How the West could break the Chinese mineral monopoly

China has weaponized it critical minerals monopoly on which the entire Western industrial base depends.

According to European Council of Foreign relations expert dr. Tobias Gherke, this dependency is even worse than Europe’s 2021 dependence on Russian gas, which led to a massive energy crisis in 2022.

So, if China cuts of critical minerals completely today

““““Tobias Gehrke (14:16) our industry is not prepared. Vast elements of our base industry in Europe, but also in other places, rely on access to permanent magnets, most importantly. So if that would stop tomorrow, Quite frankly, some of these industries like the automotive industry would grind to a halt. Imagine that. 13 million people are employed in the car industry in Europe. Imagine 95 % of them would stop production. I mean, we’re talking an economic crisis of historic proportions. “““

No wonder governments ranging from Europe to the US to India are scrambling to reduce their dependence on Chinese minerals like rare-earths, copper and lithium.

But, this WILL BE incredibly hard. China’s mineral monopoly is protected by it’s massive scale, massive government subsidies, lax environmental regulations, and

“““Tobias Gehrke (37:07.338) China churns out hundreds of thousands of academics and PhDs in mining and geology and you know in Europe it’s a drop in the ocean. And so even if you now want to reverse this, now the deck is stacked against us. “““

But, there is hope for the West. In the 1980s and 90s, the West dominated all these industries, and China was able to break the Western monopoly through clever policies. So, can the West learn from China to take back its sovereignty? Yes. In this video, I’ll show you how they can do it in 5 steps. But, before getting into the specifics, let’s do a quick recap of

Why critical minerals are so important

For simplicity, let’s start with the critical minerals that have been in the news the most

“““news clips —> rare earths, rare earths, rare earths @Safia Mohamed “““

What is so special about rare earths? Sure, the F-35 jet, state of the art US navy destroyers, nuclear attack submarines, I found they all contain thousands of pounds of rare earths

Okay.. but what for?

“““Tobias Gehrke (00:09:54) The main product that is made out of refined rare earth is permanent magnets.“““

These are magnets that do NOT need an external power source to generate their magnetic field. They allow modern wind turbines to transform wind into electricity. They are at the core of loudspeakers, microphones and all of our headphones. The new Nintendo Switch 2 has supper snappy magnetic attachments that sound like this.

But, perhaps more crucially, modern cars cannot be made without permanent magnets. They power your car’s trunk sensor, your car’s steering system, it’s air conditioning actuator, the window lifting motor, and for electric vehicles even its motor.

So, this is why it really matters that

“““Tobias Gehrke (11:26.084) China holds a global share of We’re with refining and permanent magnet production somewhere around 95%.“““

And worryingly, China has recently introduced a licensing system that requires ANY firm in the world to apply for a Chinese license to use them.

“““Tobias Gehrke (00:10:46) You need to go to Beijing and say, hello, I’m Volkswagen. I need that permanent magnet. Do I get a license?“““

If Beijing says no, Volkswagen, Stellantis, Ford, the entire Western car industry grounds to a halt, and even if they can replace all the permanent magnets all over Western cars, that will be so expensive that they would soon be crushed by competitors that DO have a license from Beijing.

China has already shown that it is willing to use economic weapons like this to devastate local industries. For example, in 2023, China no longer granted Chinese firms licenses to export Graphite to Sweden. It wasn’t exactly clear why it did this, but publications like the Economist have mentioned that it may have been triggered when a Swedish free speech group gave an award to a Chinese dissident.

But, the reason could also have been strategic. For a while Sweden’s promising battery start-up Northvolt seemed like the only company that could be competitive against Chinese producers. But, 2 years after China’s ban, Sweden’s Northvolt shut its doors for good in Sweden.

Only 10-15 years ago this was unthinkable. Back then, the dominant idea was that the global free market just determines everything. If a battery company wants to buy minerals and it’s in short supply, the price will go up FOR EVERYONE AT THE SAME TIME and the highest bidder will buy. The only job of the government was to let the free market function as efficiently as possible.

This logic no longer works today. Governments are increasingly realizing their role is no longer just about making markets efficient, it’s also about protecting domestic industries from foreign manipulation. Therefore, governments have now been forced to think carefully about critical minerals and critical materials more broadly, which are defined as any materials that (1) have a high risk of supply chain disruption AND (2) serve an essential function in one or more technologies.

By this definition, rare earths are a clearly a critical material. China now has massive power over foreign manufacturing firms because it has a monopoly, or near monopoly in the two other parts of the supply chain, mining and refining. On average, China controls 54% of rare earth mining. But, more importantly, it controls about 77% of rare earth refining.

