Inside China's Chokehold on Rare Earth Minerals

My fear is that the West needs to act quickly. There are economic factors dragging on China that can't be reversed. So we need to sort of take the next few years and make sure they don't win the technology competition before their economy slows them down. - Hello and welcome to One Decision. I'm Kristina Rafini, joined by my co-host Sir Richard Deerlove. And in today's episode, we're gonna talk to Liza Tobin. She's the former China director at the NSC, that's the National Security Council for our friends abroad. She was there during the Trump and Biden administrations. She's also currently a fellow at the Jamestown Foundation and the Center for New American Security. So with President Trump in Asia for ASEAN, APEC, and this high-profile bilat with Chinese President Xi Jinping, we wanna talk to Liza about America's long-promised, little-delivered pivot to Asia, competitiveness versus isolationism, rare earth minerals, why we need them, why they have them, why we don't refine them. And if these two economic behemoths can ever really, truly just get along. So Liza, thank you so much for joining us. First off, you've been watching this Trump trip to Asia. The Xi meeting is coming up. How do you think that's going to go? We heard from Besant this week that they think they have an economic framework, but also nothing is agreed to until everything's agreed to. How do these very different leaders get in the same room and make some progress? Excuse me. Yeah, well, the real negotiations happened this weekend, the 25th and 26th of October in Malaysia between Secretary Besant and his team and their Chinese counterparts. And the US side came out pretty quickly to try to frame the results of the talks. Besant was teasing this idea of a potential 12-month pause on the implementation of China's rare earth export curbs that they had announced on October 9th. Now, the Chinese side hasn't confirmed this. So my sense is that the Chinese side is gonna wait until Trump and Xi meets and then potentially confirm it. But the Chinese negotiating tactic is usually to try to leave themselves some wiggle room and to retain maximum leverage and maximum optionality. So if indeed the two sides were able to agree on some kind of a pause where the rare earth would continue to flow out of China, that would probably be the best news that the US and markets could hope for. So it will be important to watch whether we get more confirmation that that is indeed the case. Do you think that's likely? Is that their big bargaining chip in these negotiations? Is the flow of rare earths? - Yes, yeah, it's certainly an important bargaining chip that they have. And we saw that all the way back in the springtime, that was the first time that the Chinese kind of pulled this gun out of the holster. So it's not a surprise that China has a choke point on rare earths. They've been developing this near monopoly position for decades really. The only thing that is a surprise is that they actually pulled it out in May and kind of escalated this tension and threatened to cut off supplies to the world, to the United States in particular. Why had they done that? You'll recall that President Donald Trump had raised the tariffs on China all the way up to 145%. He was flirting with the idea of decoupling from China. And so then the Chinese kind of switched and they said, okay, we're not playing the tariff game, but we have rare earths. And so they started choking off supplies of these things and it started hurting the US auto sector as well as the defense sector. And of course, President Trump cares very deeply about the auto sector. So when he started getting calls from some American automakers that they were worried about running out of supplies, that essentially changed his entire calculus. And then the tariffs came down and you started seeing additional concessions over the summer unilateral concessions from the US to China. And then that brought us up to the fall. And so, the trade talks have sort of continued in this very shaky foundation where the sides continue to meet. And instead of sitting down and having real discussions on the structural issues that have the two sides divided, how do we solve the trade deficit? Is China willing to do anything about the unfair trade practices that the US has complained out for so long? What about the flows of fentanyl coming from China and killing so many Americans? What about the status of Taiwan, which China aims to annex? And of course, the US has a problem with that. So instead of dealing with those big issues that are really key divisive points between the two, they had to keep coming back to this rare earths issue. Will you give us a few more months of rare earths? And so the Chinese have continued to kind of drag out and recycle this leverage. - How on earth, I mean, and I'm making a pun by saying, how on earth did we get into this situation with rare earths? Because my understanding geologically is that their distribution globally is not exclusive to China. In fact, you find them all over the place. But Chinese, as far as I understand the problem, started refining in, I mean, it's seriously refining in 2014, 2015, when the market wasn't that large. And of course, we all know it's exploded since then. And the West seems to have been very complacent. I imagine the UK was amongst the most complacent, given, you know, our relations with China before they went belly up. And they were sort of dependent on a Chinese supplier. And the Chinese have just exploited that. They've managed to put many other refining companies globally out of business because of the cheapness of their own product. And the fact that investment in rare earth refinements in other countries has not been profitable. Did you see this problem coming? I mean, did someone, you know, strategically in the sort of position you held, anticipate that we were gonna get into this real bind? - Yeah, you make a great point, Richard. The problem