When President Donald Trump launched a trade war, China hit back by imposing export restrictions on seven heavy rare earth elements vital for manufacturing advanced semiconductors and other key technologies, particularly for aerospace and defense.
China’s ability to shut down the heavy rare earth element supply chain demonstrates the difficulty of decoupling. The US cannot find domestic substitutes, at least in the short term. And it must compete with China to find alternative suppliers, most of whom are located in the Global South.
China dominates the heavy rare earth element supply chain. The world’s richest deposits are located in Jiangxi Province. Until 2023, China produced 99% of global heavy rare earth elements, and it still produces 90% of the global rare earth magnets (a critical input in defense manufacturing). At the same time, rare earths comprise a small share of China’s total exports, allowing Beijing to sustain minimal economic damage – while causing a giant pain for the US.
The US has no heavy rare earth refining. In its 2024 National Defense Industrial Strategy, the Department of Defense set a target to establish a fully integrated mine-to-magnet rare earth supply chain capable of meeting American defense requirements by 2027. It has invested more than $439 million over the past five years, awarding almost $45 million to MP Materials, which owns the only rare earths mine in the US, the Mountain Pass mine in California. Ironically, China’s Shenghe Resources owns 7.7% of the Mountain Pass Mine, underscoring just how deep China has drilled down into critical minerals.
Under President Joseph Biden, the US championed several initiatives to counter China’s critical mineral dominance. It launched the Partnership for Global Infrastructure and Investment in June 2022, which aimed to invest $600 billion in infrastructure projects. One of its landmark projects, the Lobito Corridor, connecting Angola, Zambia, and the Democratic Republic of Congo, facilitates the transport of critical minerals to the US and Europe. The Minerals Security Partnership is another G7 initiative that aims to fund strategic minerals projects jointly with India, South Korea, and Estonia, among others. These initiatives depend on pooled funding and aligning differing interests.
So far, US investments are far less than required to de-risk. According to the International Energy Agency, the cost of mineral investment required for the energy sector alone ranges from $590 billion to more than $2 trillion by 2040. The US is unlikely to be able to shoulder such exorbitant costs. Pouring huge sums into far-flung mines might not be the wisest approach, either.
An alternative strategy would be to encourage and incentivize investment in mineral-rich countries. Here, too, US companies are at a disadvantage. China takes a strictly business approach to investment, ignoring human rights and corruption concerns. American companies, on the other hand, need to abide by prohibitions around investing in authoritarian or democratically challenged countries.
China has a tolerance for high-risk investment. Since 2005, the country has poured more than $391 billion into troubled loans that may never be paid back. While this could be seen as a miscalculation in investment decision-making, it has allowed the country to gain a foothold in new markets and build the infrastructure and networks needed to dominate future supply chains.
China also doles out generous state subsidies. The Chinese Ministry of Finance has even set up four financial asset management companies to act as “bad banks” to hedge against high-risk investments. The four “bad banks” – Cinda, Huarong, Great Wall, and Orient – were set up to “swallow toxic assets.”
As China and the US compete on critical minerals, both face a common problem: nationalization. Alternative sources of critical mineral reserves are concentrated in South America and Africa. Governments there are realizing the importance of these deposits – and keeping control of them.
Chile plans to nationalize its lithium industry. Mexico passed legislation in 2022 to nationalize its lithium reserves and created a state-owned company to manage the sector. Bolivia has long kept its lithium resources under state control. In Africa, the Democratic Republic of the Congo is renegotiating foreign contracts. Namibia banned exports of unprocessed critical minerals in 2022. Indonesia, a major nickel producer, banned raw ore exports and mandated domestic refining.
As mineral-rich countries develop their national industries, will they choose to engage with the US or China? The answer will do much to determine who wins the accelerating race for global tech supremacy.
Elly Rostoum is a Google Public Policy Fellow with the Center for European Policy Analysis (CEPA). She is a Lecturer at Johns Hopkins University.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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