The Strategic Importance of Rare Earths in US-China Relations
Rare earth elements (REEs) have become a critical focal point in the evolving dynamics between the United States and China. These materials, essential for manufacturing high-performance magnets used in electric vehicles, wind turbines, industrial robotics, and advanced defense systems, are at the heart of global technological competition. China’s dominance in the rare-earths sector has created a significant challenge for the U.S., prompting a range of strategic responses.
In response to China’s tightening control over rare-earth exports, the U.S. has taken several steps, including lowering tariffs, relaxing export controls on AI chips, and easing visa restrictions for Chinese students. These measures reflect a broader effort to mitigate the impact of China's growing influence. However, these actions also highlight the complexity of the situation, as they come alongside efforts to secure alternative supply chains.
The U.S. Efforts to Reduce Dependence on China
The U.S. government has made substantial investments to bolster domestic rare-earths production. In July, the Department of Defense announced a multi-billion-dollar investment package aimed at supporting MP Materials, a key player in America’s rare-earths industry. Despite these efforts, the question remains: can the U.S. truly escape its reliance on Chinese rare-earths?
Japan’s experience offers a cautionary tale. In 2010, after a maritime dispute with China over the Senkaku Islands, Beijing abruptly cut off rare-earth exports to Japan. In response, Japan pursued a multifaceted strategy, including investing in Australian producers, boosting R&D in recycling and substitution, forming commercial partnerships with Chinese magnet manufacturers, and building strategic stockpiles. Yet, even after more than a decade, Japan still sources over 70% of its rare-earths from China.
China's Unmatched Industrial Capacity
China’s dominance in the rare-earths sector is not accidental. Its strength lies in its industrial capacity to refine, process, and produce at scale. Currently, China controls between 85% and 90% of global refining capacity and produces roughly 90% of the world’s high-performance rare-earths magnets. It is the only country with a fully vertically integrated rare-earths supply chain, from mining to chemical separation to magnet fabrication.
This industrial edge has given China a technological moat. Between 1950 and 2018, China filed over 25,000 rare-earths-related patents, more than double the number filed in the U.S. Decades of hands-on experience in the complex chemistry and metallurgy of rare-earths processing have created a depth of expertise that Western firms find difficult to replicate. Moreover, in December 2023, China imposed sweeping export bans on technologies related to rare-earths extraction, separation, and magnet production, further solidifying its position.
Environmental Regulations and Competitive Advantage
China’s lax environmental regulations have also contributed to its competitive advantage. In 2002, the Mountain Pass Rare Earth Mine in California was forced to halt operations after a toxic waste spill. In contrast, China’s more permissive regulatory environment has allowed for rapid expansion of rare-earths production with fewer delays and lower costs.
Evolving Chokepoints and Future Challenges
Importantly, rare-earths chokepoints are not static; they evolve with technological advancements. China understood this, waiting patiently as Western demand for rare-earths magnets surged due to the global green transition, which increased the need for electric vehicles and wind turbines.
Even if the West manages to build a parallel supply chain for current needs, future chokepoints may emerge elsewhere. For example, quantum computing increasingly relies on rare isotopes like ytterbium-171, as well as elements such as erbium and yttrium. These emerging applications could become new pressure points, forcing the U.S. and its allies to again play catch-up.
The Need for an Offensive Strategy
The U.S. must confront the uncomfortable reality that China’s dominance in rare earths is likely to persist for the foreseeable future. Defensive strategies like supply-chain diversification may address some vulnerabilities, but true resilience requires an offensive approach that enhances American leverage.
The U.S. still holds valuable cards, particularly in controlling technologies or infrastructure that China cannot live without. These include advanced chips, frontier AI models, and access to the dollar-based financial system. However, the U.S. has historically pursued a path of decoupling and restricting technology flows to China, which has had unintended consequences.
Since the first Trump administration, the U.S. has blacklisted leading Chinese tech firms and tightened export controls on cutting-edge chips. While these measures initially hindered Chinese companies like Huawei and ZTE, slowing their AI development, they proved difficult to enforce. Loopholes created opportunities for enforcement arbitrage, as acknowledged by outgoing U.S. Commerce Secretary Gina Raimondo in December 2024.
Shifting Policies and Strategic Engagement
Recent policy shifts suggest a growing recognition of these challenges. The Trump administration’s decision to relax restrictions on sales of Nvidia’s H20 chips to China signals a move away from blanket bans and toward more calibrated engagement. Counterintuitively, such engagement may be a smarter form of de-risking. The more China relies on American technology, the more deeply the two sides’ supply chains will become entangled, making it harder for China to weaponize its strategic assets, including rare earths.