is really a gray rhino. It's not a black swan. It didn't come out of nowhere. There have been efforts during the Biden administration and even the previous Trump administration put out an executive order calling attention to this rare earth dependency and saying we need a national effort to do something about it. And these things kind of get started and then peter out because of course, mining, processing, and developing rare earth is a money-losing endeavor. The Chinese have been developing this chokehold over rare earth processing, mining, and developing for decades. And I think any China analyst who studies China's strategy on this has to go back to the Deng Xiaoping quote from 1992 when they said the Middle East has oil and China has rare earth. And so he set this agenda and over time, as the West, as the United States and Europe and others said, we don't want to mine and process this stuff. It's really dirty, it's dangerous, it's not profitable. Why don't we just outsource it overseas? And so that happened. China was very early in seeing a strategic opportunity which now they've turned on its head to become a choke point. So, but I think you were asking earlier about, aren't these things all over the world, how can China get a choke point? So there's, you have to kind of break down the problem. Rare earths are all over the place. First, you have to mine them. So in some cases, it's easy to find them, some are in the United States, some are in Canada. They're all over it, they're in Africa. So first you have to mine them and then you have to process them into something useful. And that is where China has developed the strongest choke point is actually in the technology and the processing equipment and just the massive scale of their industry and their tolerance to do these processes which are frankly unprofitable and dirty. The state has been willing to subsidize them. So whenever a mine in the United States would come back online like the MP Materials Mine, they would get off to a good start and then China would come in and lower their prices and basically flood the market and push them out of business again. Is it significant though because China has been reticent to kind of pull back and break the glass on these restrictions because they know I think once they start to hold them back, the US and Australia and other places will try to look for their own different sources. Could this backfire, do you think, using these rare earths as leverage like this or are they at a point economically, politically where they feel like they can really exert their power and throw their weight around and they are confident that they can do this and not have repercussions because there just is nowhere else, as you said, that can do it at the scale that they can do it? - That's a really good question. 2025 is a pivot point because we've seen for years that the Chinese use their economic scale to coerce other countries. You've seen this against Lithuania and Australia and all the way back to 2010 when the Chinese temporarily cut off rare earth exports to Japan. So the world got that warning shot. Japan heated this and started to diversify supplies and they've done a pretty good job. They're one of the only countries in the world that has a national stockpile of this stuff. The rest of us kind of ignored it and said, "Ah, no, let's let the market take care of it." But yes, there's a dynamic here where once you pull this massive gun out of its holster and you show the world and you say, "If you don't follow my rules, I'm going to cut off your rare earth and kill off your industry." Essentially, they're threatening. They're saying, "We have a chokehold over global auto industry, EVs, wind turbines, defense industries, even AI data centers use this stuff." All kinds of almost every technology industry uses this stuff. So yeah, I've been hearing from private sector clients really that why would China do this? Does this make it obvious that they're an unreliable trading partner? Well, yeah, there's the rub and so it'll take time to see how fast global industry responds. What I've noticed so far is that some sectors and some companies are accelerating their efforts to stockpile so that they can have some supply of this stuff on hand and not be caught over a barrel because of China. So I think the next year or two will be critical. How fast can the United States and its allies and partners and then how fast can industry players move to develop stockpiles, alternative sources, and even alternative technologies that can maybe substitute for some of these things. But China has fired that warning gun and it's off to the races. But logically, in terms of what you're saying, I mean, Trump should be announcing a warp speed program to get the stuff supplied and stocked across the Western world, particularly as we're on the cusp of a major realm program. But it seems to me that's the issue with a lot of these Trump tariff, Trump economic policies. You know, he wants to even out the trade deficit, but there's no back end to these policies. That's what you talked about. You referenced this earlier, Liza, saying that they're not addressing the systemic issues. And it seems to me the rare earth is a good example of that. But it goes with the other things as well. You know, he's also not investing in alternatives for manufacturing. Alternatives for these cheap goods that we're getting in China. It's only, it's a very one-sided policy. It seems with rare earth that could be especially dangerous. Why aren't they doing that? I would argue that they're trying to. I would argue that they, you know, by their own attestation, they are pursuing something like an operation warp speed effort for rare earth. Now, it's too soon to tell if it will be successful or when it will be successful. But they have the biggest part of this is an equity investment and some other investments they're making in MP materials. So it's kind of unorthodox approach to industrial policy where the