DEEP DIVE – Coverage of the U.S.-China tariff war has focused on the impact for consumers – the potential for spikes in the prices of cars and iPhones and laptops and lower-end consumer goods that are made in China, or with Chinese-made parts. But one recent salvo from Beijing poses a major headache for the U.S. defense industry, and a potential national security risk: China’s imposition of export controls on rare earth minerals.
Rare earths and critical minerals are used in the production of U.S. fighter jets, warships, tanks, precision-guided ballistic missiles, and more. “There is not one thing that we use in the industry that doesn't have some type of critical mineral or rare earth element,” Dak Hardwick, vice president for international affairs at the Aerospace Industries Association (AIA), told The Cipher Brief. “It's essential to the aerospace and defense industry.”
“Rare earths” refers to some 17 elements, many of which are not actually rare, but are difficult to extract and process. China produces an estimated 60 percent of the world’s rare earths and processes nearly 90 percent of them. Last month it imposed restrictions on the export of seven rare earths, measures that raised concerns across the U.S. defense sector. Chinese officials said this week that the recently negotiated agreement to pause or reduce some reciprocal tariffs would not alter the rare earths restrictions.
The Cipher Brief asked the Pentagon for comment on the impact of China's restrictions. “We are monitoring the CCP’s actions around strategic and critical materials," a Defense Department official said. "We continue to engage our industry partners to assess their full impact on the defense industrial base.”
The U.S. has its own rare earth mining capacity – as do Canada and Australia and other U.S. allies – but remains heavily dependent on China for processing. In March, the Trump administration issued an executive order calling for an immediate boost in U.S. minerals production, and said “overbearing Federal regulation” had stalled such efforts in the past. The directive called for more federal land with mineral reserves to be cleared for mining, and stressed national security concerns in the directive, given that the U.S. currently obtains large amounts of its critical mineral resources from China.
Experts say that geological realities mean the U.S. must rely on other nations for supplies. “We can't change that geology is where geology is,” Gracelin Baskaran, Director of the Critical Minerals Security Program at the Center for Strategic and International Studies, told The Cipher Brief. “We have less than 1% of the world's nickel, graphite, and cobalt. But then the other half of that is that we're going to need to do more at home and we're going to need to do more abroad.”
Cipher Brief Editor/Writer Ethan Masucol spoke with Hardwick and Dan Blumenthal, a Senior Fellow at the American Enterprise Institute, to tackle two basic questions: Are U.S. weapons at risk from China’s rare earth export curbs? And what can the U.S. do to mitigate the risks?
Their comments have been edited for length and clarity.
THE CONTEXT
- The U.S. Geological Survey (USGS) released a report in February 2022 identifying 50 minerals deemed critical to the U.S. economy and national security and warned that the supply chains for some of these minerals were vulnerable to disruptions. That list added 15 more commodities from an initial list compiled in 2018.
- China dominates global critical minerals production and refining. China produces 60 percent of rare earths and processes nearly 90 percent of them. China also hosts a significant portion of global lithium, cobalt and nickel production.
- President Trump signed an executive order on March 20 titled "Immediate Measures to Increase American Mineral Production.” The order aims to boost U.S. minerals production by streamlining permitting processes, identifying mineral-rich areas on federal lands to develop, and invoking emergency powers to allow the Pentagon to prioritize focus on securing critical minerals supply chains, namely by reducing reliance on sources from foreign rivals.
- On April 30, the U.S. and Ukraine agreed to a critical minerals deal which created the jointly run United States-Ukraine Reconstruction Investment Fund to invest in and benefit from Ukraine’s economic recovery. In addition to near-term financial and military support, the deal will have the U.S. invest in the development of Ukrainian critical minerals. Kyiv will contribute 50 percent of future revenues of royalties from new licenses for critical minerals, oil and gas exploration. Development projects will likely take years, but the agreement offers a pathway for U.S. public and private investment on Ukrainian territory.
THE EXPERTS
Cipher Brief: Can you give us a picture of the risk and exposure that the U.S. has to China's dominance in the critical minerals sector, specifically the national security and military supply chains?
Hardwick: There is not one thing that we use in the industry that doesn't have some type of critical mineral or rare earth element. It's essential to the aerospace and defense industry. We have to source from all around the world, because much of the domestic production of critical minerals doesn't really exist here in the United States anymore.
