“The most important long term national security and foreign policy consequence of this coronavirus pandemic is going to be a fundamental reassessment of the United States’ relationship with China. I believe China is the most significant geopolitical threat to the United States for the next century, and I have been saying that for years. Many in Washington have not been interested in hearing it or have refused to listen. I think this coronavirus pandemic has opened the eyes of many in Congress, many in Washington, and even some in the media.”US Sen. Ted Cruz
Once a rival to Donald Trump during the 2016 Republican Party presidential primaries, Senator Ted Cruz is a well-known China Hawk who is 100% aligned with President Trump on this strategic issue. Last month, Sen. Cruz introduced a legislation dubbed the Onshoring Rare Earths Act or ORE Act “to end U.S. dependence on China for rare earth elements and other critical minerals used to manufacture our defense technologies and high tech products by establishing a supply chain for these minerals in the U.S., including by requiring the U.S. Department of Defense (DOD) to source these minerals domestically“.
Rare earths are mentioned in the so-called intermediate trade agreement or Phase I agreement concluded between the United States and China before the outburst of the coronavirus crisis. They could become a focal point in the coming trade battles following the scraping of that agreement. Indeed before the Coronavirus crisis and the US reaction to the Hong Kong protests, the deal was hinging on increased Chinese purchases of US Soybeans. But a recent report by the US Department of Commerce shows that purchase commitments remained below their 2017-2018 levels. China actually increased its purchases of soybean from Brazil where a record harvest this year led to more competitive prices.
This new legislative initiative brought by Senator Cruz comes atop several years of increased attention to the subject from the Executive and Legislative branches. In December 2017, President Trump issued an Executive Order asking the Secretary of Interior and the Secretary Commerce to develop a Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals. After one year and half of consultations the corresponding report has been published in June 2019. The document outlined the extreme dependency of the United States on imports for most critical minerals, as mentioned in the Executive Summary:
The United States imports most critical mineral commodities. Specifically, the United States is import-reliant (imports are greater than 50 percent of annual consumption) for 31 of the 35 minerals designated as critical by the Department of the Interior. The United States does not have any domestic production and relies completely on imports to supply its demand for 14 critical minerals.
The notion of critical mineral retained by the US Federal authorities goes far beyond the geological category of rare earths. Indeed, as per the aforementioned Executive Order it is:
“A mineral identified by the Secretary of the Interior [pursuant to the Executive Order] to be (i) a non-fuel mineral or mineral material essential to the economic and national security of the United States, (ii) the supply chain of which is vulnerable to disruption, and (iii) that serves an essential function in the manufacturing of a product, the absence of which would have significant consequences for our economy or our national security.”https://www.federalregister.gov/documents/2017/12/26/2017-27899/a-federal-strategy-to-ensure-secure-and-reliable-supplies-of-critical-minerals
It is perhaps a mere coincidence but a few days after the ORE legislation has been proposed, U.S. Secretary of Commerce Wilbur Ross has just initiated an Investigation into Imports of Vanadium. This decision follows review of the petition filed by domestic producers, AMG Vanadium LLC (Cambridge, OH), and U.S. Vanadium LLC (Hot Springs, AR), on November 19, 2019, asserting that domestic industry is adversely impacted by unfairly traded low-priced imports, limited export markets due to value-added tax regimes in other vanadium producing countries, and the distortionary effect of Chinese and Russian industrial policies.
The economics of scarcity and abundance
The main paradox with rare earths is that most of the minerals grouped under this appellation are actually abundant on earth as I explained one year ago in an interview in French to the Swiss National Radio and TV Broadcasting corporation when China threatened to block its exports of rare earths. Although it holds only half of total global reserves, China produces around 80% of the 17 minerals labelled as Rare earths. Hence, the concentration of rare earths production in China is linked to their economics. Indeed, in OECD countries, mining these metals is expensive and restricted as it has to comply with stringent environmental rules, which is not the case in China. Among OECD countries, Australia is the closest contender to challenge China’s leadership in rare earths production but it will have to invest tens of billions of dollars to ramp up its domestic production to a level that will make it a viable alternative to Chinese production.
Another important caveat to Chinese supposed domination of the rare earths markets is that Chinese chip makers, renewable energy equipment producers and other industrials are for the time being heavily reliant on imports of components including Chinese exported rare earths. Hence, taking into account the whole value chain based on the transformation of rare earths from ore to consumer products, there is actually much more an interdependence between China on one side and Japan, Korea and the US on the other side, than an outright dependence of the later countries on the former.
Therefore, in the wake of the coronavirus crisis that exposed the dependence of Western economies on China in a range of critical industries (cf. our quantitative analysis of that dependence based on a new available database), the question of rare earths has to be put into a broader context. Revamping global value chains will require the forging of new “coalitions of the willing” to bypass Chinese in these industries. In reaction, China might be tempted to reinforce its own alliances with a range of affiliate countries. It will also seek to distend the transatlantic alliance by forging closer economic bonds with Russia and with the European countries which will refuse to align with the United States in what increasingly looks like the beginning of a new Cold War.
A moonshot for rare earths and other minerals?
Rare earths are also at the center of an emerging battle for Space exploration between the United States and China. Speaking on CNBC one year ago, on the 50th anniversary of the Apollo 11 mission to the moon, NASA Administrator Jim Bridenstine explained that harvesting rare-earth metals from the surface of the moon is one example of how companies can profit from space exploration. Asteroids in the Asteroid Belt between Jupiter and Mars have already been valued by some government agencies and private investors for their potential in terms of metals, minerals…and water. They could be worth hundreds of trillions of dollars... once the daunting challenges associated with transporting and deploying a mining infrastructure to these orbiting objects are solved. For some private investors and space enthusiasts like Elon Musk, this could be possible within 20 years provided sufficient funding is allocated to the new start-ups and technological ventures emerging in this promising field. The moon is closer to the earth and it could offer the same potential of ressources with much lower risks and technical challenges. Hence, it is not a surprise if a new race is waging between long established and emerging space powers to get humans back on the moon. Beside the United States, Russia, China, Japan and the European Union, other countries are planning to establish an industrial footprint on the moon like India, Australia, Brazil, Iran, Israel and the United Arab Emirates.