Maxime Sommerfeld Antoniou is a Master’s student in Geopolitics, Territory, and Security at King’s College London. His academic interests range from the geopolitics of rare earths to green industrial policies.
Abstract: This article is the initial contribution to a series of three articles on the rising and intertwined importance of China, the geopolitics of rare earths, and the green energy transition. It aims at introducing the theme of the geopolitics of rare earths by explaining what they are, their current technological applications, and which actors – in this case China – controls them and how it did so. The key take-aways are that (1) rare earths are the central resource to the green technologies needed for our green energy transition, and (2) that China used instruments of economic statecraft since the 1990s to become a quasi-monopoly of both rare earths and their subjacent green technologies.
Introduction: The Janus Face of the Green Energy Transition
Last summer, Ursula Von der Leyen, the new president of the European Commission, urged the European Parliament to back her European Green Deal aiming at making the European Union carbon neutral by 2050. This call for action is in line with the old continent’s commitment, made at the Paris COP21, to limit the global average temperature increase to “well below 2°C above pre-industrial levels”.
To do so, the EU has already started to transform its energy sector by shifting from fossil fuels toward renewables energies. The latter are gaining impressive tractions both for environmental and economic purposes. Recently, for the first time in the EU’s history, electricity generation from renewable energies surpassed fossil fuel ones during the first half of 2020.
However, the rise of green technologies implies a whole new set of geopolitical challenges and risks which are often eluded in political discourses and analysis. Indeed, by reducing its dependence on fossil fuels and turning towards renewable resources, the EU might very well jump from the frying pan into the fire by becoming overly dependent on a new resource: rare-earth elements (REE). Indeed, REE are central to the development of any modern, green technology – from electric vehicles to solar panels or wind turbines – and China has over the last decades increased its stranglehold on this resource and its supply chain.
The following questions might soon burst forth from one’s mind: what are REE? How did China come to dominate the RE industry?
Answering these questions will be the objective of this article. After providing a broad understanding of what REE are, it will demonstrate how, since the 1990s, China used economic statecraft to capture the REE industry and how the West gave up its technological superiority.
What are rare earth elements?
Defining rare earth elements
Rare earths are seventeen elements of the period table that include the family of lanthanides, plus scandium and yttrium. REE include terbium, neodymium, dysprosium, erbium, ytterbium, gadolinium, or promethium, to only cite a few. Importantly, REE are not as rare as they sound. Indeed, they can be found in low concentration throughout the Earth’s crust. The real challenge, however, is to find geographical locations where they are in sufficient concentration to make it economically profitable to mine them. This is what makes them rare.
The technological applications of rare earths elements
In her newly published book China and the Geopolitics of Rare Earths, Sophia Kalantzakos explains that REE have two main applications. On the one hand, they can be considered as enablers in engineered products or other materials (e.g. TV screens or computer monitors). On the other hand, they are also used as “components in engineered products to enhance functionality and end-product applications”. With regards to green technologies, they are indispensable elements of electric vehicles’ batteries, magnets for wind turbines and electric vehicles, energy-efficient lighting, and solar cells.
In a word, REE are extremely important for nowadays green technologies. For example, the magnets made out of them are “forty times stronger than ordinary magnets and can hold more than a thousand times their own weight”, they efficiently convert electric energy to motion in motors, and they enable the miniaturization of electronics.
How did China come to dominate the REE industry ?
“To understand how China came to dominate REE supply chains globally, a knowledge of the Middle Kingdom’s deft use of economic statecraft for political purposes since the 1990s is critical”. Economic statecraft is defined as the use of economic means in the pursuit of foreign policy goals. As Baldwin noted in Economic Statecraft (1958), “the essence of foreign policy is its purposive behavior,” actions must be taken to achieve determined objectives. To do so, instruments of economic statecraft include embargoes, dumping, quotas, or license denial.
Controlling the extraction of REE
Until the late 1980s, the United States (US) was the main extractor of REE with the mine of Mountain Pass in California, exploited by Molycorp. Molycorp was an American private corporation which provided electronic needs for the US economy during the Cold War. This dominance began to fade away during the early 1990s with the growing environmental restrictions and fines imposed on Molycorp due to the ecological impact of mining and processing REE.
Simultaneously, however, China increased by 40% the annual production of REE in the Bayan Obo mine in Inner Mongolia (the largest REE deposit in the world). Such an increase in production was possible thanks to both economic and environmental dumping. On the one hand, economic dumping entailed low production costs due to the vast Chinese labour market; on the other hand, environmental dumping meant that the ecological costs of mining and refining REE were never incorporated into the production costs. Guillaume Pitron, a French journalist, reported, after having done fieldwork next to the Bayan Obo mine, that neighbouring villages were renamed “cancer villages” due to the occasioned industrial pollution. Resultantly, dumping enabled China to sell raw REE at a 50-60% discount in the international market and their prices began to plummet.
