Rare Earth Elements and National Security
Rare earth elements have been in the news a lot recently, with key investments happening in the United States, concerns about China’s dominance in the industry, and them being key parts of Trump’s dealings with Ukraine and Greenland. I’ve done some light digging into the issue, because as with many industry-related topics tied to national security concerns I am fairly sceptical of the arguments put forward. I believe this is likely the case here too.
Rare Earth Elements (REE)
Some quick facts:
Rare earth elements (or metals) are a group of 17 that, while not exceptionally rare in terms of overall abundance, are not typically found in high concentrations in the Earth's crust, making their extraction and processing challenging and costly.
REE are used in numerous applications, normally in small amounts, appearing in everything from oil refining, to smartphone touchscreens, to earphones and loudspeakers, to wind turbine generators, to golfing bags and windshield wipers.
They are also used in a number of critical components of high technology military applications. They appear in cutting edge radars, the F-35, submarines, on cruise missiles, and all manner of applications.
The overwhelming amount of REE mining (~60-70%) and refinement (~90%) is carried out in China. This raises questions about dependency on Chinese supply chains and risks to national security.
As a response to this perceived weak spot, governments (particularly the US) have responded by looking to diversify supply chains, subsidise domestic production, and in some cases threaten to invade Greenland.
I am generally sceptical of arguments relating to national security concerns of a critical supply chain weak spot. Economies under war are remarkably resilient, and there are countless examples of supply chains adjusting under remarkable pressure. This includes the general failures of strategic bombing to live up to its promises in WW2, the failure of German shipping interdiction campaigns also in WW2, the regular limited effect of sanctions to coerce behaviour changes, and many more. The resilience of the Russian economy even while under enormous sanctions is a case in point, where it has made do with various financial levers, sanctions evasion, innovation or replacement.
The 2010 REE Embargo
On the REE front specifically, there is actually a very useful case study. In 2010, there was an incident by Senkaku, and Japan arrested the skipper of a Chinese trawler. In a stark example of using strategic minerals for diplomatic leverage, China embargoed its exports of REE to Japan. (Technically, the Chinese government denies there was an embargo, but in actual fact there was a clearly coordinated cancellation of all REE exports to Japan).
The embargo raised serious concerns because, in 2010, China accounted for an incredible 97% of the world’s total production of REEs, about half of which were exported to Japan. This was significant worldwide, as with Japan being such a large processor and user of REEs almost all supply chains downstream would be impacted.
Japan quickly buckled, and released the skipper, showing the potential efficacy of this near-monopoly as a diplomatic tool. However, it bears witnessing what happened next. The embargo continued, and Chinese exporters cancelled their contractors with Japanese companies one by one in the following months. As expected, prices quickly soared. Well, between November 2010 until mid-2011, and then they began to decline again. See the chart of some REE in comparison to Gold and Silver below:
There were a few reasons for this. China’s REE inventories surged as a result of the export restrictions, creating a significant surplus they needed to unload somewhere. Japanese companies stockpiled their REEs, and were using this surplus even into 2013. Mining companies throughout the world moved to invest into REEs to make good on the soaring prices, causing a mini bubble and pop. Companies, like Hitachi making REE magnets, quickly developed more efficient products lessening dependence. Some technologies were developed replacing the need for REEs entirely.
Another very significant factor was that there were significant holes in China’s embargo. With such high prices there were very high incentives to sell. Chinese producers exploited loopholes to get around export controls, by mixing rare earth metals with other more common metals for example. It is estimated that 10-30 percent of official Chinese production was simply smuggled out of the country.
Though the event did cause some actions by government, there was not really significant moves like we have seen under Biden or Trump. Rather, it was primarily moves by private industry that has seen China’s market share steadily reduce since 2010. The joint efforts of Japan, the United States, and Australia have diversified the global supply of REEs, and China’s share of global output has been reduced to 62% by 2021. China is now in a considerably weaker position than it was in 2010.
