Is Rare Earth China's Trump Card?

It's not rare, it's not expensive, but the lack of it could make supply chains grind to a halt. It's rare earths...and China has the leash on the supply.

When China first brandished the Rare Earth card it was in 2010 against Japan in a fishing dispute of all things. Japan was caught napping and panicked. Rare Earth Elements (REEs) are a tiny but critical ingredient in the automotive, electrical and defense supply chain. For the want of $50 dollars worth of rare earths, a $60K vehicle does not get made.

The Japanese automakers freaked out. But in the end it really didn’t get that bad. Prices of the restricted rare earths spiked to 10 times its usual price, which was high enough to induce “semi-smuggling,” where exporters in China fudged the identification of the REE’s to get past Chinese customs. “High prices is the cure of high prices” wins again! In the fullness of time the right fishing boat captain was released and the crisis was over.

The fact that the 2010 REE export ban against Japan was a bit of a damp squib really lulled experts, including Bloomberg’s excellent commodities commentator Javier Blas into a false sense of complacency. On the Odd Lots podcast last month, Blas dismissed the fact that they could be a difference-maker in the US-China Trade War. “The US only imports $170 million worth in a year. And then beyond that, the most common usage of them is in vacuum cleaners.”

However time have proven that this time China is being very forreal this time compared to 2010, and we’re playing a different game.

Same call, different readouts

This time around, China put REE-export restriction in place in the wake of Trump’s “recipriocal” tariffs. They were never lifted even after both sides backed off on the crazy tariffs and counter-tariffs themselves.

Would the REE-restriction have bite? Reuters pointed to China’s REE-restrictions as the reason why Japan’s Suzuki motors halted their Swift EV production line. The REE-restrictions are not even aimed directly at Japan. The fact that they are catching strays from a ban aimed at the US speaks to the determination for China to enforce the ban diligently this time.

The issuance of export licenses is now strict and centralized. This allows the Chinese to shut down unofficial channels and track the inventory of what get used for the production of which product, when and how.

After what seems like weeks of fruitless weedling on social media by Trump, his call with Xi of China finally happened. I know most of us were too busy with the soap opera of the Trump-Musk Bromance Breakup, but the call and its implications deserve our attention and analysis.

According to Trump, not only did Xi take his call, after a 90-minute conversation the whole REE-thing is sorted! And he’s of course honored to have Chinese students in America as long as he has some sort of “list.”

What happened? Here’s what I think happened. China’s rare-earth ban was more effective than me or Blas expected. The stakes are higher this time and nothing was getting out. Trump has excellent raw animal instincts. He’s been obsessed with rare earths. But he doesn’t seem to understand it’s not the stuff that’s so rare but your whole supply chain to refine that stuff to something useable.

That’s what China does. There’s a lot of opacity to exactly what the deal was for China to agree to loosen rare earth exports. In fact, we only have Trump’s word for that part, since the Chinese readouts talks about everything BUT rare earths. Platitude about mutual cooperation? Check. Vague mention of how bad Taiwan separatism is? Check. Warm invitation extended for President Trump to come see China some time? Check. REEs? *crickets*. But you can be sure that to the degree there’s a relaxation of the ban, it is not unconditional and China is getting something it wants for it.

A leash on Trump?

What I’m interested in is to what degree the rare earth card is reusable. Once export resume I’m gonna assume the Chinese are gonna keep a tighter track on that inventory than IAEA inspectors does on enriched uranium. It would be hard for the US to divert enough to stockpile.

So in the short to medium run REE licenses becomes a valuable leash do keep Trump from reneging or misbehaving. It puts the lotion in the basket or it gets the REE-ban again.

But won’t the US just build out their own rare earth supply chain? Maybe, but it’s gonna take years plus major government dollars. The complexity of this feat is something that TP Huang explains much better than I do. Here’s what he has to say to get a flavor:

“Mining is just the 1st step. You need to actually separate the rare earth ore in RE oxides, refine them into metals, form alloys & then make them into RE Magnets.”

All this requires land, water, energy and a lot of investment.

It’s kinda similar to the enriched uranium problem. There Russia was the low-cost source but they got sanctioned. Industry knows exactly what to do, the source material of yellowcake uranium is cheap and abundant, but nobody wants to invest! This is because they know all that low-cost Russian capacity for uranium enrichment is still waiting in the wings. There’s zero guarantee that their investment won’t be instantly rendered worthless if geopolitical situation changes.

Same with rare earths. The problem is it’s a high capex low margin business the way the Chinese do it. As Blas pointed out, the US buys $160 million a year of this processed rock dust. It’s not enough profit there to get your nose out of joint about as a producer. And while you can command a pretty penny now the Chinese can literally kill your business at any time by flooding the market again.

(It’s instrumental to recall that the Japanese, who were initially menaced with the REE ban in 2010, did some exploration of potential rare earth deposits and then completely forgot about the threat. It’s not finding the rock that’s hard, it’s grinding and refining the rocks.)

This is in fact an unspoken question behind a lot of Trump’s efforts to bring manufacturing home. These are high-capex low-margin businesses in a country that is currently really good at low-capex high-margin businesses such as services or MNCs like apple that designs things in Cupertino and keeps the dollars while giving their Chinese contract manufacturers pennies and dimes.

Who is going to invest massively in manufacturing when the current demand for Made in Amerca is being manufactured by a capricious political actor like Trump?