In addition to this, the Chinese implementation of value-added tax rebates to its exports further undercut the financial viability of many western mines which, ultimately, went bankrupt. A noteworthy example is the Mountain Pass Mine and its mining company Molycorp. Besides, by declaring that REE was a “protected and strategic mineral”, foreign investors were prohibited from mining REE in China. Concurrently, while western countries stopped mining REE, their manufacturing sectors began to rely exclusively on China’s cheap supply of REE. In a word, by the early 2000s, China became a monopolistic seller of most REE.
Controlling the supply chain
The French understood a long time ago that the wealth of their vineyards did not emanate from the selling of grapes but from the added value of their finished product: the vine of their vineyards. Similarly, Beijing began to realize that selling REE was a lost opportunity and subsequently decided to use new instruments of economic statecraft to capture the whole REE supply chain.
To do so, China started by capturing the REE magnet market. Originally, the American General Motors (GM) and the Japanese Hitachi companies possessed the patents for the neodymium-iron-boron (NdFeB) magnet. Thereafter, GM created the company Magnequench to produce these REE magnets. In 1995, two Chinese groups acquired the company based on the condition that for the next five years, jobs and technologies would remain in the US. However, the day after these conditions expired US-based operations were shut down and the entire business was repatriated to China. And so, changed the upper hand in the production of REE magnets. While in 1998, 90% of the world’s REE magnets were produced in the US, Europe, and Japan, nowadays China is the world leader in REE magnet production.
Once in quasi-monopolistic control of both the raw resource and the REE magnet production, China began to implement export restrictions – another instrument of economic statecraft – on its REE resources to force Western companies to delocalize their production and know-how to China. The use of quotas to stem the overseas flow of REE entailed Western companies to bring their operations to China to have unrestricted access to them. For instance, the carmakers BMW and Toyota delocalized parts of their activities to China to be able to produce batteries – which required REE magnets to function.
Even if the export quotas were eventually lifted in 2012, the harm had been done. Indeed, western industrials prioritized to delocalize their productions rather than risking to fall short of REE. For example, the world-leading low-energy lighting manufacturers, such as General Electric, Osram, Sylvania, and Cree, delocalized their factories to China over the last ten years. As Sam Jaffe, a green research analyst at Navigant Consulting, explains: “The primary reason many companies are in Asia has to do with material costs”. The same can be said about other green technologies. China is the first manufacturer of solar panels in the world, it is the first investor in wind-power worldwide, it is the first market for ‘green’ cars, and the first producer of green energies in the world in absolute terms.
While this analysis of China’s control of REE is far from exhaustive, it demonstrates the possible geopolitical power of such control on the resource of the 21st century. After all, while the market of REE only amounts to a couple of millions of dollars annually, the capturing of the REE supply chain has enabled China to transfer on its territory hundreds of billions of dollars worth of technological know-how, manufacturers, and industries which are central for the oncoming global green energy transition. After all, Baotou has been renamed by the Chinese “the Silicon Valley of rare earths”.
At a time when the world, and especially the EU, increasingly shifts from fossil fuels to renewable sources of energy, one might wonder about the geopolitical implications of this ongoing energetic transition. Keeping in mind that China is in a position of monopoly with regards to the production of REE and its adjoining green technologies, what are the implications for the EU? Is there a real risk of dependency? What are the possible solutions? These interrogations will be answered in the next articles of the series “The rise of a new geopolitical risk”.
What is the probability that the risk will materialize? 2/3
While the risk of becoming dependent on China and its REE-based industrial products, the third article of this series will propose different options to prevent this scenario from materializing.
What is the predicted size of impact? 3/3
Outstanding. This is notably due to the urgent need, worldwide and within the EU, to mitigate climate change by changing its energy supplies.
What is the expected speed of onset? 3/3
This is already happening and will amply over the next years and decades.
Will regional or non-regional actors be involved? 3/3
This is one does not exactly apply to the subject of this particular article. Still, because I will deal with China, and the European Union and European countries which are respectively regional actor(s), there will be some external involvement.
What is the probability of spill-over? 3/3
Due to the outstanding use of REE in the global economy, and as I will show in the second article, and the almost non-existent options to replace them
Featured Image Source: https://www.defenseone.com/ideas/2018/11/china-beating-us-rare-earths-game/152674/