The trade battle between the United States and China could affect American imports of “rare earths” that are used to manufacture wind mills, solar panels and electric car batteries. They are even used in drill bits for the oil and gas industry. Those elements are now in the eye of the storm, which could potentially give China a powerful new weapon in this escalating war.
Because the United States gets about 78% of its rare earths from China, they could be withheld from the United States. That would potentially trip up this nation’s high tech sector as well as its green energy economy. But such a strategic move could blow up in China’s face, given that other countries supply rare earths and that this country could develop its own.
“(T)he Federal government will take unprecedented action to ensure that the United States will not be cut off from these vital minerals,” Secretary of Commerce Wilbur Ross said.
Large deposits are available in such friendly countries as Australia, Brazil and Canada. Even United States used to mine its own rare earths in the 1960s and 1970s at the Mountain Pass in California. But this country decided to forego those elements because the environmental costs were too high — and because China’s labor prices can’t be topped.
Rare earths are common. But mining them is both destructive and labor-intensive — a dirty process that requires separating the various minerals. The United States, though, could resume development. Besides the California repository, the U.S. chemical company Blue Line Corp. and the Australian mining firm Lynas may team up. This country has also stockpiled some minerals, meaning it could weather any short term embargo.
“We doubt that China’s rare earth metals card is a trump card,” says John LaForge, head of real asset strategy analysis at Wells Fargo Advisors. “China will have a hard time going beyond limiting direct exports to U.S. manufacturers.
“The reason is that China is the world’s largest exporter of consumer goods—the same consumer goods … that rely on rare earth materials,” he continues. “We have a hard time seeing how China could slap rare earth restrictions on consumer goods—goods that are produced inside China and are increasingly consumed globally—and not shoot itself in the economic foot in the process.”
Shot in the Foot?
The firm notes that President Trump signed an executive order in 2017 to authorize the Department of Interior to locate new rare earths while also streamlining the permitting process. Meantime, legislation is wending its way through Congress to ease exploration efforts. The United Mining Association says that this country has access to $6 trillion in such resources, which if developed, they could grow significantly the U.S. economy.
But breaking the addiction to China’s rare earths is problematic. While the United States could develop its own markets, it is unlikely to happen. For starters, it would require legislation or regulatory approval: Regulatory moves take time while the U.S. House won’t pass new rare earths’ production given the environmental impact.
Even if a presidential administration and a sympathetic Congress could wave a magic wand, it would take the United States many years to catch up with China. It accounts for 70% of the globe’s production and 40% of its reserves, says the U.S. Geological Survey.
And this dynamic is notable in the new energy economy. In 2018, for instance, global production of clean energy vehicles exceeded 2 million units and of those, 1.27 million units were produced in China, according to ResearchAndMarket’s “Research Report on China’s Rare Earth Industry, 2019-2023” report.
It says that China is expected to produce 6 million new electric vehicles by 2023 and if this achieved, it would mean consuming 30,000 tons of rare earths. Moreover, Bloomberg New Energy Finance is predicting global sales of 30 million electric vehicles by 2030, with China making up half of those. So, if China chooses to hoard those minerals, it would reverberate globally.
“The Sino-U.S. trade war has little impact on China’s rare earth industry,” says the ReseachAndMarket report. “For example, in May 2019, the United States again decided not to impose import tariffs on China’s rare earth and other key minerals. It shows that the United States still relies heavily on China’s minerals to produce consumer electronics, military equipment, and many other products.”
If China stops exporting its rare earths to the United States, it would no doubt upset the domestic economy and especially the energy sector. But withholding minerals is not a risk-free proposition for China. Therefore, the smart move is to resolve the trade dispute before it would escalate any further.