As the world’s largest economy, America thought it held all the cards. China was hurting because of the US ban on the export of artificial intelligence (AI) chips made by Nvidia Corp, as well as Electronic Design Automation (EDA) software for chips made by firms like Synopsys and Cadence Design Systems. Without the chips and software, Chinese tech manufacturing would hit a brick wall. It turns out that the US was hurting, too. China’s export ban on critical rare earth minerals and metals, as well as magnets made from them, had hit the US auto industry as well as a range of sectors, from defence to technology, hard.
Rare earth elements are used to build high-tech goods, from smartphones, consumer electronics, electric vehicles, industrial robots and wind turbines to missile guidance systems, drones, MRI machines, nuclear submarines and F-35 fighter jets. “The US needs China’s rare earth resources just as much, if not more so, as China wants access to US advanced semiconductors,” notes Christopher Wood, global equities strategist for Jefferies & Co in Hong Kong. “Beijing views the imposition of controls on the exports of tech products as the equivalent of a declaration of economic war against China since it amounts to a deliberate effort to prevent the upgrading of its economy,” Wood noted.
For two decades now, China has been the dominant force in the rare earth supply chain. A recent Morgan Stanley report notes China produces 65% of the world’s rare earth minerals, processes 88% of all rare earth minerals and manufactures almost all heavy rare earth metals. It also makes 300,000 tonnes, or 95% of permanent magnets. (The US makes just 3,000 tonnes of permanent magnets, mostly for defence contractors.) More recently, Beijing has enacted new measures to protect its domestic supply chain, declaring rare earths as “property of the state” and drafting regulations to further tighten control.
Rare earths are the new oil, and China is the Saudi Arabia of rare earths, which has 44 million tonnes of reserves — by far the world’s largest. Brazil, with the next biggest reserves, has 21 million tonnes, India has 6.9 million tonnes and Australia has 5.7 million tonnes. Australia has mined rare earths since 2007. Until last year, Brazil produced no rare earths. It will produce 5,000 tonnes of rare earth oxide next year. In rare earths, you need to make a distinction between more valuable “heavy” rare earths and “light” ones. China has more light rare earth elements and is a net importer of heavy rare earths.
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As the factory of the world, the country is the world’s biggest exporter of rare earth metals. Last year, it had a trade surplus of US$992 billion ($1.27 trillion) with the rest of the world. China’s surplus with the US in 2024 was US$361 billion. During his first four-year term in office, Trump tried imposing tariffs on China. Eventually, China agreed to buy more agricultural produce from the US to balance its lopsided trade relationship. So, when Trump returned to the White House in January and unveiled his new, more aggressive tariff strategy, China was ready. Beijing’s bet was that it had a big ace up its sleeve with its dominance of rare earths. “The rare earth issue must be a shocking reminder to Washington’s national security lobby of the US’s lack of leverage over China,” Wood says.
Clearly, it was unrealistic for Washington to assume that Beijing would ease controls on rare earths if the US did not do the same with export controls of US tech products, like lower-end AI chips such as the H20 made by Nvidia. Before the US export ban on AI chips, China accounted for nearly 25% of Nvidia’s total global sales. Now, it accounts for just 15%. The US is expected to announce a relaxation of those export controls. China still won’t get the top-of-the-range chips but will get modified AI chips that are one rung lower. Beijing has a long history of weaponising rare earths. In 2010, it used rare earth against Japan after a conflict over the Senkaku Islands.
China’s growing leverage
On June 10, the two countries reached a tentative deal in London that gave China even more leverage than it had. It now awaits the sign-off from Trump and China’s President Xi Jinping. The US agreed to relax restrictions on sales to China of jet engines, related aircraft parts and ethane, a component of natural gas required for manufacturing plastics. China now makes its own Comac C919 narrow-body twin-jet commercial aircraft, a rival to the Boeing 737.
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Those jets need engines and parts made in the US. Washington also agreed not to impose visa restrictions on over 300,000 Chinese students pursuing university courses in the US and to allow new Chinese students to enter the country. It will also lift some restrictions on AI chip sales to China. In return, China agreed to immediately approve rare-earth licence applications for US companies for the next six months. That means if Beijing believes the US is squeezing it to force more concessions or hike tariffs, it reserves the right to reject new licences for rare earths from US companies. That will allow China to retain its chokehold on the supply of critical commodities like rare earths.
