Joris Teer works as a strategic analyst for The Hague Centre for Strategic Studies. Chris Miller is an associate professor at Tufts University’s Fletcher School and is also the writer of “Chip War: The Battle for the World’s Most Vital Technology.”
Amid increasing tensions between China and its primary trade partners, Beijing holds a significant bargaining chip – its dominant control over the extraction and refinement of numerous essential minerals.
Using trade as a weapon for materials essential to advanced industries could result in significant economic impacts. To combat this, Western nations must increase efforts to fund and establish alternative supply chains for crucial minerals.
The EU’s current investigation into Chinese government support for electric vehicles highlights China’s significant influence in the supply chain for crucial minerals. China dominates the entire process of producing EVs, from mining and refining to processing, battery production, and vehicle manufacturing. Even EVs made outside of China often rely on minerals that have been refined in China or by Chinese companies. With the rising demand for minerals during the shift towards renewable energy, China’s control over the supply chain is becoming even stronger.
Can China potentially exploit its dominant position in critical minerals as a means of coercion?
In the early 2010s, Beijing implemented unofficial limitations on the sale of rare earth elements to Japanese companies due to conflicts over the Senkaku islands, which are currently under Japanese control but are also claimed by China. Additionally, China has recently put in place a licensing system for the export of gallium and germanium, two minerals essential in electronics production, where it holds a dominant position.
The current market situation in China presents significant dangers. Minerals play a crucial role not only in the shift towards sustainability and digital advancement, but also in many essential industries.
Rare earths, a collection of 17 minerals, are utilized in the production of various devices including pacemakers, MRI machines, drones, fighter jets, wind turbines, and hard drives. China has control over 90% of the global refining capacity for these essential rare earth elements, which are crucial in the creation of highly efficient permanent magnets used in products ranging from electric vehicles to iPhones.
Rewording: Another example is cobalt, a crucial mineral used in various battery technologies. The majority of global cobalt production comes from mines in the Democratic Republic of Congo, but these mines are primarily owned by Beijing and the refining process often occurs in China.
Beijing also has a strong position in materials like gallium and germanium, which are used to manufacture respirators, defibrillators and electric engines, as well as electronics. It produces 97 percent of the world’s gallium and 68 percent of its germanium.
In 2022, Russia’s actions in the gas market showed that relying on each other for trade may not always lead to peaceful relationships. If there are interruptions in the supply of minerals, the consequences could be even worse.
Although Western policymakers have acknowledged the potential risk of critical minerals trade, efforts to address these dependencies have been limited. Japan and the United States have made more progress in this area compared to the European Union.
The difficulty lies in the fact that private companies tend to purchase the least expensive minerals, while China’s dominant position in the market allows it to dictate prices for certain materials, making it difficult for competitors in free market economies to establish profitable businesses. If a competitor appears to be gaining a larger share of the market, China can easily saturate the market and lower prices. Unfortunately, there is no global authority to regulate China’s dominance in the market.
China’s advantages aren’t geological, they’re political. Chinese firms benefit from cheap loans from state-owned banks; lax environmental standards mean cheaper production; and Beijing’s state-owned enterprises have scoured the world for decades to lock up mining concessions.
The Western world does have potential solutions. The shift towards renewable energy and advanced technology could generate a fresh need that could be utilized to bolster mining and refining industries in reliable nations. However, the success of this potential supply relies on governments implementing policies that make it financially feasible for other countries to supply critical materials.
The governments of Japan and the United States have provided backing for efforts to find alternative sources of supply. One example is the investment made by the Japan Organization for Metals and Energy Security in the Australian company Lynas, in order to secure a significant portion of Japan’s rare earth requirements.
In the United States, the Inflation Reduction Act aims to balance out Beijing’s advantages in the EV industry by disqualifying companies from receiving tax credits if they use components or materials from countries of concern, such as Russia or China.
The United States has successfully reopened the Mountain Pass Mine in California, increasing its global rare earth mining from zero percent to 16 percent in 2020. This achievement was made possible by a Pentagon program aimed at ensuring defense production. President Joe Biden’s recent trip to Hanoi and signing of an agreement to encourage investment in Vietnam’s rare earth reserves demonstrates the country’s commitment to securing a stable supply of these valuable minerals. Vietnam possesses the second-largest known deposit of rare earths and is determined to break China’s monopoly on refining and producing magnets.
The EU has not yet experienced similar accomplishments. However, it is currently establishing a permanent magnet production facility in Estonia. Additionally, the bloc can increase its influence in the energy transition.
As an illustration, the countries bordering the North Sea have made significant investments in offshore wind energy, leading to a high demand for rare-earth permanent magnets used in wind turbines. However, although this could potentially stimulate mining, refining, and production of these magnets in reliable countries, governments have typically overlooked the geopolitical risks in their tender designs. As a result, these investments have further cemented the dependence on rare earth magnets manufactured in China.
Advanced economies need to do more to counter Beijing’s monopolistic position in upstream materials value chains. In addition to the announced EU probe into Chinese EV subsidies, they should commission formal studies to understand and address market distortion in the entire value chain of all China-mined or -refined critical raw materials.
The EU Critical Raw Materials Act urges member nations to establish raw material observatories for monitoring dependencies. This is a positive initial move.
However, developed countries, particularly the European Union, require improved strategies for increasing production. The process of establishing new mines and refineries in democratic nations is complicated due to lengthy consultation procedures and opposition from local communities. Obtaining permits for these projects can also be a lengthy process. In order to compete with China’s non-market price advantages, government funding, such as the Pentagon’s support for rare earths mining, may be necessary.
Expanding sources of supply from reliable partner nations is the sole solution to combat China’s control. Urgent measures must be taken as it typically takes anywhere from 7 to 20 years to establish a new mining operation, according to one estimation.
Another option is to allow China to strengthen its position in a sphere where it has the upper hand in escalation, especially as the likelihood of escalation grows.