This is the pattern that we see all across industries that power the modern increasingly electrified global economy. For example, if we look at copper, which the main conductor of electricity, we can see that mining is relatively diversified, even though Chile, the Congo and Peru are the biggest producers. But, when it comes to refining China is much more dominant.

But, the West’s critical material vulnerability is not purely limited to China. Take for example Nickel, which is a key input in steel production, AND it is one of the most promising metals to be used in batteries. However, supply is not secure at all given that Indonesia is the epicenter of global Nickel production and now also refinement.

Like China, Indonesia has shown that it is more than willing to use it’s Nickel dominance as an economic weapon, as it has banned all raw nickel exports to ensure that it also dominates the Nickel refinement industry. However, so far, China has smartly moved in to make sure many of the best Indonesian based Nickel refineries are in fact Chinse companies.

But, Nickel is a rare exception where a country other than China dominates. If we look at the most common element used in batteries, Lithium. We can again see that, in mining sure, China is a big player. But, Australia is actually more important. However, Australian mines largely depend on Chinese refining capacity, making Western battery manufacturers again largely dependent on China.

This pattern holds for almost all critical minerals, Graphite, Cobalt, you name it. Mining dominance is different per mineral even if China almost always plays a big role. But, the real story is about refinery. China dominates almost ALL critical mineral refinery, giving it an insanely powerful economic weapon that it now started using to get the both Western and non-Western countries like India to do what it wants.

But, before we get to how the West can respond, this of course raises the question

Why is China so dominant in mineral refinement?

Because, it really wasn’t like this, just a few decades ago. In fact, after the second world war the dominant rare earth player was actually The United States, thanks the massive Mountain pass mines in California

So, ironically as US treasury secretary Scott Bessent recently said

“““The technology especially in rare earth magnets that’s being used against us. It was US technology.“““

But, Japan and Europe also played a major role

“““Tobias Gehrke (26:49.198) France Germany, Portugal, Spain, all of them had strong mineral mining industries and know-how.“““

So, what happened? How did the Chinese take over this strategic industry?

The answer consists of two parts. The first part is Chinese strategy. Interestingly, there are some rumors that China’s rare earth monopoly was a result of a grand geo-economic strategy set out already by Deng Xiapeng in 1992. But, according to Mihaela Roibu, who is doing her doctoral thesis on China’s rare earth monopoly, China’s current dominance is probably —and ironically— a result of industrial protection by Japan and the US in the 90s, which excluded Chinese firms from obtaining the know-how to refine critical minerals.

To counter this, they were force to

“““(Tobias 23:28) attract a lot of foreign investment and talent and know-how into the mineral space.“““

mostly from Europe. And, they did this by giving foreigners all sorts of juicy advantages like

“““Tobias (23:51) tax credits. gave lax environmental protections.“““

But, crucially, the Europeans LET them do this. Why? Well, two reasons. The first is the increasingly dominant free market philosophy in the 1990s. If European firms could produce more cheaply in China, then of course, they were free to do it.

The second reason was environmental protection. You see, refining critical minerals is a really really dirty business

“““(Tobias Gherke 7:51) You will need a lot of big chemical mix to clean, to wash off the actual mineral that you want. “““

The 1990s was also a time of rising environmental regulations in the West. Western firms could dodge these regulations by moving to China, and politicians were actually quite happy to be rid of these highly pollutive industries.

However, just as with Western car firms moving to China, the Chinese had regulations in place that all foreign firms needed to set-up local joint ventures, where they had to transfer knowledge to China if they wanted to work in China.

But, the thing is, businesses care about profits in the next couple of years. They don’t strategize about competition in 40 years. So, they happily moved their production to China. But, today, after three to four decades, just as German car manufacturers now struggle to compete with Chinese firms, the rare earth mining and especially refinery business is now dominated by Chinese firms, giving the Chinese government their incredibly powerful economic weapon.

So of course, Western governments are now struggling to respond. And, actually, it may be too late, for at least four reasons

1. Environmental regulations are still much stricter in the West than in China.
2. Chinese firms now have massive scale advantages.
3. Chinese firms in strategic sectors are often heavily subsidized by the government if they need it.

and, number 4

“““Tobias Gehrke (37:07.338) China churns out hundreds of thousands of academics and PhDs in mining and geology and you know in Europe it’s a drop in the ocean. And so even if you now want to reverse this, know the deck is stacked against us. “““

And, yet, the deck was also stacked against China in the 1990s when all of the know-how and technology was in the West. So, what can the West learn from China. Here’s

How the West should respond

And actually, this is not JUST applicable to the West, it’s applicable to any country that wants to remain independent in the new age of geo-economics, where great powers, including those in the West, will not hesitate to use economic weapons to achieve political goals.

