Behind the call: China’s rare earth strategy comes into focus

After the US experienced the impact of being bottlenecked by key resource and supply cuts, the leaders of China and the US finally shared a phone call.

The White House and US Treasury Secretary Scott Bessent did not make empty statements this time. The White House said recently that US President Donald Trump and Chinese President Xi Jinping would have a phone call within the week, and this indeed took place on 5 June.

Coincidentally, on 4 June, Trump had complained on social media that Xi was “very tough, and extremely hard to make a deal with”. The Trump-Xi phone call happened at the right moment, as if placating Trump and preventing China-US relations from worsening before the teetering China-US Geneva trade truce consensus unravelled. China likely also did not want to overplay its “rare earth card” and cause global alarm, recognising that this could result in long-term losses for them, despite initial short-term gains.

US eagerness to negotiate an agreement shows that China has the upper hand in the negotiations. China’s strategic use of the “rare earth card” has worked wonders — this could be something that even China itself did not anticipate.

According to US media reports, America’s four major automakers are reportedly feeling extremely anxious; if they remain unable to obtain rare earth magnets produced in China, they may be forced to shut down parts of their automobile production lines within weeks. The Wall Street Journal cited informed sources as stating that several traditional and electric vehicle makers — and their suppliers — are considering shifting some auto parts manufacturing to China to avoid looming factory shutdowns. The car makers reason that if rare earth magnets are installed in motors manufactured within China, the finished components will be able to clear customs and be exported without issue. 

If this happens, wouldn’t it indicate that the Trump administration’s trade war not only failed to reshore manufacturing but actually drove US industries to relocate to China?

Europe is also affected by China’s rare earth export controls. Many automobile production lines and factories have already shut down due to the lack of rare earth magnets. With inventories running out, more disruptions are expected in the coming weeks.

Broadly speaking, China’s threat to cut off or restrict rare earth supplies is just as effective as the US strategy of using semiconductor chips to choke China.

High-end chips are widely used in mobile phones, computers, smartwatches, cars, high-speed trains, aircraft, and other high-tech equipment, but lower-end chips (based on mature technology) can be substituted to some extent, and China is also capable of producing them itself.

Rare earth magnets are widely used in the automobile, semiconductor, fighter jet and robotics industries, and as for the automobile industry — a pillar industry for many countries — cutting the supply of rare earth magnets is akin to a deathblow.

It should be noted that it has been 15 years since the first time China successfully played the “rare earth card”. In 2010, a diplomatic conflict broke out between China and Japan over the detention of a Chinese captain in the waters near the Diaoyu Islands. In retaliation, China halted the shipment of rare earths to Japan at ports for seven weeks.

At the time, China’s Ministry of Commerce denied implementing a rare earth export ban, but reports from Japan indicated that exports of rare earths from China to Japan had been suspended. Back then, Japan relied on China for 90% of its rare earth supply. Even today, China still accounts for 90% of global exports of high-performance rare earth magnets.

In those days when free trade was still the global norm, Western countries were suddenly alarmed to realise that China held such a powerful trump card. After meeting with Japan’s foreign minister, then-US Secretary of State Hillary Clinton remarked that such high dependency on a single source should serve as a wake-up call.

15 years on, Japan has finally managed to reduce its reliance on Chinese rare earths to 58%, through a diversification strategy that included investing in overseas mines and developing new technologies and materials. Noting Japan’s experience, some US media outlets have criticised American leaders for failing to plan ahead like Japan, resulting in the current lack of alternative sources.

But that is perhaps also an understatement. Even after 15 years of effort, Japan’s reliance on Chinese rare earths remains over 50%. Developed countries have struggled to establish mature rare earth processing technologies, largely because the global rare earth market is too small. Large-scale development requires massive investment, while sales revenue and profits remain minimal, leaving companies with little incentive to invest.

Rare earth processing also has high technological barriers. However, China can implement long-term national strategies to “reinforce international industrial chains’ dependence on China”, as Xi Jinping called for in 2020, when he urged the development of “killer technologies” to “create strong countermeasures and deterrent capabilities against deliberate supply cut-offs by foreign parties”.

This will be difficult for the US. According to The New York Times, China has 39 universities offering rare earth chemistry programmes, while the US has no similar programmes. The once rampant problem of rare earth smuggling in China has also been curbed through repeated crackdowns. On 12 May, 11 Chinese national ministries and officials from seven provinces held a meeting and issued a joint statement vowing to “closely monitor the flow of strategic minerals” and to strengthen control over the entire export chain.

Coincidentally, the US-China talks in Geneva had just concluded on 12 May. The issue of whether China is committed to restoring rare earth exports to pre-2 April levels has now become a matter of contention between the two sides; each is sticking to their own version of the truth.

The US accuses Beijing of continued delays in approving export licenses for rare earths and other elements, while China accuses the US of suppressing its growth by imposing restrictions on the sale of critical technologies such as semiconductors, and by limiting student visas.

These tensions and disputes were at the heart of Thursday’s phone call between the Chinese and US presidents. After the call, Trump posted on social media declaring that “there should no longer be any questions respecting the complexity of Rare Earth products”, and revealed that he had been invited to visit China. According to the Chinese side, the two also discussed the Taiwan issue. Whether any broader “grand bargains” were reached remains to be seen.

What is clear from this round of US-China engagement is that China’s use of the “rare earth card” is intended as a deterrent, not a move toward decoupling or mutually assured destruction. Furthermore, with deep interdependence in trade between China and the US, the era when America could block China’s access to semiconductors without fear of retaliation is over.

This article was first published in Lianhe Zaobao as “中美元首终于通话了”.

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