Developing disorder: China's step set to shake up supplies of rare earths

China’s control of the supply chain for rare earth minerals, critical for multiple sectors from energy transition to aviation and defence, has long been known to be a global vulnerability. In response to the prohibitively high tariffs that United States President Donald Trump has placed on Chinese exports, leaders in Beijing have finally begun to deploy this long-feared economic weapon. They have restricted the exports of seven rare earths — out of a possible 17 that they list — unless the exporter possesses a proper licence for shipment. Most exporters have noted that the licensing system does not effectively exist at the moment, and so this — at least in the near term — may amount to an export ban. It is unclear whether the Chinese authorities genuinely plan to set up a real export-licensing authority with sufficient capacity to scrutinise exports. Even if they do, this will bring significant friction to the system. And that will possibly allow bureaucrats in Beijing to target firms and customers in countries deemed geopolitically sensitive — the US, obviously, but also possibly some European nations and India. Such export controls will also now apply to certain magnets built using rare earths that are widely used in precision manufacturing, including in the automobile and defence sectors.

 

It has been known since at least 2010 that China has been seeking a monopoly on certain critical minerals, and that it would also be willing to use this monopoly for the purposes of economic coercion. That was the year Beijing first deployed this weapon by restricting exports of rare earths to Japanese companies at a time of political tension between the two countries. There has been ample time since then for other nations in Beijing’s crosshairs to have developed alternative capacities. Unfortunately, despite various new policy missions being developed in multiple nations, as well as a large pot of money being set aside by the previous administration in the US, China’s effective control over this supply chain continues. American companies, in particular, have been unforgivably lazy about building up vital stockpiles to deal with disruption in supply. The global implications of this might be dire. The car companies switching to electric vehicles will particularly struggle to obtain vital magnets. Manufacturers of drones, robotics, and missiles will also find their supply chain compromised, which will significantly affect Western military readiness — especially at a time when arsenals are being built up across Europe as a consequence of the Ukraine war and transatlantic tensions.

 

These concerns apply to many in the industrial sector in India as well. The government has for too long relied on the public sector to source and manage the supply of rare earths in India. The consequence has been underexplored local deposits. This controlling mindset has limited the interest of the private sector even when some blocks were opened up for exploration and exploitation in recent years. Nor has the government sought new avenues for import proactively enough. For example, China now controls sources for rare earths in Myanmar’s Kachin state — although rebels there have constantly reached out to New Delhi for support as well. India should work harder on sourcing new raw materials — but also recognise that processing capacity, including the supply of metallurgical engineers, is of vital importance. These are segments of a critical supply chain where the Indian private sector could contribute globally — if allowed and incentivised to do so by the government.