Rare earths: the Chinese monopoly to make the economy tremble

In 1964, China discovered three weapons with which to shake the world. In the Lop Nor desert, in Xinjiang, the Chinese government successfully detonated an atomic bomb for the first time. In the printing houses of Beijing, the Party published the first edition of Mao's Little Red Book. A nuclear weapon and an ideological weapon. That year, however, Chinese geologists also discovered the most potent economic weapon that China currently possesses. Beneath the arid rocks of the Inner Mongolia desert lay the world's largest deposit of rare earths.

“The Middle East has oil; China has rare earths,” the Chinese leader Deng Xiaoping said years later. The phrase was prophetic. Rare earths are an essential material for manufacturing everything from automobiles to electronic devices, military equipment, and medical equipment, data centers, and industrial robots. And China has almost total control over them: 91% of refined rare earths come from the Asian superpower. Two large Chinese state-owned companies control almost all production. The vast majority of the machinery for processing rare earths is manufactured in China. The Communist Party has taken care to maintain strong control over this sector.

China has achieved this near monopoly on rare earths, partly thanks to the luck of its geography (it has 36% of the world's reserves). But the key to building this dominance has been the Chinese government's policies. In the eighties and nineties, China began to displace the United States as the main producer of rare earths thanks to more lax environmental and labor policies, and government support for the sector. It attracted large international companies to absorb technical knowledge. Little by little, it went from simply extracting minerals to manufacturing 94% of super-powerful permanent magnets, the most valuable component manufactured from rare earths. It now dominates industries such as electric vehicles or renewables.

But rare earths not only provide economic power, but also geopolitical power. Last year, in the midst of the trade war with the United States, China imposed export controls on these materials and managed to make Trump back down in his economic offensive. The International Energy Agency has calculated that, with its control over rare earths, China has the capacity to put $6.5 trillion of the world economy at risk, the equivalent of 10% of the GDP of the affected countries. The most exposed markets are the United States and the European Union; the most at-risk sector, the great engine of Europe: the automotive industry.

That China has used rare earths as a geopolitical weapon gives it a short-term pressure tool. But the EU and other countries are trying to diversify away from Beijing. Recycling rare earths or alternative innovations can help reduce dependencies. But the transition will be long. During these years, China will use its dominance in the sector both to defend itself from external coercion and to pressure for its interests.