1 November 2020

How the United States Handed China its Rare Earth Monopoly

By Jamil Hijazi, James Kennedy

At the end of September, U.S. President Donald Trump released an executive order amounting to an all-hands-on-deck call to end China’s monopoly on rare earths, the metals and alloys used in many high-tech devices. It was high time; China’s dominance of these resources has resulted in the transfer of entire U.S. industries (medical imaging, for example), technologies, and jobs to China while also compromising the U.S. defense industry’s supply chain.

China didn’t always dominate the Rare Earth (RE) industry. In fact, up until 1980, 99 percent of the world’s heavy REs were a byproduct of U.S. mining operations for titanium, zircon, and phosphate. In fact, it was only because of changes in U.S. regulations, the voluntary transfer of expertise and intellectual property, and the absence of an industrial policy that China has been able to corner this market.

The story of how the United States and others surrendered the RE industry to China may suggest the ways in which the country might reestablish self-reliance.

The United States’ downfall as a leader in the RE industry was set in motion in 1980, when the U.S. Nuclear Regulatory Commission (NRC) and International Atomic Energy Agency (IAEA) amended its definition of source material (broadly, material containing uranium or thorium) for nuclear weapons. Previously, heavy RE byproducts had not been considered source materials, which meant that they could be easily sold and processed into high-value materials. But under the amended definition, they were suddenly placed under extensive licensing, regulatory, disposal, and liability rules. Given the added cost and liabilities, their production and refining was eventually terminated in the United States and other IAEA member states.

China, meanwhile, is not constrained by IAEA regulations, since it is only an observer of the agency, not a member. It was able to step in to replace the United States in the production and processing of REs.

Also at play was the transfer of relevant technology from the West to China. While the United States and other IAEA nations were busy limiting their RE capacity in the 1980s, the U.S Congress granted China most favored nation trading status. In doing so, it opened the door for the exchange of goods, knowledge, and technology between the two nations.

Over the years, U.S., Japanese, and French companies transferred their intellectual property in refining and metallurgical technologies to China, which had lower cost of production, resulting from cheap labor, lax environmental regulation, and generous Chinese state subsidies.

China took that technology and ran with it.

The United States was the first nation to file an international patent for REs in the 1950s. China’s first RE patent did not come until 1983, but it made up for lost time by establishing five well-funded National Rare Earth Laboratories operating under a series of National Industrial Policy initiatives. (By contrast, the United States has one National Lab. The Ames National Laboratory works on REs on an on-again/off-again basis.) In turn, China surpassed the United States in the number of field patents by 1997, and by 2021, it is estimated that China will have accumulated more RE patents than the United States and the rest of the world combined.

China has also been able to tailor its industrial policy to shift focus to the upper end of the RE value chain; China produces or controls over 70 percent of the world’s mined REs, and it refines more than 80 percent of all REs into mixed oxides and separates more than 90 percent of all REs into individual elements. China and Chinese-controlled enterprises produce more than 99 percent of all so-called new REs metals (produced from virgin ore).

With most of the economic value from rare earths coming from the production of metals, alloys, and magnets (the materials that make modern technology work), China is now looking to other countries, including Myanmar, Vietnam, Burundi, and the United States to do the dirty work of mining. This new strategy protects China’s environment, preserves its resources, and creates a highly priced competitive environment among its suppliers.

In contrast to China’s quick moves on RE, the United States has not had base RE-metal production capabilities for over a decade. Japan, likewise, ended production in 2018. In turn, China’s control over the process has allowed the country to force foreign technology companies to move IP and manufacturing to China. Perhaps even worse, under an obscure critical materials law, 10 U.S. Code § 2533b, Chinese RE base metals have been used in the defense industry for the last decade and a half. The law, which was meant to ensure domestic production of “critical materials,” defined those materials as magnets and alloys. But even U.S.-made magnets and alloys use Chinese base metals, which means that the U.S. military is still entirely dependent on China to build its weapon systems.

The first real steps to correct the problem were taken by Trump administration in 2019, beginning with his amendment of the Defense Production Act of 1950. As a result of that amendment, the Department of Interior, in coordination with other agencies, redefined critical materials to their point of origin, not alloying. The move forced the Pentagon to seek alternatives to the long-standing practice of directly or indirectly utilizing Chinese RE metals within the U.S. defense industry.

More recently, the administration issued a new executive order to expedite public policy focused on REs and other critical minerals. Meanwhile, there are numerous legislative efforts from the Pentagon and Department of Energy to invest in domestic capacity. These plans include subsidies and injecting funding for research and development into the private sector. This scramble to action was initiated only after a long decade of private investment failures intended to challenge China’s monopoly. With over 400 business failed startups in the rare earth mining space since 2010, Washington has finally started looking at ways to balance the uneven contest.

One recent Congressional proposal—“Onshoring Rare Earth Act,” which was introduced by Republican Senator Ted Cruz of Texas this spring—suggested that the United State could mine its way out of this problem with massive subsidies directed to domestic metal and magnet makers. However, targeting subsidies this way will translate into chaos at the mining and refining level because the miners will be subject to China’s substantial global pricing power. Subsistence mining operations, taking environmental short cuts, and attempts to elude responsibilities through bankruptcies would become the norm. Yet providing subsidies to miners and refiners could lead to greater inefficiencies and pricing distortions. The act also has no answer for dealing with Chinese price manipulation and other new low-cost producers in the Asian and African region.

Another effort is the REE-Coop 21st Century Manufacturing Act, introduced by Republican Senator Marco Rubio last year. This act proposes that the United States start using the high-value REs, historically a byproduct of many other commodities, that are currently disposed of as part of the 1980 regulatory change. These resources would be sent to a privately owned, operated, and funded RE production facility operated for the benefit of U.S. and other technology firms that use rare earths. Such cooperatives could pass along the savings of using mining byproducts to the end-users.

The history around publicly funding private ventures that require subsidies to survive also suggests that Rubio’s proposal may be more on the mark—particularly since it addresses one of the root causes of the United States’ fall from dominance to begin with. In that way, the plan may put the United States back on the right path.

No comments: