Donald Trump was shocked, angry and speechless, but also powerless at the same time when China tightened restrictions on rare-earth exports this month. It was a counterstrike which the White House didn’t expect largely due to the perception that the Chinese were always inferior and highly depended on the U.S. and its allies. After all, Beijing has always been bullied by the U.S.
In fact, U.S. President Trump doesn’t quite know how to deal with China. He did not hide his surprise – and frustration – when Beijing on October 9 suddenly expanded its restrictions on the export of rare-earth metals that are used in a range of daily and critical industries like electric vehicles, smartphones, laptops, aircrafts, fighter jets and defense equipment.
China’s move represents the first time Beijing shifts its strategy – exercising “long-arm jurisdiction” over foreign companies to target the semiconductor industry, taking a page from the U.S. playbook. Essentially, any company – in China or abroad – must get Chinese government’s export licence if the final product contains or is made with Chinese equipment or material.
The extra-terrestrial measures of extending its curbs on rare earths beyond borders is a game-changer. Make no mistake – this is a “power play” by China, and not merely empty rhetoric. Beijing is well prepared to match every U.S. escalation, and this is what really terrified Washington. This is a very different kind of trade war, one that makes Trump’s first term trade war looks like a child play.
Trump could only reuse the same boring weapon in his toolbox – threatening to impose 100% tariff on imports from China from next month. But why wait till next month and not immediately? And why only 100% when 500% is more damaging to China? Heck, after throwing tantrums and making some initial noise with Trump saying there was no reason to meet Xi Jinping any longer, the meeting is on again.
{ China’s Long Game }
China’s dominance did not happen overnight, but was decades in the making. The U.S. relinquished its position as the “top rare earth power” to China over the past 30 years due not only to Beijing’s relentless efforts to secure production and refining technologies, but also Washington’s decision to abandon the industry without strategic consideration, prioritizing environmental regulations and corporate profitability.
Until the early 1990s, the global rare earth market landscape was very different. For much of the second half of the 20th century, the United States controlled the market on rare earth elements, after prospectors discovered them in Mountain Pass in California in 1949. It accounted for 60% of global production, and nearly 100% of global rare earth refining and processing was done in the U.S.
However, the mine faced severe environmental pollution from radioactive wastewater leakage since the 1980s and was eventually closed in 2002. Although China had large reserves and production volumes, it lacked refining technology. But China recognized the strategic value of rare earths, and starting in the 1960s, Chinese executives visited Mountain Pass several times to learn everything.
“We toured them. We explained what we do, allowed them to take pictures and everything else. They took it back to China,” – revealed Mark Smith, CEO at Molycorp, a former rare earths processing company at the Mountain Pass mine, who gave tours to Chinese visitors in the 1980s and 1990s. Chinese refineries then improved on technology, and taking advantage of cheap electricity in China, hundreds of mining and processing firms in the country popped up.
Treating the metals like national treasure, China has used aggressive strategies to build up and maintain its lock over rare-earth minerals. Unlike the U.S., China designated rare earths as a “strategic resource” and enacted laws to prevent foreign mining companies from acquiring Chinese rare earth mines in 1991. Foreigners were prohibited from even visiting mines without special permits.
Beijing also provided financial support to the country’s leading companies, encouraged them to snap up rare-earth assets abroad. It eventually consolidated its domestic industry from hundreds of businesses into a few giant players, giving it further leverage over prices. There’s a reason why Deng Xiaoping declared in 1992 – “The Middle East has oil, China has rare earths.”
Not only did the Chinese understand that rare earths were more important than Americans recognized them, but China also recognized it would need to move up the rare earths value chain if it wanted to command the industry. Instead of just mining, Beijing needed to be able to process the ore and turn it into magnets – expertise that could only be found overseas.
{ A Dirty Business }
At the early stage, Chinese small-scale, private mines and refineries competed against one another, undercutting each other’s profits. They were cannibalizing each other, thanks to a highly unregulated and chaotic industry. As Chinese producers sought an upper hand in rare earths, they also unleashed unrestrained mining that came at great cost to the environment.
“They would mine the side of the hill with their axes and picks and shovels, and then they would dig a hole in the ground, no liners or anything like that at all. Then they poured five gallon buckets of sulfuric acid or hydrochloric acid, and let that certain stew for a while. When the storms come in, all that acid just washes out” – recalls Smith, who frequently visited China during this period.
The mining left China’s terrain scarred with lasting groundwater and soil pollution – the same reason American miners abandoned the dirty business to the Chinese. Local residents staged periodic protests against rare earth mining, but the industry provided local governments with handsome revenue, and they repeatedly ignored central government orders to close down dirty mines.
