Insights -

The US-China trade tensions highlight a critical vulnerability in America's trade relationships with China, particularly the dominance of rare earth magnets and other strategic products. President Donald Trump has threatened China with 200% tariffs on rare earth magnets, but this would likely mean a total embargo on trade between the countries. China's exports to the US represent about 2.9% of its GDP, and a complete closure of US markets would hurt China's economy but not destroy it. However, China's dominance of rare earths and other strategic products gives it tremendous leverage over the US, which is racing to develop alternative sources of supply.

Key Takeaways:

  • China controls more than 70% of the global supply of rare earths, more than 90% of the processing of rare earths, and more than 90% of the processing and manufacturing of rare earth permanent magnets.
  • The US has limited alternative sources of supply, with the Defence Department funding a separation facility in Texas and arranging a $US1 billion debt facility, $US150 million of Defence Department loans, $US400 million of equity, and a 10-year floor price to support MP Materials, the only significant rare earth producer in America.
  • China has been diversifying its range of trading partners and reducing its reliance on the US since Trump first deployed tariffs against it in 2018.
  • China's dominance of rare earths gives it the ability to use tariffs in a highly strategic way, with the ability to dial up or down export quotas almost instantly.
  • The US has made significant progress in developing alternative sources of supply, including Defence Department funding and a guaranteed purchase commitment for 100% of MP Materials' output.
  • The US has also been discussing potential sales of modified high-end chips to China in an effort to avert the threat posed by China's stranglehold on rare earths.

Statistics:

  • China's exports to the US represent about 2.9% of its GDP (down from 3.5% in 2018).
  • The US has a $US1 billion debt facility, $US150 million of Defence Department loans, $US400 million of equity, and a 10-year floor price to support MP Materials, the only significant rare earth producer in America.
  • It is estimated that it will take 15 years and $US120 billion for the US to completely distance its rare earth supply chain from China.
  • China has been selling more than 70% of its rare earth magnets to the US, but recent data shows that it has limited sales to the US defence industry and is tightening its export controls for rare earths.
  • The average US tariff on China's exports is 57.6%, while China's rate on US exports is 32.6%.

Sources:

  • The Peterson Institute for International Economics
  • The Stockholm meeting between US and Chinese trade negotiators
  • The London meeting between US and Chinese trade negotiators
  • The US Department of Defence
  • The Biden administration
  • The Trump administration
  • The US Department of Commerce
  • The US Department of Energy
  • The National Intelligence Agency
  • The Business Briefing newsletter.