Concerns are mounting over the United States’ reliance on China for rare earth elements, an issue highlighted by Wharton economist Jeremy Siegel. He emphasized that the U.S. lacks a strategic reserve for these critical minerals, which is a significant security oversight.
China’s Control Over Rare Earth Elements
Siegel pointed out that China currently controls about 90% of rare earth refining. This figure raises alarms regarding the U.S. manufacturing and defense sectors, which heavily depend on these materials. The need for a strategic stockpile, akin to the Strategic Petroleum Reserve established after the 1975 oil embargo, is urgent.
Recent Developments
China recently implemented stringent export controls on rare earth elements, requiring global companies to obtain Chinese approval before shipping products containing these minerals. This decision has rattled the U.S. industrial base.
- The export restrictions affect advanced technologies, including:
- Electric vehicles
- Smartphones
- Wind turbines
- Semiconductor manufacturing
In response, U.S. Treasury Secretary Scott Bessent stated that President Donald Trump is set to meet with Chinese President Xi Jinping later this month during the Asia-Pacific Economic Cooperation summit in South Korea. This meeting could be crucial as tensions rise over China’s rare earth policies.
Historical Context and Future Plans
China’s dominance in rare earth processing shifted the industry from the U.S. during the late 20th century, primarily due to lower costs and lenient regulations. Recognizing the risks, the Pentagon is now investing in new processing facilities in Texas and California. Moreover, partnerships with countries like Australia are being formed to reduce dependence on Chinese supplies.
China has previously leveraged its rare earth supply against other nations. For instance, in 2010, a dispute with Japan led to a temporary halting of exports to Japan, illustrating China’s willingness to use its mineral dominance in geopolitical conflicts.
Potential U.S. Responses
In light of current tensions, Bessent warned that the U.S. has multiple counter-strategies available. These include:
- Restricting semiconductor software exports
- Controlling access to U.S. financial markets
- Limiting aircraft components from American companies
- Utilizing influence over the large population of Chinese students in U.S. institutions
He hinted that the U.S. might implement similar export controls as those used against Huawei and China’s AI sector in recent years.
International Cooperation and Economic Outlook
The U.S. administration aims to work closely with allies, including Japan, South Korea, India, Australia, and various European nations, to address the implications of China’s export controls. These discussions are expected to be central during upcoming low-level talks in Washington.
Despite these challenges, Siegel believes the economic impact will be temporary. He anticipates that financial markets will recover, adapting to these geopolitical changes.