Are rare earths really “rare”? Most rare earths are not rare. What is rare, however, is finding concentrated, economically mineable deposits of rare earths. To be sure, extracting, separating, processing and developing them into permanent magnets is extremely difficult, hazardous for the environment, and incredibly expensive. “The bottleneck is in separation and purification of rare earths, Lynas Rare Earths’ CEO Amanda Lacaze noted recently. “Even if you have ore, if you can’t separate the individual rare earths at commercial purity, you don’t have a viable supply chain.”.
They were called “rare earth” because they were identified during the 18th and 19th centuries as “earths” or materials that could not be changed further by heat. Moreover, compared with other “earths”, such as lime or magnesia, they were relatively rare. Cerium is the most abundant rare earth and is more common than copper or lead. All rare earth minerals, except promethium, are more abundant on average in the Earth’s crust than silver, gold or platinum. What is rare, however, is finding concentrated and economically mineable deposits of rare earths.
Rare earth metals are considered today’s “vitamins” for high-tech equipment. Used in small quantities, these 17 minerals are essential components for over 200 commercial, high-tech and military defence products. Little wonder, then, that rare earth minerals and metals are at the centre of an escalating tech and trade war between China and the US. America imports 70% of its rare earth metals from China, while Europe imports 39% of its own needs.
The irony is that the US was once the dominant producer and processor of rare earths and the manufacturer of rare earth metals. Rare earths were first used commercially in the late 19th century to brighten lamps. Decades later, in the 20th century, they were used as an alloy in ammunition for machine guns. The first deposits of bastnasite, a mineral that contains rare earth oxides, were discovered in the US in the 1940s in Mountain Pass, California, about 100km southwest of Las Vegas. In the 1960s, rare earths were used as catalysts for refining petroleum and in TV sets.
In the 1980s, Sumitomo Corp of Japan and General Motors Co developed the first rare earth magnet, derived from the rare earth element neodymium, which was as strong as an iron magnet but a fraction of the volume, allowing automakers to introduce thin power doors, power steering and power seats. They named their magnet-making venture Magnequench. Chinese investors bought Magnequench and moved its plants to China. Molycorp, the company that owned the Mountain Pass facilities, eventually expanded into China, where it transferred technology and expertise to a host of mining companies that made China a rare earth powerhouse. Trump has called the growing demand for rare earth metals the “gold rush of the 21st century” due to their importance in “emerging technologies” like robotics.
Because China has a chokehold on critical rare earths, Trump has also called for the annexation of Danish-controlled Greenland for its rare earth reserves and other minerals. He also wants to annex mineral-rich Canada and has referred to it as America’s “51st state”. The US recently signed an investment deal with Ukraine that grants it access to its minerals and guarantees US investment in Ukraine’s rare earths and other critical minerals. However, access to rare earths is one thing; the capacity for processing and making metals is another. Then, there is the manufacturing of permanent magnets. Even if the US somehow gets hold of Greenland and discovers rare earths in Ukraine, it will be a decade or more before the world cuts its reliance on Chinese production.
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Finding alternatives
For now, countries around the world are ploughing resources into finding alternatives to Chinese rare earths. In late March, the European Union announced 47 new mineral projects, including five involving rare earth metals, to diversify its access to raw minerals as part of Europe’s Critical Raw Materials goals of 10% mining, 40% processing or separating rare earths from other minerals, and 25% recycling rare earths by 2030. Around the same time, Trump issued an executive order boosting US critical and rare earth metal production to enhance national security and reduce US reliance on foreign minerals. That aside, researchers around the world are also experimenting with powerful magnets that do not require rare earths.
Yet, countries trying to diversify their supply chains are challenged by rare earths’ highly geographic concentration — China and Brazil hold 70% of the world’s total rare earth metal reserves — high production and mining fees, and environmental costs associated with processing the minerals. Las Vegas-based MP Materials Corp and Australia’s Lynas (which has a mixed rare earth carbonate processing plant in Malaysia), the two biggest rare earth firms outside of China, are still playing catch up.
Global demand for rare earths is expected to grow at a 9% compound rate until 2040, with an expected shortage by 2027, notes a recent Deutsche Bank report on the sector. Permanent magnets and catalysts account for 71% of rare earths’ use, though magnets make up nearly 90% of the total value. Demand for a range of consumer electronics like smartphones, tablets, electric vehicles, batteries, robots and drones will remain a key growth driver.
Expect China to build rare earth processing plants and factories making permanent magnets in the US over the next few years using not just rare earths in China but also minerals from Brazil, Australia, and India. It will be Beijing’s way of indicating it does not really want to hold the world at ransom with its rare earth dominance but is willing to use that dominance as a force for good.
Assif Shameen is a technology and business writer based in North America