Defense Department is taking a stake in MP materials and putting in place an agreement to buy the offtake. So there's price floors, there's all kinds of elements to this deal. It remains to be seen whether all of that will pay off. A couple of things to look for, though. The U.S. can't completely get out of this choke point on its own. It does need to work with other countries because of where some of these elements are located around the world and because of where the technology is. So a couple of examples. Just last week, President Trump met with his counterpart, Prime Minister Albanese of Australia, and they did issue some agreements that they're each going to put in a billion dollars. They're going to open up a new mine in Australia. Can we just investigate another technological track, which is related to this but slightly different, which is the Chinese requirement for semiconductors, which is not good at factoring itself. And, of course, one of the primary producers in the world for semiconductors is Taiwan. So taking that issue apart from the emotional and political issue that lies behind Taiwan and the Chinese attitude to Taiwan, isn't the, as it were, semiconductor issue a sort of catalyst which might drive Chinese policy, given the emphasis that China puts now on, as it were, confronting the world in the science and technology context. I mean, in my opinion, it's pushed for, let's say, a global system, which is Chinese, is very much driven by its need to lead in science and technology globally, and it's lacking semiconductors in its sort of hand of cards. Yeah, it's a great point. There's sort of a parallelism, right, between China's choke point over rare earths, and the United States still has an essentially a choke point on AI chips. So the most advanced semiconductors that are essential for training frontier AI models, those are largely made by American firms, NVIDIA and AMD, and then produced, they're designed by those American firms and produced at TSMC in Taiwan. So this is one of the few remaining areas where China has not been able to replicate or displace the technology that America has a choke point on. It comes down to a question of which side China or the United States can get the other ones boot off its neck and kind of relieve itself of this choke point. The US is dependent on China for rare earths, and China is dependent on the US for AI chips, and they've both put these export controls on the other. I will say, though, there is a distinction not to create some kind of equivalency. The rare earth export controls that China announced on October 9th were a massive escalation. Basically, they were saying we have jurisdiction over the entire world's technology sector. If you are a German company trading with a French company and the component that you're selling contains even 0.1% of Chinese rare earths, then the Chinese Ministry of Commerce is saying you have to come to us to get a license to make that transaction or between Canada and Mexico or something like that. So it's essentially just this massive claim to jurisdiction over technology supply chains across multiple sectors. The US export controls are significant, but they're much more tailored and narrow. So the question is, which side could impose more pain? Could the US like radically escalate and kind of say, we're not only going to limit you from buying certain AI chips. We're going to limit you from buying all advanced chips. That would kind of be the equivalent of what China just did on October 9th. And the US could do that. It would need some coordination with its allies like Taiwan and Korea and Japan and the Netherlands. But in theory, they could do that and shut down China's technology sector. That would stop the chips going to companies like BYD, like HickVision, any Chinese AI company, any Chinese tech company that are all still dependent on these American chips. The US has not done that. It's kind of a gun that the US has kept in its pocket up until this point. But clearly, the Chinese know that they have this dependency and are trying incredibly hard. They're putting hundreds of billions of dollars into trying to replicate or displace the NVIDIA chips and the AMD chips. So far, they have not been able to do so. Now, it's anybody's guess. If you or I could anticipate and know exactly how long it would take them, two years, six months, 10 years, if we knew that, Richard, we would be rich. Now, we don't know that. Nobody knows that. It's a moonshot. I do not underestimate the Chinese capability to innovate. They've done so before across many sectors, EVs, all kinds of sectors, but they're not there yet. So it's really a question of, is the moat around US AI chips deep enough that China won't be able to surpass it, or are they eventually going to be able to catch up? And by that point, will the US have addressed its rarest dependency? The rarest challenge is different than the semiconductor challenge. It's much, much harder to replicate NVIDIA's technology, ASML's technology, Tokyo Electron, these highly complex, elaborate technological systems that are probably the most complex technology systems ever known to humankind. I do want to ask you, when we talk about rare earths, I think a lot of people think cell phones, daily use technology, but there's a difference between light rare earths and heavy rare earths. And how do they impact the defense industry, especially in the US? Like, if the US loses access to some of these minerals, I always think, oh, we're not going to have iPhones, but it's kind of a bigger problem than that, right? Like, the defense industry, the DoD really needs these. Can you talk about how they're used and what the concern is there? Yeah, I mean, rare earths go into almost any kind of technology, and that includes defense technology from fighter jets, the F-35, to night vision goggles, to pretty much anything. There are a few little rays of hope there. Some defense contractors already have stockpiles. They have the financial