Michael Froman
China is willing and able to exploit this strategic vulnerability. It has already proven its willingness to use export controls as a tool of economic coercion. Some fifteen years ago, China curtailed rare earths—a subset of critical minerals—to Japan over a dispute in the East China Sea. More recently, China has restricted its exports of critical minerals in response to the United States’ tariffs and export controls.
While China maintains that it's not a ban, China announced new measures last week that build upon its earlier semiconductor-focused restrictions, extending to products made outside China that have as little as 0.1 percent of Chinese rare earths in them or use mining, separation, or magnet-making technology developed by Chinese firms. That is similar to the United States’ Foreign Direct Product Rule. Moreover, China has insisted that applicants for an export license submit schematics for products that use Chinese-produced minerals, a powerful tool for accessing proprietary intellectual property.
China did not become the dominant player in critical minerals overnight; it was a long march to get there. During his famous 1992 Southern Tour, while visiting Inner Mongolia’s Baotou rare-earth basin, Deng Xiaoping said, “The Middle East has oil; China has rare earths.” Rare earths are actually not rare, and certainly not present in China alone, but ever since Deng noted the importance of such minerals, China has developed a dominant position through decades of concerted industrial policy. For years, the Chinese government invested heavily to support firms at every step of the rare earth refining and production value chain, bolstering its domestic mining, refining, production, and recycling facilities, as well as expanding its network of foreign mines around the world.
Today, the biggest chokepoints in the supply chain for critical minerals are refining and processing (both in terms of capacity and intellectual property), not mining. China controls up to 90 percent of the world’s processing capacity, including more than 99 percent for three kinds of rare earths necessary for heat-resistant magnets. This has been achieved in part by subsidizing, producing, and engaging in pricing practices that made it economically unviable for competitors in the United States and other countries. Chinese firms also innovated in their own right—that’s why they possess the industry’s most valuable intellectual property and capacity to boot. And they also took advantage of the fact that the United States and other developed countries didn’t want to expand domestic mining and refining activity as a result of environmental consequences and other factors.
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