Those "Rare Earths" Battles

Rare earth minerals. No, they don’t refer to gold or silver. They are the lanthanides (lanthanum, neodymium, cerium, europium etc), scandium, and yttrium. Never heard of them? Well, they are critical for a whole host of industries, which is why they have been in the news for a while.

 

Importantly, China is the world’s largest producer of these vital minerals. A key point here is that the rare earth minerals aren’t really rare. Rather, they are found in low concentrations, which makes their extraction economically unviable. So did China just get lucky in having higher concentration ores in its territory? Like how the Middle East lucked out by having oil under its feet?

 

Nope, that’s not the case here. Rather, China got to this point via its deliberate economic policies. First, China heavily subsidized the rare earth mining/extraction industry. These subsidies made it cheaper to extract in China.

 

Second, China doesn’t allow its exchange rate to be decided by market forces. Other currencies go up and down based on demand and supply, their economic performance etc. Not so the Chinese yuan. It is “pegged” (fixed) by the government at specific values to make Chinese exports cheap. This policy was to drive and maintain Chinese exports in general, and the rare earth industry was one of many beneficiaries.

 

Third, China flooded the market with rare earth exports for years. It was so cheap that it was neither necessary nor possible for any other region to even consider getting into the rare earth mineral business.

 

This then is why China today is able to use the threat of denial of rare earth minerals to pretty much the entire world. They are the cheapest source (reasons #1 and #2), and no other alternative exists (reason #3).

 

Of course, China didn’t start this “war” – America initiated it by restricting the sale of highest end semiconductor chips to China because they feared that AI in China would grow faster than the US (AI needs those highest end chips). And so China has decided to hit back via items that they control…

 

In line with that, a couple of weeks ago, China has put restrictions on rare earth magnets in addition to the rare earth minerals. The rare earth magnets are vital to the automobile industry because they have (1) high magnetic strength and (2) an abnormally high strength to weight ratio. These rare earth magnets are used in the powertrain, windshield wipers, headlight adjustment systems, power windows and rear-view mirror controls of automobiles.

 

Foreign companies now need to submit an application, convince the Chinese authorities the magnets won’t be used for defence or military purposes (exactly the condition the West has thrust on everyone else), wait for clearance, and only then get the magnets. Automakers worldwide are grappling with this shock, the possibility of denial, and the delay in processing of such applications.

 

This is a good example of why a trade war with China is so complicated. The West believed that denial of the highest end of tech is a game-over kind of move, while China is showing that they can cut off daily use products and low/mid-end tech that are still vital to many industries.

 

It is impossible to predict how things will play out, what move here will result in what kind of countermove there, which of those moves and countermoves will succeed and which will fail. We can only watch on.