What the US–Australia rare earth deal means for China

Australia and the US have signed a joint multi-billion-dollar investment agreement to turbo-charge both countries’ rare earth industries, with Australia now positioned as the key strategic supplier to the US market. Their goal is to break China’s dominance over the sector. 

As laid out below, success is not guaranteed and may depend on how China responds, and whether additional countries are willing to decouple from Chinese rare earth supply. Yet the strategic agreement also raises broader questions for the future of China’s export-led model and the international economic system it depends upon.  

China has recently fired its big geoeconomic bazooka in the trade war with the US, releasing a comprehensive export control regime for rare earths. Announcing the new regime on 9 October, China’s Ministry of Commerce laid out sweeping new licensing requirements and restrictions on products, technologies and human knowledge relating to the rare earth sector.

These include regulations with extraterritorial application – meaning they apply overseas to foreign firms, not just firms in China. Furthermore, the rules apply where those foreign firms are using as little as 0.1% of rare earths in products such as magnets and semiconductors. In fact, Beijing’s new rare earth regime is taking a leaf out of US export controls, particularly its Direct Foreign Product Rule, highlighting China’s ability to engage in policy learning from its geopolitical competitor.

Extraterritorial application applies in three key areas: (1) foreign-made products using China-origin rare earth elements, such as magnets; (2) foreign products using China-origin rare earth element technology; and (3) export of controlled items to military end users. 

The new rules require foreign firms to submit significant amounts of information to prove they are using China’s rare earth elements and technologies in accordance with China’s domestic law. Crucially, the rules ban the use of these products and technologies for supplying military end users, threatening to hamstring defence supply chains globally, not just in the US.

China’s absolute global dominance as a monopoly supplier of light and heavy rare earth elements, and technological leadership in key processing technologies, means the new export regime, which builds on export restrictions released earlier in the year, has predictably roiled global advanced manufacturing supply chains. 

Major US auto manufacturers face shutdown of their facilities, as the flow of rare earth products grinds to a crawl while licensing applications are assessed. US defence primes face an even bigger challenge — unlike auto producers, they face an outright supply ban. With China’s rare earth exports dropping by a staggering 31% in September as earlier restrictions kicked in, markets are facing a looming supply crunch in the face of these additional October rules.

Timing for this latest export control announcement no doubt had the upcoming meeting between Xi and Trump in mind, maximising leverage for Xi to negotiate tariffs and the US’s own export controls against China from a position of strength. 

Yet while there is no doubt the US must factor in Xi’s ace card, playing the “rare earths ace” also provides powerful incentives for the US and its partners to finally get serious about building an alternative supply. Put another way, the big bazooka can have its strongest effect only once, as efforts to mitigate its leverage are then accelerated.

Less than two weeks after China’s big announcement, Australia and the US have released a major bilateral rare earth strategy initiative. Combining Australia’s strengths as a world-leading mining nation and America’s financial muscle and market demand, these two long-standing military alliance partners are now forging ahead with rare earth economic security. 

The agreement will see the two nations pump an initial US$1billion of new investments within six months to fast-track promising projects. Beyond that, billions more are expected to flow in the medium term, with price support mechanisms in place to guard against China’s market tactics of depressing rare earth prices to undermine new competitors.

Australia has emerged as the US’s key strategic partner in breaking China’s hold over the rare earth market. The country currently hosts by far the largest number of active rare earth exploration projects, 89, compared with the second-placed country Canada, with 18, and is seeking to position itself as a key non-China global supplier. 

Taking inspiration from Beijing’s long-term rare earth development policy, Canberra has initiated its own rare earth strategy since 2019, including cutting Chinese investment out of its rare earth sector. Current geoeconomic tensions offer a huge opportunity to realise its goals. Yet success is not guaranteed. To succeed in developing alternative supplies of rare earth elements and related downstream technologies such as magnets, Australia, the US, and their partners need to first overcome significant technical hurdles in processing critical minerals at scale. 

Currently, only the Australian firm Lynas offers significant volumes of refined rare earths outside of China. Getting the refining part right is only the first step; there needs to be significant non-defence commercial demand for rare earth elements to sustain a non-China supply chain. At present, China’s vast industrial system consumes the majority of refined rare earths, including those from Australia’s Lynas, during the production of everything from EVs to batteries, wind turbines, solar panels, semiconductors and a bevy of advanced consumer goods.

At the same time, if China loosens its rare earth export regime in the coming years, then private firms will inevitably gravitate towards the cheapest supplier, leaving governments in Australia and elsewhere on the hook for supporting potentially loss-making industries. 

A critical mass of industrial demand will be required to sustain the economics of non-China rare earths. This will require other countries with large industrial sectors to sign up to buy more expensive but securely supplied non-China origin products. Doing so will, in turn, create tensions with Beijing, with repercussions in trade relations. Accordingly, the rare earths deal between the US and Australia will test Canberra’s recent repairing of strained relations with China.

For China, things are equally complicated. While firing its rare earth bazooka has rattled the US and offers Xi crucial leverage in tariff negotiations, it has also set in motion actions that can eventually unwind Beijing’s dominant position. Furthermore, China’s actions have had large spillover effects for third countries that are not direct parties to the China-US trade war. These countries are aggrieved at becoming collateral damage in the great power competition. 

Moreover, China’s restrictions on a key chokepoint in global supply chains run contrary to an open, liberal economic order. These actions will encourage more countries to consider security of supply and domestic industrial protection as taking precedence over WTO commitments.

The systemic knock-on effects of such power politics conducted through economic means are that the liberal international economic order that has been critical to China’s export-led model of development is fast becoming a relic of the past. 

As more countries face collateral damage from the trade war, they will be encouraged to participate in economic security alliances, breaking global trade into groupings aligned by geopolitics and security interests. Evidence shows this trend is already underway. The new rare earths agreement between Australia and the US adds momentum, but given the many hurdles, it is far from certain to break China’s hold over the sector.

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