China’s rare earth dominance makes US supply chains vulnerable

China’s dominance in rare earths makes US supply chains vulnerable, US Trade Representative Katherine Tai said in an exclusive interview Saturday with CNBC’s Martin Soong.

Rare-earth metals are used in high-tech products, such as motors for electric cars. Over the decades, China has increased its capacity to process the metals, giving it enormous pricing power in a critical global market.

“What I want to draw your attention to is not just the vulnerabilities around China’s investments [overseas]but the fact that China’s dominant position in the world market now [rare earths] means it is able to turn the tap on and off,” Tai said.

“And until we are able to access and create additional supply chains, we will remain completely vulnerable to that influence,” the US trade representative said. Tai spoke in New Delhi, India, on the sidelines of the B20, the G20’s official business dialogue forum.

Tai noted that about a decade ago, China raised rare earth prices so high that some US mines were able to operate in the industry again, only to have to shut down once China lowered prices.

The United States had a majority share of the rare earth metals market before the 1980s. But lower labor costs abroad, as well as less pressure on environmental standards, helped drive the rare earths industry out of the United States. Joined.

Meanwhile, Beijing supported the industry.

“China’s advantage in terms of dominance is not necessarily a natural advantage,” Tai said. “It’s not that they have more rare earths, but that they were able to implement coordinated industrial and trade policies that allowed them to corner the market.”

The Chinese government sets economic plans at least every five years, with some goals (such as boosting self-sufficiency in technology and reaching carbon neutrality) set years in advance.

While top-down planning is not guaranteed to yield results, the electric car industry has become an example of how the Chinese industry has been able to capture significant market share across the entire supply chain, including product final.

The level of America’s reliance on China-based manufacturing came to the fore during the Trump administration and accelerated when the Covid-19 pandemic in 2020 disrupted global supply chains. The Biden administration has announced multi-billion dollar initiatives to encourage companies to develop and manufacture critical technologies in the US.

“Where we are today in terms of our supply chains is not where we want to be,” Tai told CNBC on Saturday. “We know we’re vulnerable. We want to be in a place where our supply chains are more diversified, where we have more confidence in them, where we just have more choice.”

In the case of rare earths, Tai pointed out that China has a monopoly on the global market. He noted that in the case of Australia’s lithium production, China is also the sole buyer, giving Beijing another leverage point in the market.

While lithium is a key component of electric car batteries, it is not one of the 17 metals scientifically categorized as rare earths.

This year, US and European government officials have talked about reducing risk or reducing the level of dependency solely on China. In a speech to global business leaders in June, Chinese Premier Li Qiang said that reducing risk is a false proposition because global economic interests are so intertwined.

Just before the pandemic began, the United States and China signed a “phase one” trade deal that called for China to increase its purchases of American goods as a way to offset the huge US trade deficit with China.

When asked about the status of the deal on Saturday, Tai said the United States is still looking into China’s shortcomings in meeting those purchase targets.

He said another aspect of that discussion is the degree to which US trade with China is “unbalanced.”

Official US data said the country’s trade deficit with China rose 8.3% to $382.9 billion in 2022.

US Commerce Secretary Gina Raimondo will visit China from Sunday to Wednesday as US high-level official travel to the country resumed this summer after a hiatus.

Tensions between the United States and China have escalated in recent years, starting with trade and spilling over into technology and finance.

Many companies have increasingly started looking for opportunities in India as the country’s relationship with the United States has improved.

On Saturday, Tai also met with India’s Trade and Industry Minister Piyush Goyal and raised concerns about India’s import license requirements for technological equipment, according to a statement.

“The stars are really aligning between the US and India and that in all political areas,” Tai told CNBC. She described the relationship as “experiencing new heights.”

He said that in his area of ​​economics and trade, the potential to work more with India was always there, but previously “we just didn’t know how to take advantage of it.”

— CNBC’s Samantha Subin contributed to this report.