A number of years ago, AIA identified 12 different minerals that were critical to aerospace and defense. And what we called for was that we needed to onshore as much as we could in the domestic production of critical minerals, to limit our exposure to adversarial sources.
So it certainly is a big thing for our industry. It is something that is top of mind for our companies, especially as they source globally for parts of components needed for a global industry.
Blumenthal: There are two different kinds of risks. One is direct and one is indirect. The actual minerals that the Chinese have put export restrictions on mostly do not go directly into military products and technologies, with the exception of antimony. But the other restrictions they put on, involving gallium and germanium, those indirectly affect military supply chains, because they affect semiconductor and microelectronic supply chains.
Some of the rare earth elements and other minerals affect armaments and missiles and munitions, but not to the levels where the DOD is panicking and their stockpiles and so forth. But many of the minerals – the critical minerals and the rare earth elements as well – affect dual-use capabilities, from semiconductors to electronics to even energy storage.
Cipher Brief: What are the minerals that are most important for the U.S. aerospace and defense industry?
Hardwick: Number one for us is going to be titanium. Titanium used in anything that flies, floats or rolls. So we use it in aerospace, we use it in ships, and we also use it in ground vehicles. It is an essential element. So titanium is one of those real critical elements. There is a 15 % duty on titanium right now, even though there is no domestic source in the United States for titanium. So one of the things we've called for is to eliminate the 15 % duty on titanium and to continue to find domestic sources here in the United States.
I should also point out that all of the titanium producers here in the United States, they are all fully employed. There is no excess capacity for them. And so we need to have an expansion of titanium production here in the United States, but that can take at least five years to develop a factory for titanium.
Another really critical element is gallium and germanium. , and gallium and germanium is controlled mostly by the Chinese. There are certainly opportunities to develop these here in the United States, and we know that our friends at the Defense Department have looked at these particular elements, because they understand the critical nature. And it's just another opportunity for us to limit our exposure to adversarial sources overseas.
Cipher Brief: This isn't a new problem, correct? I understand that Japan went through a similar dilemma in 2010?
Blumenthal: Yes. The first time that people who watch and execute policy towards China paid attention to this was in 2010, when the Chinese authorities held back on the export of some rare earth elements to Japan after a dispute – a fishing dispute, essentially, and a territorial dispute in the East China Sea. It turned out that rare earth elements and critical minerals are not actually so rare – or the reason that they're rare is just that China dominates the mining, the processing, and has built up an industry second to none in processing and refining of both these minerals and the rare earth elements. Unfortunately, since 2010, when the market did react, and mining facilities and operations in the U.S. and other countries said we too can do this mining and we can do the refining and so forth, the industry never really was built up.
So the reason they're still rare is because while there was an initial market response, the policy response that should have accompanied that market response lagged or just was absent. So there really hasn't been a number of policies or government intervention to fix the problem. And therefore, they still are rare and we still are very dependent on China.
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Cipher Brief: To what extent does Beijing actually control critical mineral supplies?
Hardwick: If you look at the U.S. Geological Survey's assessment of how much the U.S. is reliant on China for critical minerals, depending on the mineral, it can be between 25 % and 100%. And obviously, that's been a strategy over the last number of years [for China], to control those critical mineral supply chains. But I would also point out that it's not necessarily an American problem. It's a problem for aerospace and defense companies around the world in every country.
We have critical minerals exposure to many countries around the world that may not necessarily be in our best interests. It's because they won the geology lottery. Those minerals exist in some of those countries, and they're willing to extract those from the ground and process them in those countries. But again, it's not just an American problem. So even though we think about it from an American perspective, it is something that impacts the global industry, regardless of the color of our passports or what flag we have on the front of our houses.
Cipher Brief: How we can mitigate this problem? Can we turn to allied countries that are similarly endowed geologically, for alternative supplies?
Blumenthal: The United States can look to itself. It can look to Canada, and to Australia – it depends which minerals we're talking about. There's certainly a lot of lithium, for the EV storage and EV supply chain, in Argentina and other places. And if you're talking about cobalt, then the Congo is very important. Nickel is Indonesia.