resources to develop stockpiles of rare earths. And so they haven't had to immediately cut off their production of weapon systems when trying to cut these things off. I think Lockheed Martin said in their earnings call that they have enough of a stockpile. They don't expect any disruption to their production this year. So that's good news. And I think the trend over time is that more and more companies will realize they need alternative sources to China. And with all of that demand for alternative sources, there will be more of an incentive, even if it means paying a little bit more. Again, these things aren't super expensive. So if companies have to pay a bit more for supply outside China, many of them can probably handle it. Rare earths are not sort of an extraordinarily expensive thing. So it's not so much a matter of price. It's a matter of having reliable supply and then having the right kind. You know, as you noted, heavy rare earths have different applications and light rare earths. The light rare earths tend to be a bit easier to mine and process. The new mine that Australia announced is going to open up with the US is light rare earths. The MP materials deal, I believe, is light rare earths. The heavy rare earths tend to be harder to find. A lot of them are located in China and Myanmar. And then China, of course, has a lot of influence over Myanmar, so that's not good. On the heavy rare earths, I believe the US is looking at some mines in Brazil. And so we may have to, you know, there may be some more action to try to get that started up with Brazil. I mean, we're assuming, you know, China is a stable producer, which does not really face massive political problems. But if you look at the wider picture at the moment of the Chinese economy and you've got this party plenum now, I think that's just started on, you know, for the next five year plan, the fragilities in the Chinese economy, not that they acknowledge them themselves, but any analyst like you is going to sit down and say, well, hang on a moment. There are things in China which are really appalling when you look at the future. And I've just read a very interesting French research paper which says that, you know, China's implosion is coming because of its demographics. It's got no workforce and it doesn't have a policy of immigration, that's for sure. So, I mean, I was just thinking relating this issue, which seems so terrifying to the West, to, let's say, the brittleness of the Chinese economy. And I think, personally, the brittleness of the political system that runs the economy. I mean, what are your observations? Okay, we're moving to a more strategic level. But I think it's important to talk about this problem in that context. Yes, absolutely. An authoritarian regime is inherently brittle. And I think it is something to keep in mind, your comment about the demographic trends in China. In some ways, the Chinese Communist Party is racing against time. And within a couple of decades, their population will be much smaller than it is today. So, some of these long-term trends are worrisome and they have to be keeping the Chinese Communist Party up at night. In a way, we're kind of living in this world where there's two trends that are giving us kind of conflicting signals. On the one hand, China's rise as a technology power has been so breathtaking just in the last five years. I used to be an analyst at the CIA, and about 10 years ago, there was kind of a commonly held view among a lot of China watchers that China can't innovate. It just borrows and steals and copies technology. That notion is just, that's just in the coffin. I think everybody recognizes that China is an innovator in its own right, and it's had all these breakthroughs. And so the question is, how long can that last? How long can they go continuing to fuel these massive technology programs, this massive military modernization? Hundreds of billions of dollars into semiconductor moonshots and then into biotech moonshots and green energy moonshots. And, you know, it seems that their pockets just are endless, but that's not, you know, eventually it has to catch up with them. My fear is that the West needs to act quickly. I mean, the window will come to a close. China's economic, there are economic factors dragging on China that can't be reversed. So we need to sort of take the next few years and make sure they don't win the technology competition before their economy slows them down. So I think we have a window, you know, the rest of this decade is a window. And the warning shot that they fired this spring on rare earths and the coercion they were willing to exhibit and really sort of claim jurisdiction on the entire world's technology supply chains, it should be a warning shot that gets the West to wake up. And we've seen it, you know, when that happens, when US and its allies come together, that is feedback that the Chinese Communist Party has to kind of take in and recalibrate. Going back to the Chinese economy and, you know, the current sort of state of it, I mean, my understanding is that if you, the inherent strength of the United States economy is the size of the domestic market in terms of generating GDP. So if you take China's GDP, so little of it is generated by the domestic market in comparison to the United States. Now, it seems to me that given, let's say, the fragility of the rise of the middle class in China, look at the property issue. You know, there are sort of systemic weaknesses, which the Communist Party leadership cannot come to terms with. Whereas in the States, you know, this isn't a party issue. There is an inherent domestic economic strength, which has passed on like a baton in a relay race. OK, with ups and downs, depending on the global markets, but the US is pretty resistant. China, if you pursue the analysis I'm suggesting, I'm not saying this is authoritative. It really is in a pretty difficult place. I mean, its economic rise is almost also its vulnerability now. Yeah, you