Foreign Affairs

America Brought China’s Rare-Earth Elements Monopoly on Itself

A new Pentagon report to Congress admits our military is critically dependent on Chinese-produced materials for high-end weaponry.  This dependency is a self-inflicted wound demonstrating a naiveté regarding Red China, a regime ready to leverage any advantage.
 
China produces 97% of all rare-earth elements (REE), 17 elements with unique magnetic properties critical for high-tech military equipment such as advanced fighters, lasers, precision-guided munitions and 21st century consumer technology, found in iPhones, wind turbines and X-ray machines.
 
Our reliance on China for REE is a self-inflicted wound because we knew more than a decade ago the Chinese intended to monopolize the REE market and then use that position for its advantage.  Now Beijing is following through with its monopolistic plans by cutting way back on exports and has shown an inclination to use those exports to leverage disagreements.  No wonder the Pentagon report states it is “essential that a stable non-Chinese source” of REE be established, according to the Wall Street Journal.

In 1997, Deng Xiaoping, then China’s Communist Party leader, observed that the Mideast may have oil, but China had REE.  With a virtual monopoly of the critical materials, Xiaoping intended for China to control the rare-earth market much as the Organization of the Petroleum Exporting Countries controls oil.  That is what happened.
 
In 2010, China’s REE export quota declined 40% over 2009, and already this year exports are down another 14%.  Now the regime intends to cap REE production, which will further reduce exports to favor domestic manufacturers, according to STRATFOR, a Texas-based think tank.
 
Such export reductions are a crisis not just because prices could increase 50%, according to the Pentagon report, but because the U.S. and other manufacturing nations previously abandoned their domestic capacity to produce these critical materials.  Restarting new production plants could take up to 15 years, according to a 2010 U.S. Government Accountability Office (GAO) report.
 
Worse, China stopped REE exports to Japan in October 2010 following a maritime incident near Diaoyu/Senkaku islands.  That caused a predictable reaction from Japan, the world’s leader in REE-dependent high-tech industries.  Exports were quickly resumed, but the message was clear:  China will use a de facto export embargo to leverage geopolitical conflicts.
 
The Chinese enjoy a REE monopoly because we are naïve.  We pretend Beijing is like our Western trading partners, which it isn’t.
 
Back in 2000, we granted Beijing Most-Favored-Nation (MFN) status, and then let the Communist regime join the World Trade Organization (WTO).  That naiveté contributed to the present REE nightmare and other China-related economic problems.
 
Since 2000, our trade deficit with China has tripled.  Further, Beijing’s theft of U.S. intellectual property has become epidemic, the regime has “encouraged” U.S. REE-dependent foreign manufacturers to relocate to China, which robbed American jobs, and Beijing keeps its currency undervalued, which fuels our trade imbalance.  Flash to Washington:  China is not and may never become a free market, and besides, much of Beijing’s profits are plowed into building a giant and sophisticated expeditionary military that threatens the balance of power in the Pacific and potentially around the globe.    
 
Prior to the 1990s, the U.S. was the global leader in REE production.  That changed because we failed to think strategically about our manufacturing base and because we naively relied on market forces alone.  Meanwhile, China used its MFN and WTO market access to create a global REE monopoly with a combination of cheap labor, virtually nonexistent environmental standards, and state-subsidized loans.
 
China’s state-owned banks granted subsidized loans to promote social stability through full employment.  Those loans created a massive mining sector that exploded REE production—even though most never recovered their operating costs—and predictably global prices plunged.  The foreign competition, to include the only REE complex in the U.S. at Mountain Pass, Calif., closed.
 
The plunging REE prices helped fuel the technological revolution, a silver lining.  But the West became hooked on cheap Chinese REE as uses expanded from cathode ray tubes to components for wind turbines, hybrid cars, laptop computers, cellular phones, and at least 36 sophisticated weapons platforms.
 
Now China is consolidating the REE sector by inducing state-owned giants like Aluminum Corporation of China to assimilate various smaller mines.  China also established a state-level REE storage system to further enhance state control over the strategic resource, according to STRATFOR.
 
Beijing’s virtual monopoly is working, but it need be only temporary if nations such as the U.S. react as they must.  Fortunately and paradoxically, rare-earth elements are relatively plentiful but expensive to mine and extract, but the risk-adverse mining sector likely won’t act without government assistance.    
 
What should America do to reduce its almost total dependence on Chinese REE?
 
First, as the Pentagon report states, we need to develop “risk mitigation strategies” for certain elements, including dysprosium, yttrium, praseodymium and neodymium, the most critical for weapons manufacturing.  These elements should be stockpiled for strategic protection.
 
Second, the Pentagon’s report calls for granting a higher priority to weapons manufacturing over commercial production.  That is a prudent course of action until dependable non-Chinese REE sources are readily available.
 
Third, the Pentagon’s report, according to RareMetalBlog.com, states that of six domestic REE companies assessed “only one has the facilities and experience to reduce all 17 elements.”  That company is likely Molycorp Minerals, which operates the Mountain Pass facility and indicates its intention to restart operations in 2012.  That is good news, and our government should help Molycorp overcome regulatory issues, raising capital and protecting it from Chinese government market manipulation.
 
But the Mountain Pass facility lacks the manufacturing assets and facilities to process rare-earth ore into finished components, such as permanent magnets.  Fortunately, Molycorp is cooperating with the U.S. Department of Energy’s Ames Laboratory.  That effort will focus on creating commercial-grade, REE magnets, which are the strongest type of permanent magnets, critical for miniaturization, and resist being magnetized in any other direction.
 
Fourth, Mountain Pass does not have substantial amounts of heavy REE, such as dysprosium, which is used for heat-resistance qualities of permanent magnets in defense systems.  That’s why other U.S. rare-earth sites such as those in Idaho and Montana must be developed, which the GAO admits could take seven to 15 years to bring fully online.  We should also work with allies such as Canada and Australia to develop their mines.
 
Finally, processing facilities may require new technologies, permissions to use existing technology patents, and environmental solutions.  Government must work with private industry to overcome these challenges.  Government must work with the processing plant operators to harness the best technologies—some of which require cooperation from international patent owners—and to satisfy the environmental concerns while expeditiously moving forward.
 
China is an economic piranha, not a free market as Beijing’s REE monopoly illustrates.  We need to rebuild our REE supply system and stop being economically naïve regarding China by protecting our defense and private industries from Beijing’s abusive trade policies.

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