There are a couple of problems. One is that China dominates the investment and running and operation of some of those mines and facilities, from the Congo to Indonesia. And there's more of a competition in Argentina and other places. But even more important, China doesn't just dominate the mining; most of these minerals and elements have to go back to China even if they're mined in an allied country – they have to be refined and processed into the metal in China. China has the industrial capacity built up to do that.
So the United States could have alternative sources, but first of all we have to be able to mine here, which is very very difficult to do for policy reasons and regulatory reasons. And second, we would need a long-term industrial strategy to help build up some of the processing and refining.
Hardwick: I know that there's been active conversation, both in the previous administration and in the current administration, about U.S. access to those minerals or materials in other countries. It is top of mind for all governments right now to be able to have access for those minerals and materials, because we recognize that it's a critical part of the supply chain. And those individual conversations that the government is having with countries around the world is something that we applaud. We need to have those conversations.
Here's a good example: We do a lot of work with Australia. Australia has a plethora of opportunities for extraction and they want to make sure that they are available to the world. We support that type of activity. We also support being able to process that material in non-adversarial countries. That's why the security of the supply chain, the security of shipping lanes from that part of the world, remain very important to the United States, because unfortunately Australia is a very long way away. So even though we pull things out of the ground in Australia, at some point you have to get it into a processing facility and into manufacturing that's either in Australia or potentially in the United States. And so we're going to want to make sure that the security of the sea lanes remains going forward, when we start to pull things out.
One of the things that we've really focused on at AIA is permitting reform. We believe that we need to have permitting reform in the United States to be able to get access to the critical minerals that we have in our country. We also support the need for additional processing domestically in the United States. It's such a critical element to our national security and our domestic supply chains – having domestic supplies of minerals and materials and being able to mine those here, being able to process those here is really critical. And permitting reform is really the first step to get through the bureaucracy, to get things licensed, and to be able to access these minerals that we are so lucky to have domestically.
Cipher Brief: There was a recent executive order from the Trump administration that focused on critical minerals and building out alternative access away from China. Are you seeing progress there?
Blumenthal: I haven't seen much progress. There needs to be both steady demand and use demand. And that really comes not just from the military. It comes from the electric vehicle supply chain, it comes from semiconductors, it comes from the electronics industry to some extent, the auto industry. So you would need a market signal that there's going to be demand, if companies in the United States and in other friendly countries were to start mining and building up processing. Perhaps DOD could backstop some of that. That hasn't really happened.
The second would be on the supply side, you need to change policy in the United States. There would have to be exceptions that certainly people concerned with environmental policy wouldn't like. There'd have to be exceptions to things like the National Environmental Policy Act. And that wasn't something that the Biden administration was willing to do.
Hardwick: The good news about the aerospace and defense industry is it's a long lead sector industry, which means our companies buy these things in bulk for long periods of time, because they want to make sure that they have access over the course of the manufacturing lifecycle. So for some of these minerals and materials, a lot of that is already present here in the United States. So we're continuing to buy that up as much as we can, because our manufacturers know that they're going to have to use that in their manufacturing process for many years to come.
This is where it becomes very important [to have] stable budgets and consistent funding from the United States government, especially for national security purposes, because we want to make sure that funding remains available, so companies have certainty when they go out to the critical minerals market. We’re going to want to make sure that we continue to stockpile as much as we can, and buy in advance as much as we can. Many of our companies signed long-term contracts to be able to have access to those minerals and materials. But the other piece to it is for the U.S. government to continue to provide stable budgets, and give us a certain operating environment where companies know that they're going to be able to deliver the equipment that's being called for by the U.S. Defense Department and used by U.S. warfighters.
Cipher Brief: This all sounds like it's going to take quite some time.
Blumenthal: Yes. It will take some time. Now if there are certain market signals you could send that show the market that China is not going to be dominant over the short term – if the U.S. made a serious attempt to change its laws on mining, that would be a very big signal. And it would have to be an actual legislative change. It couldn't be an executive order, because nobody's going to start mining or investing in mines if it's a policy that can be changed by executive order from one administration to another. But that would be a major market signal. And while we wouldn't actually have the refining or mining capacity for a number of years, it would demonstrate that China is not going to remain in that position forever.
Cipher Brief Editor/Writer Ethan Masucol contributed to reporting.
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