make a great point. It's interesting. The fourth plenum has recently wrapped up in China. And, you know, at each of these big party meetings, you kind of pick up some signals of which way is the CCP wanting to take the economy. There were a few different things, but what emerged as their top priority was advanced manufacturing. Not boosting consumption, not boosting social services, not making life better for ordinary Chinese people, but advanced manufacturing. And this just kind of indicates it's the tip of the iceberg. I think what American trade negotiators often downplayed over many years of trying to sit down and persuade China to change its economic model and open up to more, you know, open up this massive potential consumer base that China has. It's been suppressed and repressed over the decades in order to create a bigger market that then foreign companies could sell into. And everything would just be a wonderful kumbaya. The pie is getting bigger. You know, why? Why didn't the Chinese Communist Party go for that? They actually have a different theory of economics. It's they have looked at the economic systems we have in the West and they say, we don't want to follow your model. We don't want to follow your model of electoral democracy and wild capitalism that just sort of careens around without objectives. We think we have a better system and it's called socialism with Chinese characteristics. We are building what they call socialist markets, which is code words for markets that are disciplined by the party and kind of turned to work towards state objectives. So they're they're optimizing for the needs of the state rather than optimizing for the needs of individuals and corporations that we do in the West. So we keep coming up against that saying, yeah, they're they're they really should be boosting consumption. They should be rebalancing their economy so that it's more sustainable as they rise up the value added chain and so that they can have sustainable growth over the medium term. But Xi Jinping doesn't buy that. He fundamentally believes what he believes and he thinks that it's going pretty well. He's having all these technological breakthroughs, their military is getting more formidable. And now, you know, if I had to guess what he was thinking right now, I would think he's playing a pretty he might think he's playing a pretty strong hand with this rare Earth's export control. But there is a risk of overplaying the hand. There is there is that risk that if he pushes too hard, it will spark some kind of a, you know, an awakening in the West, where we realize like, OK, this is just not working and we have to accelerate de-risking and sort of reduce our exposure to a nation state that that's willing to weaponize global technology supply chains. I've been dealing with China, you know, now on and off. I'm not a Chinese expert, but strategically thinking about China and watching China since, you know, the final years of my career in MI6 has been a preoccupation. And what I find really interesting and you may not appreciate this is the quality of discussion that we can now have about China. The extent to which this consciousness of as it were, how do we accommodate China into the international situation? How do we deal with China? How do we relate to China? How do we develop policies? Because if, for example, go back to when Cameron and Osborne in the UK were leading, you know, the UK's move towards China, it was so poorly thought through as naive. They had no idea of the reality and the problems. But I feel that, you know, the whole thing, perhaps thanks to Trump, not personally, but to his administration has been elevated to a different level of discussion. So I'm actually very encouraged by the way that we can have this exchange and ready look in depth at what, for me, is the key question of international relations for the 21st century. I think you're right that there is now much more focus, much more expertise on China. And what I'm worried about is a potential turn in US China policy that could again sort of slip back into errors of thinking that be deviled US policymakers for in previous decades. And these were kind of the dream, a China dream, I'll call it, that we can transform China into some kind of reliable economic partner that's it's maybe not democratic, but it's maybe democratic adjacent, a little bit more liberal, a little bit more open, a little bit more like us. It was ultimately a condescending view of the Chinese Communist Party that dismissed their own ambitions and dismissed their description of their own regime, which is, you know, to lead the world and displace the United States and its allies and its democratic values and replace them with the Chinese Communist Party's interest in values. So if the United States sort of turns back to a, you know, tries to force us back into a position of engagement with China and kind of downplaying strategic competition and downplaying the reality of the CCP's ambitions, I am worried that the kind of scholarly thinking and discourse might follow. It's too soon to tell, but I think that the best place to start is always by taking the regime in Beijing seriously on its face at its own word and then measuring their own articulated ambitions against the track record, what they're actually doing in the world. And not to start with our own belief system and our own hopes and dreams for China, but to start with the reality. I think that's a really good place to leave it. I know we've kept you for a while because it was absolutely fascinating. I learned a ton. Thank you so much, Liza Tobin, for taking the time. That's going to do it for this week's episode of One Decision. Thank you to our listeners for more conversations with leading decision makers and thinkers. Check out OneDecision.com, of course, our YouTube page. And if you like the show, let us know, leave a comment, let us know how we're doing. I'm Christina Rafini. Thanks so much for listening. (gentle music)