The 90-day pause in the US-China trade war brought relief to global markets. But while the trade truce is good news, rare earth elements have steadily emerged as a new flashpoint. Beijing’s dominance over this strategic industry – vital for military and renewable energy technologies – and its ability to manipulate it at will are alarming.
Yet focusing on China’s control of rare earths supplies arguably distracts from the underlying problem. Global market conditions created by China’s industrial policy make alternatives economically unviable, entrenching China’s dominance. If those conditions are not addressed, there is no escape from this chokehold.
Since July 2023, Beijing has developed new export control laws covering seven rare earth materials. China’s near monopoly over these inputs gives it leverage to exert geopolitical pressure, creating vulnerabilities for countries dependent on Chinese exports. Japan experienced this firsthand during China’s 2010 rare earths embargo. While Japan subsequently succeeded in diversifying supplies, today’s market conditions make it hard to replicate this feat.
The central obstacle to diversifying production of rare earth elements is not their scarcity. Ironically, the materials are commonly available as by-products of existing industrial processes, and recycling is also available. The real barrier is the artificially low prices created by decades of aggressive Chinese industrial policy, coupled with a “peacetime mindset” among Western companies that led to underinvestment.
China’s capital allocation model has incentivised rare earths oversupply for decades. The government provides generous credit towards rare earths mining and processing as specialised inputs for the technologies in which China aims to lead. Investing ahead of demand has created oversupply and depressed prices. Low prices, in turn, discouraged investment elsewhere. Non-Chinese companies, unwilling or unable to compete economically, opted to outsource highly polluting refining processes to China. Firms outside China now find minimal incentive to establish costly and environmentally challenging production facilities.
Australia and other key partners need to remind Washington that the right market conditions to achieve a key national security goal cannot be created unilaterally.
In an era of escalating US-China rivalry and weaponised interdependence, however, this reliance is more of a problem. Australia, with its extensive rare earths deposits, illustrates this challenge. Despite recent government initiatives, such as the Critical Minerals Strategic Reserve and significant domestic investments, the underlying economic incentives have not changed. Oversupply further erodes profitability and deters private-sector investment.
Without substantial shifts in market dynamics, these domestic solutions risk compounding global oversupply rather than resolving the underlying economic imbalances. Addressing this challenge requires governments to actively reshape market incentives. Australia cannot resolve the issue alone – international collaboration is essential.
On the demand side, like-minded states should form mechanisms like the International Energy Agency. Australia and other partners should implement stockpiling requirements, introduce efficiency and recycling quotas, and create joint-financing programs providing off-take guarantees. Existing initiatives such as the Minerals Security Partnership already provide a coordination forum for these initiatives.
On the supply side, partners should establish “cartels” to set prices, making domestic production economically viable. This resembles OPEC’s model. Partners can use these groupings to strategically adjust supply, set prices, and undercut Chinese firms’ ability to depress margins.
A collective tariff on Chinese rare earths imports would strengthen these efforts, albeit proactively from Beijing’s perspective. While these measures might increase costs for critical industries, the relatively minor economic footprint of rare earth minerals compared to their outsized strategic importance makes these costs manageable – and necessary – for long-term resilience.
With Donald Trump in the White House, collective efforts will require skilful diplomacy. Deteriorating relations between the United States and other major minerals producers, such as Canada, undermine the push for resilience. Australia and other key partners need to remind Washington that the right market conditions to achieve a key national security goal cannot be created unilaterally.
China’s institutionalisation of economic coercion demands serious attention. This worrying trend makes calls for supply chain resilience urgent. But the current market conditions make this goal economically unviable. It is up to governments to find collaborative ways of fixing this.
