If top government officials were regular readers of this blog, they would have been warned by a headline here more than two years ago, “China To Squeeze West by Restricting Export of Essential Rare Earths “.  For the last few years, the U.S. has been trying to limit Chinese access to the most powerful computing chips, which are largely made by American company Nvidia. But China has some high cards to play in this game. It produces some 90% of refined rare earths and rare earth products like magnets.  These super-powerful neodymium-containing magnets are utterly critical components in all kinds of high-tech products, including wind turbine generators and electric motors for electric vehicles and drones, and miscellaneous military hardware.

It has been painfully obvious at least since 2010, when China put the squeeze on Japan by unofficially slowing rare earth exports to Japan over a territorial dispute, that it was only a matter of time before China played that card again. But the West slumbered on. There is a reasonable amount of rare earth ores that are mined outside China, but nobody wanted to build and operate the expensive and environmentally messy processes to refine the rare earth minerals (carbonates, oxides, phosphates) into the pure metals. Unlike the esoteric and hard-to-imitate processing for cutting edge computing chips, anyone can gear up and start refining rare earth ores. It mainly just takes money, lots and lots of it, to build and operate all the processing equipment for the multiple steps involved*. There was little free market incentive for a Western company to invest in expensive processing, since China could readily bankrupt them by cutting prices as soon as they started up their shiny new process line. Reportedly, the Chinese used this tactic twice before (in 2002 and 2012) to kill nascent refining of the rare earth ores at Mountain Pass mine in California.

As of April of this year, in response to ongoing U.S. export restrictions on chips, China threw its latest rare earth card down on the table, requiring export licenses and imposing other restrictions that throttled rare earth exports. Western manufacturers were soon howling in pain. As of early June:

Global automakers are sounding the alarm on an impending shortage of rare earth magnets as China’s restrictions on the material vital for the automotive, defence and clean energy industries threaten production delays around the world.

German automakers became the latest to warn that China’s export restrictions threaten to shut down production and rattle their local economies, following a similar complaint from an Indian EV maker last week. U.S., Japanese and South Korean automakers warned President Donald Trump on May 9 car factories could close.

The Trump administration quickly caved on chips and in July permitted boatloads of high-end H20 Nvidia chips to ship to China, in return for resumption of rare earth exports from China. Score one for the CCP. As of mid-August, rare earth shipments had climbed back to around half of their pre-May levels, but China ominously warned Western companies against trying to stockpile any reserves of rare earths, or they would “face shortages” in the future.

After this ignominious face-slapping, the administration finally did something that should have been done years ago: they gave an American company a solid financial incentive to buckle down and do the dirty work of refining rare earth ores at large scale. The Defense Department inked a deal with MP Materials Corp, the current operator of the Mountain Pass mine and the modest refining operation there to quickly ramp up production:

The Department of Defense is investing capital in MP across several fronts. This includes a $400 million convertible preferred equity, struck at a fixed conversion price of $30.03. The government gets 10-year MP stock warrants also set for a $30.03 price. As planned, this would get the Department of Defense to about a 15% ownership position in MP Materials. In addition, the Department of Defense will lend MP Materials $150 million at a highly competitive interest rate to help the company expand its heavy rare earth element separation capabilities.

It’s not just a financing deal, however. This arrangement also provides a striking level of influence over pricing and profitability for MP Materials going forward.

For one thing, the Department of Defense will provide a price floor of $110 per kilogram for NdPr. NdPr is a product that is a combination of neodymium and praseodymium. This is a generous floor price…

The Department of Defense’s involvement now gives MP Materials the runway necessary to build what’s being dubbed the 10X magnet manufacturing expansion plant. The Department of Defense is committed to buying the output of this plant with a controlled cost-plus pricing structure. And there will be a profit split with the DoD getting a significant chunk of the upside above certain EBITDA thresholds.

This is being billed as a private-public partnership, but it is akin to nationalization. The government will be heavily involved in planning output and setting pricing here, as well as sharing in profits.  Fans of laissez-faire free markets may be understandably queasy over this arrangement, but national security considerations seem to make this necessary.

I predict that further “private-public” deals will be struck to subsidize Western production of vital materials. Let’s be clear: massive subsidies or similar incentives, in one form or another, will be needed. And this means that Americans will have to devote more resources to grinding out industrial materials, and less to consumer goods; hence, we will likely live in smaller houses, perhaps (gasp) lacking granite countertops and recessed lighting. Economics is all about trade-offs.

Due to its vast, lower-paid, hard-working and highly-capable workforce, the whole Chinese supply chain and production costs run far, far cheaper than anything in the West. We don’t have to produce 100% of what we use, even say 40% might be enough to keep from being helplessly squeezed by another nation. How to do this without descending into unproductive rent-seeking rip-offs will be a challenge.

Some other materials candidates:  China has as of December 2024 completely shut off exports to the U.S. of three key non-rare earth technical elements, gallium, germanium and antimony, so those might be a good place to start. China mines or refines between half and 90% of global supply of those minerals. Also, China has instituted export regulations of for more key metals (tungsten, tellurium, bismuth, indium and molybdenum-related products), so these may be further subjects for squeeze plays. Finally, “China is the world’s top graphite producer and exporter, and also refines more than 90% of the world’s graphite into a material that is used in virtually all EV batteries,” so that is yet another vital material where the West must decide how much it is worth to break its dependence on an unreliable trading partner.