China’s sweeping restrictions on rare earth exports threaten the U.S. defense industry, providing President Xi Jinping with powerful leverage over President Donald Trump in upcoming trade talks.
Beijing will not allow the export of rare earth materials for use by foreign militaries, China’s Ministry of Commerce announced on Oct. 9. These are the first restrictions imposed by China that specifically target the defense sector, according to Gracelin Baskaran, a critical minerals expert at the Center for Strategic and International Studies.
“What this essentially means is that it will deny licenses to foreign militaries and companies that are producing military use end goods,” Baskaran told CNBC. “It undermines the development of the defense industrial base at a time when there is rising global tension. It is a very powerful negotiating tactic because it undermines national security.”
Rare earth magnets are crucial components in U.S. weapons systems such as the F-35 warplane, Virginia and Columbia class submarines, Predator drones, Tomahawk missiles, radars, and the joint direct attack munition series of smart bombs, according to the Department of Defense.
China dominates the global supply chain for rare earths. It controls 60% of mining and more than 90% of refining worldwide, according to the International Energy Agency. The U.S. is dependent on China for around 70% of its rare earth imports, according the U.S. Geological Survey.
“It’s scandalous that we don’t have a rare earths strategic reserve, that we let China monopolize 90% of the refining of rare earth materials,” Jeremy Siegel, University of Pennsylvania professor emeritus of finance, told CNBC on Monday. “Where were we?”
‘Massively disruptive’
Beijing also imposed broad controls that require foreign companies to obtain an export license if rare earths processed in China make up as little as 0.1% of their products’ value. Firms willalso need licenses for products that rely Chinese rare earth technology for mining, smelting, separation, magnet manufacturing and recycling.
“If these rules were to be strictly and indefinitely enforced, they would be massively disruptive, not just to the US but globally,” Wolfe Research analyst Tobin Marcus told clients in an Oct. 10 note. Rare earths are also also crucial inputs for the semiconductor and automobile industries.
The restrictions would impact every sector of the U.S. economy but the defense, semiconductor and electric vehicle industry would face the brunt, according to Alicia Garcia Herrero, an economist at French investment bank Natixis. Defense contractors, Apple, Nvidia, Intel, Tesla, Ford and GM are all highly exposed, Hererro told clients in a Monday note.
The Trump administration is working to build out a domestic supply chain. The Defense Department struck an unprecedented deal with the largest U.S. rare earth miner MP Materials in July that included an equity stake, price floors and an offtake agreement.
“This will certainly also further…
Read More: How China’s rare earth restrictions could disrupt the U.S. defense industry