Any country that wants sovereignty in this age needs a grand geo-economic strategy in which they set themselves a goal for HOW independent they want to be. Importantly, such a strategy is not just about critical minerals. It considers minerals, it considers oil, it considers cloud computing infrastructure, it considers the entire economy. Having a grand geo-economic strategy does NOT mean every country should be independent in everything, given that complete independence is often impossible and in all cases extremely inefficient. So, any Western strategy should focus on achieving the right balance between full free market specialization and autarky.

For critical minerals, this means the following. Step number 1 is that they should learn from China, — who is already stockpiling oil, grain and even pork - that in the age of geo-economics every nation needs some buffers of critical materials and minerals. For the most part, Western governments already started doing this or planning to do this.

Step number 2 is that most Western governments need to realize that gaining SOME more independence from Chinese minerals can best be done in a big Alliance. Europe and Japan don’t have many minerals. But, they do have some know how left, and they have lot’s of money to invest. Australia and Canada have lots of minerals. But, they almost completely rely on Chinese refineries. Therefore, Western governments like Japan and Australia, Canada and the EU, the US and Australia and many more are already forming mineral alliances.

But, in my opinion, these individual Alliances are likely to be much less effective than a concerted big group effort. Just as NATO as a big Alliance is far more effective than a patchwork of defensive Alliances between individual states would have been.

Still, even with a big Alliance step number 3 is needed. We know that Chinese industrial advantages are now too big for private Western companies to overcome. On top of that, as Scott Bessent recently said

“““anytime anyone tries to stand up one of these rare earth, critical mineral facilities, Chinese come in, they flood the market.“““

In other words, the Chinese state is actively coordinating its industry to prevent foreign competition from rising. Therefore, a free market approach will not work. Instead, governments need to study and copy China’s industrial policy approach. As a group, they should use industrial policy tools like subsidies, price floors and tariffs to help the mineral mining and refinery industries recover in Allied countries.

On top of that, in step number 4, Western countries should use industrial policy tools like subsidies and tariffs strategically to speed up the development of alternative and recycling technologies as well. Yes. This is already happening. For example, France is building a massive magnet recycling plant in Southern France. Also, when it comes to technological replacement, BMW and Renault are already experimenting with new electric motors that don’t rely on rare earths. But, these are just small projects. There is no big strategic effort yet.

The potential of Chinese retaliation then brings us to step 5: Western countries should develop a portfolio of other technologies and materials on which China relies and they should create a doctrine that determines what happens if any ally faces a geo-economic attack. Even mineral regions regions like Europe are not powerless.

“““Tobias Gehrke (01:03:17.081) imagine Europe would say in response to China threatening to cut rails in relation to Europe would respond and say and then we will cut off the maintenance and servicing of Airbus aircraft in China. It would be huge. “““

Similarly, like Russia did in 2020, China holds almost all of its financial reserves in Western currencies. In step 5 Western nations develop a doctrine that essentially makes clear in geo-economic terms that

“““Tobias Gehrke (01:02:23.691) If you do X, I will do Y. And our Y needs to be very large. and painful because you want to escalate in order to de-escalate. “““

And, while, of course it’s clear that when it comes to critical minerals, these 5 steps are intended to counter China specifically. I personally think Western countries should develop their geo-economic strategy not to target JUST critical minerals and also NOT to target JUST China.

China is not unique in using geo-economic weapons to get others to do what they want. Under Trump the US is doing this as well.

But, yeah, that is my take. Have I been unfair to China. Do these steps make sense? Am I forgetting something. Let me know in the comments below….

and If you are interested in in-depth follow-up analyses, I highly recommend you check out our advertising sponsor The Economist.

Specifically, I recommend you check out this detailed analysis about how China’s licensing system is actually using America’s own trade weapons to beat it. Then, follow up with this analysis about why China’s power over rare earths is not as great as it seems. AND finally, how all of this is so far means that arguably China is winning the trade war.

These kind of detailed, balanced analyses are exactly why I highly recommend you subscribe to The Economist, which now offers an exclusive 35% discount for Money & Macro viewers.

Whether you prefer the digital edition, or you are like me and prefer to catch up on the global economy during the weekend, sitting down with a nice cup of coffee and the paper edition, you’ll always stay on top the latest global developments no matter where you are. So, don’t miss out – click the link in the description or top comment below, or head over to economist.com/moneymacro to claim your exclusive 35% discount today.