The Biden administration’s 100-day review of supply-chain vulnerabilities ^[1] has produced fresh insights into the United States’ dependence on China for supplies of rare earths and other critical materials but falls far short of a strategy to achieve any change.

The review, led by the Department of Defense, expresses confidence that military needs for critical minerals could be met in a crisis by diverting supplies from civilian use, but says this would result in ‘very large essential civilian shortfalls’ that would be more than 10 times the peacetime needs of defence.

‘Even though the US Armed Forces have vital requirements for strategic and critical materials, the essential civilian sector would likely bear the preponderance of harm from a disruption event,’ the report says.

The review of critical minerals supplies is included in a four-part study ^[2] also covering semi-conductors, pharmaceutical ingredients and large-scale batteries, which President Joe Biden ordered shortly after assuming office and released last week.

The most immediate outcome of the review is a statement by the White House that it is considering a further review into rare-earth permanent magnets, to establish whether dependence on China for their supply represents a threat to national security that would warrant the imposition of tariffs.

The use of national security to impose tariffs was pioneered by the Trump administration, which used the exemption from World Trade Organization rules to impose them on US steel and aluminium imports, and threatened to use them to impede imports of motor vehicles.

The idea is that if the tariffs were set high enough, they would stimulate some domestic US production of rare-earth magnets; however, they would also raise costs for end users making motors for electric cars, wind turbines, computer hard-drives and missile guidance systems.

They would likely encourage a trend exposed by the new analysis for US firms to import components containing rare-earth magnets, rather than manufacture the components themselves. The study found that 60% of essential civilian demand for rare-earth magnets was embedded in other imported manufactured goods.

‘Implicit in this trade phenomenon is the gradual decline in value-creation, innovation, research, and human capital development,’ the report says.

By contrast, two-thirds of defence demand is for direct rare-earth permanent magnets, which are then used by US manufacturers.

‘DoD’s import posture affords it marginally greater visibility into its foreign reliance compared to other essential civilian sectors, who may not even realize their exposure to an NdFeB [rare earth] magnet disruption since it is several tiers removed from the products they purchase from foreign sources,’ the report says.

The study has identified which industries are using rare-earth elements, either purchased directly or ‘embedded’ in other inputs. It estimates that the US private sector uses rare earths worth US$613 million as essential inputs to total manufacturing activity worth US$496 billion.

For example, spending on rare-earth magnets by manufacturers of computer storage devices is $US78 million; medical and therapeutic devices, US$39 million; air and gas compressors, US$24 million; and phones, $38 million.

Magnets are by far the largest use of rare-earth minerals by value globally. Other major uses for rare earths include as catalysts for oil refining and petrochemicals, pigments for dyes and paints, pure glass for optical instruments, ceramics for turbines, and electronic components and phosphors for lighting and screens.

The review emphasises the technical difficulty involved in the rare-earth industry. ‘As a series of complex extraction, chemical, and refining operations, establishing strategic and critical material production is an extremely lengthy process. Independent of permitting activities, a reasonable industry benchmark for the development of a mineral-based strategic and critical materials project is not less than ten years.’

It notes that at the peak of market interest in the rare-earth industry in 2011, there were approximately 275 rare-earth projects under development in 30 countries, excluding those in China, Russia and India. Only two projects have come to full production—Australia’s Lynas and the US’s Mountain Pass, with the latter partly Chinese owned and sending its output to China for processing.

‘[I]t is quite common for most companies to fail to reach the end of this development process, simply due to the long project development time without cash flows to offset expenses and the technical challenges associated with large, complex project financing for materials production.’

However, the study attributes the erosion of US capacity to the doctrine of economic efficiency, which it contrasts with the single-minded focus of the state-driven strategy of China.

‘Economic efficiency took priority over diversity and sustainability of supply—made manifest in the slow erosion of manufacturing capabilities throughout the United States and many other nations. In addition, as the point of consumption drifted farther and farther from the point of production, U.S. manufacturers increasingly lost visibility into the risk accumulating in their supply chains. Their suppliers of strategic and critical materials, and even the workforce skills necessary to produce and process those materials into value-added goods, became increasingly concentrated offshore. In such opaque conditions, the exploitation of forced labour and a disregard for environmental emissions and workforce health and safety could thrive.’

‘By contrast, the Chinese Government has focused on capturing discrete strategic and critical material markets as a matter of state policy. For example, China implemented a value-added tax (VAT) rebate for rare earth exports in 1985, which contributed to the erosion and then elimination of US production in the global market.’

‘China’s Ministry of Industry and Information Technology took the lead in forcing the vertical and horizontal integration of Chinese rare earth companies—pushing privately-held rare earth miners out of the market in favor of a handful of national champions. This central planning and active management of the rare earth industrial base continues, with new draft management regulations under review and even more expansion projects underway.’

The review’s recommendations will do little to close the gap in the US capability. Surprisingly, the top priority is to develop new sustainability standards for the extraction and processing of critical materials, suggesting that legislated standards will be an incentive to investment in the US.

It also recommends greater attention to environmentally sensitive recycling, although the analysis acknowledges that recycling can never overcome the gap. It is often difficult to extract the rare earths from the components, such as computer hard drives, that contain them.

The most concrete recommendation is greater use of the Defense Production Act, which empowers the government to advance loans to help finance critical mineral developments, though there’s no guidance for how this should be done.

The Trump administration used this legislation to finance the production of personal protective equipment and vaccines in the fight against Covid-19. However, the funds were disbursed in a scatter-gun manner, and many of the loans went to military projects with no relevance to the pandemic.

The US has a lot to learn from the Chinese when it comes to central planning.