While it secured the tactical victory in the return of its skipper, China took note of the broader strategic failure and limitations of using REE as leverage. It wrote a number of papers and undertook a number of reforms to try and strengthen its position. For example, to better control and consolidate its REE industry, it merged the various REE enterprises into four State-Owned-Enterprises in 2016, and then formed a new conglomerate China Rare-Earths Group in 2021. To borrow from James C. Scott’s Seeing Like a State, the goal of this is to make the industry more ‘legible’ to the State. By concentrating the industry (similar to the Soviets and their Kolkhoz farms) it becomes easier to police, and therefore extract from – in this case, easier to clamp down on smuggling or other evasive actions.
Cost Impacts and Bottlenecks
US military demand for REE is not particularly significant, at an estimated 0.1% of global consumption and likely to relatively drop as production ramps up. As seen in 2010, demand is not entirely inelastic. Can we forgo REE in golf bags and windshield wipers if prices surge, clearing the use of resources by the military?
A quick point that could be made about most instances of protectionism for whichever industry on national security grounds. A Virgina Class Submarine has roughly 4 tonnes of rare earth metals contained within. Rare metals vary significantly in value. As of writing this, dysprosium sells for ~$250,000 per metric tonne, whereas neodymium sells for ~$64,000.
Let's assume a worse case and say all 4 tonnes in the submarine is dysprosium, for a total of $1m. Let's say a shortage quintuples the price to $5m. The price tag for a Virgina Class Submarine is over $4 billion. The price increase is fairly inconsequential, all things considered, and I'm using fairly extreme numbers.
And further, the US is aiming to produce 2.33 Virgina Class Submarines a year, a target it is struggling substantially to meet. One needs to ask whether rare earth metals are the limit on production here. All the rare earth metals in the world will not help production if, just as an example, the nuclear reactors for the submarines cannot be produced at a higher rate.
There are just two shipyards capable of building these submarines, so the difficulty of ramping up production goes far beyond sourcing rare earth metals. A 2023 study by the GAO, Weapon Systems Annual Assessment: Programs Are Not Consistently Implementing Practices That Can Help Accelerate Acquisitions (GAO-23-106059) found the primary reason for the Virginia Class Submarine years long delays was due to workforce constraints, being 25% under necessary levels. Other recent delays have been attributed to difficulties in producing specifically the torpedo tubes.
The point here is that there are rapidly diminishing returns on expanded production of rare earth metals. The cost component is trivial and the need for increased availability is constrained. If China were to suddenly halt all global exports, yes, it would cause some issues. But it is more likely that people will live with poorer quality airpods or recycle their EV batteries (how long has Cuba kept their automobiles functioning in the face of sanctions?) than military production will halt, and only temporarily as other production ramps up.
Difficulties in maintaining constraints
It is always important to also consider the fact that China's strategy here is not free. China has invested very heavily in REE production. Environment concerns have been put aside, which will cause long term issues; subsidies have preferenced REE over other industries; and the consolidation to make the industry more legible is bound to create inefficiencies and a lack of competitiveness in time.
The EU currently has a target to attain 15% of its REE needs through recycling by 2030. Such an endeavour would significantly curtail China’s ability to halt REE from reaching military goods. It may sound somewhat desperate or absurd to suggest dismantling old EVs to use their REE for cruise missiles, but similar things happened in WW2. The Allies devastated German ball bearing production, but they sacrificed ball bearings in washing machines for the military, or just used other bearings instead. If push came to shove, how resilient and innovative would the West be as China banned an industry it has invested heavily into from actually selling its goods?
Or alternatively, as mentioned above, sanctions evasion is a very real thing. Is it terribly unfeasible for the CIA to set up a front in, say India, to divert some REE supposedly for other uses towards the US military? The already-limited efficacy of US sanctions is built upon a broad international coalition of willing supporters and the US dominance over the international financial system. Advantages China simply does not hold.
I remain somewhat sceptical about the national security case for REE. Less so than the blatant autarkic nationalism of steel protectionism, but also, no one is threatening to invade Greenland over their iron supplies.
Suggested Reading
My main sources for the 2010 case study are: