Chinese dominance over rare earths leaves 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 with CNBC’s Martin Soong on Saturday.

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

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

“And until we are able to access and build additional supply chains, we will remain entirely vulnerable to this leverage,” the U.S. Trade Representative said. Tai was speaking in New Delhi, India, on the sidelines of the B20, the official G20 trade dialogue forum.

Tai pointed out that about a decade ago, China raised rare earth prices to such a level that some US mines were able to operate in this sector again, only to have to shut down once China reduces prices.

The United States held a majority stake in the rare earth metals market before the 1980s. But falling labor costs overseas, as well as less pressure on environmental standards, have contributed to drive the rare earth industry out of the United States.

Meanwhile, Beijing supported the industry.

“The Chinese dominance advantage is not necessarily a natural advantage,” Tai said. “It’s not that they have more rare earths, but they’ve been able to pursue coordinated industrial and trade policies that have allowed them to corner the market.”

The Chinese government sets economic plans at least every five years, with certain goals – such as boosting technological self-sufficiency and achieving carbon neutrality – set years earlier.

Even though such top-down planning is not guaranteed to yield results, the electric car industry has become an example of where the Chinese industry has managed to capture a significant market share throughout the supply chain, including the final product.

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

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

In the case of rare earths, Tai pointed out that China has a monopoly in the global market. She noted that in the case of Australian lithium production, China is also the only buyer, giving Beijing another point of leverage in the market.

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

This year, US and European government officials have talked about reducing risk or reducing the level of reliance on China alone. In a speech to business leaders around the world in June, Chinese Premier Li Qiang said risk reduction was a false proposition because global economic interests are intertwined.

Just before the start of the pandemic, the United States and China signed a “phase one” trade agreement that called on China to increase its purchases of American products in order to offset the huge United States trade deficit with the China.

Asked about the deal’s status on Saturday, Tai said the United States was still studying China’s shortcomings in meeting those procurement targets.

She added that another aspect of this discussion was the degree to which US trade with China was “unbalanced”.

Official US data indicates that the country’s trade deficit with China increased by 8.3% to $382.9 billion in 2022.

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

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

Many companies are increasingly looking for opportunities in India, while the country’s relationship with the United States has improved.

On Saturday, Tai also met India’s Trade and Industry Minister Piyush Goyal and raised concerns about India’s import licensing requirements for tech equipment, a statement said.

“The stars are really aligning between the United States and India and that in all policy areas,” Tai told CNBC. She described the relationship as “an experience of new heights”.

She said that in her area of ​​economics and trade, the potential to work more with India was always there, but before that, “we just didn’t know how to tap into it.”

— CNBC’s Samantha Subin contributed to this report.