A Chinese media investigation into the industry in 2012 compared the rare earths industry in China with trafficking illegal drugs – “There are generally two types of people who can deal with rare earths: the first is someone who has just been released from prison, and the other is someone who can get someone out of prison. Those who are not afraid of death and leading cadres are all involved,”
{ Snapping U.S. Assets }
In 1995, Chinese state-linked companies received U.S. government approval to buy the rare-earth materials and magnet business started by General Motors, called Magnequench. In the following years, ownership shut down all its rare-earth plants in the U.S. and shipped the equipment to China. Top American engineers were offered opportunities to go to China and set up new plants there.
“There were some colleagues that were dead set against it, saying they would never help China learn our technology,” – said one magnet expert who ultimately agreed to go to China. “When I arrived, I could not believe what I was seeing. The number of new factories being built, and the rate at which they were being built, was mind-blowing,” – he said.
A former Magnequench engineer, Mitchell Spencer, said he agreed to set up a plant in the Chinese city of Tianjin, which was supposed to be a sister facility to his home factory in Indiana. He was confused when he got a call telling him to double the Tianjin factory’s capacity. Not long after returning home, he learned the Indiana factory was being closed.
By the mid-2000s, the U.S. rare-earth industry had been all but wiped out. Mountain Pass, America’s major rare-earth mine, had been shut down, as had virtually all American facilities that processed rare earths and turned them into magnets. China has overtaken the U.S. as the new leader – a global monopoly – of the world’s rare earths.
{ Project Phoenix }
Beginning around 2005, China’s government tightened the screws, levying export taxes on rare earths that made it costlier for Western magnet makers to churn out products. With virtually no rare earth mines left outside China, motor-parts makers and other companies that relied heavily on rare earths opted to relocate factories from the West to China to access cheaper raw materials.
Rare-earth production became so limited in the West that an American company, Molycorp, attempted to revive the Mountain Pass mine and make its own magnets. It called its plan “Project Phoenix,” but it was too little too late. China had installed what you might call a tap system, where they can turn that tap on and off – dominating the industry once dominated by the U.S.
In 2012, the Obama administration, together with the European Union and Japan, launched a suit against China at the World Trade Organization (WTO), accusing it of improperly using export quotas to restrict rare-earth supplies abroad. China, on the other hand, argued that its restrictions were intended to keep mining at sustainable levels and protect the environment.
In 2014, the WTO ruled against China, concluding its export quotas were unfair. China abandoned them, and sales to the U.S. surged. But Molycorp went bankrupt as American rare-earth prices collapsed. For the second time in a little over a decade, cheap Chinese prices had contributed to shutting down America’s only rare-earth mine.
Mountain Pass eventually ended up in the hands of a U.S. company called MP Materials. Hilariously, it had to seek help from a Chinese partner to get the mine back up and running. Chinese rare-earth producer Shenghe Resources provided upfront financing and received a small stake in MP. Shenghe would then distribute MP’s rare earths to buyers in China, who used them to make magnets.
{ Flood The Market }
By 2021, the U.S. government could smell trouble as it was growing more worried about China’s ability to weaponize rare earths, especially after Covid-19 disrupted supplies from China, causing prices to skyrocket. Washington began offering huge funding for new rare-earth plants, including a refinery in Texas to be built by Lynas, an Australian rare-earth company.
But Beijing, which continued to regulate how much Chinese rare-earth companies could produce despite lifting export controls, knew exactly what to do and responded in 2022 by pushing up output by 25%, the most in years, with another large increase the following year. Prices tanked, hitting the bottom lines of Western producers and leading some to unload assets.
Every time the U.S. tries to engineer a revival of its domestic industry, China would flood the market with supply, crippling Western producers instantly. As Western rare-earth companies’ valuations collapsed from the low prices caused by soaring Chinese production, they were forced to slow their expansions, and in some cases, sell their mines to Chinese buyers.
Beijing’s methodical approach to dominating the industry is precisely why fresh U.S. efforts to resurrect its domestic rare-earths industry – including Pentagon’s direct 15% stake involving US$400 million investment in MP Materials – could prove difficult to sustain. The U.S. government’s business deal in July also saw a price floor for the company’s rare earths to help ensure it can withstand any future influx of low-price Chinese minerals.
However, while the U.S. has committed to spending billions of dollars investing in a major U.S. producer and purchasing its output, China is likely to do everything it can to ensure it doesn’t lose its rare-earth leverage. It has no intention of sleeping at the switch after spending more than 30 years building its most lethal trump card that sends shivers down the spine of the world’s biggest economy.
Today, China controls 69% of global rare earth mining, 92% of refining, and 98% of magnet manufacturing. Interestingly, the commodity isn’t lucrative at all. The global rare earth market was worth US$6 billion – only one-thirtieth the size of the copper market. However, a 10% disruption in supply in rare earth-dependent industries would reduce economic output by US$150 billion.
Lynas, which originally planned to have its Texas operation ready to run as soon as 2025, hasn’t built the plant. It says there is significant uncertainty about whether the project will go ahead. It also complains about issues with radioactive wastewater and chemical sludge treatment, tightened U.S. federal and state wastewater discharge standards, soaring costs and whatnot.
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October 23rd, 2025 by financetwitter
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