Horizon Advisory - Absolute Competitive Advantage, June 2020

HORIZON ADVISORY

2020

ABSOLUTE COMPETITIVE ADVANTAGE

June 2020

Rare Earth Elements in China’s Strategic Planning

by

Actionable Geopolitical Insight

Emily de La Bruyère & Nathan Picarsic

HORIZON ADVISORY Horizon Advisory, an independent strategic consultancy, helps businesses, investors, and government actors understand and respond to geopolitical, economic, and technological change. Visit us at www.horizonadvisory.org to learn more.

Reach us at info@horizonadvisory.org.

Table of CONTENTS ABOUT HORIZON ADVISORY Executive Summary

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T he Middle East has Oi l

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A Long T ime Coming

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Conclusion

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HORIZON ADVISORY

ABOUT

HORIZON ADVISORY

Horizon Advisory brings a new approach and unparalleled sources and methods to understanding geopolitics. Horizon Advisory was formed with the mission of applying its key personnel’s expertise in analyzing Chinese strategy and implications for critical security and economic challenges. Decision-makers across sectors – national security leaders, stakeholders from the private sector, US partners and allies – face uncertainty associated with geopolitical, technological, and economic changes activated or impacted by China. Beijing wields new type powers in ways and for effects that traditional analysis risks misunderstanding.

Leveraging unprecedented primary sources, we apply updated strategic frameworks and novel analysis techniques to generate differentiated insights for clients including businesses and investors grappling with uncertainties.

Emily de La Bruyère Emily de La Bruyère is a co-founder of Horizon Advisory. She has led extensive China research programs and developed novel analysis tools and techniques. She received her BA summa cum laude from Princeton University and her MA summa cum laude from Sciences Po, Paris, where she was the Michel David-Weill Fellow. Her public commentaries have been published in The New York Times, Bloomberg, and the Wall Street Journal. Her expertise has been cited in sources ranging from Tech Crunch to Politico.

Recent Commentary: Testimony before the USChina Economic and Security Review Commission, 8 May 2020

REPORT ATUHORS

Nathan Picarsic Nate Picarsic is a co-founder of Horizon Advisory.

His research focuses on the development of competitive strategies and longitudinal trend analysis to monitor and benchmark competitive dynamics across sectors and domains. His expertise has been cited by sources ranging from The Wall Street Journal to Vice. He holds a BA from Harvard College and has completed executive education programs through Harvard Business School and the Defense Acquisition University.

Recent Commentary: The American Interest, 22 June 2020

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EXECUTIVE SUMMARY In 2010, Japan paid a tangible price for pushing back against China over the Senkaku Islands dispute. Beijing temporarily ceased exports of select, critical rare-earth elements to Tokyo.

Observers noticed corresponding restrictions on European Union and United States rare earths exports. They warned that, then or thereafter, the EU and US, too, might fall into the line of fire.1 Those concerns have not yet been validated. Beijing has not explicitly deployed rare earth restrictions for coercive effect since. But Beijing has, deliberately, strengthened its asymmetric market leverage in rare earths – as well as other critical raw materials.2 The United States has finally begun to recognize the risks associated with China’s rare earth and broader supply chain dominance. 3 It has failed to take serious steps effectively to reduce dependence on China’s rare earth supplies and industry chains – or to offset Beijing’s predatory pricing power. Chinese government, industry, and academic sources continue to express confidence in the Chinese Communist Party’s (CCP’s) dominance over rare earths and related industry, as well as in the coercive leverage that results. 4 Beijing also continues actively to hone its dominance, across global rare earths sources in China and globally as well as along the rare earths supply chain.

This report draws on authoritative government and academic sources from China to document two relevant, novel findings. First, Chinese sources discuss leveraging rare earth dominance against the United States for coercive ends. Beijing would do so as, or within the context of, an escalatory measure in response to geopolitical dispute. Statements from Chinese sources are explicit. Per a government-funded project on rare earth policy: China will not rule out using rare earth exports as leverage to deal with the [Trade War] situation.5 Second, this report identifies the scope and depth of China’s state planning in the rare earth industry. The People’s Republic of China (PRC) has focused on rare earths for as long as it has Keith Bradsher, “China is Said to Resume Shipping Rare Earth Minerals,” The New York Times, October 28, 2010, https://www.nytimes.com/2010/10/29/business/energy-environment/29rare.html.

2 Emily de La Bruyère, “Testimony before the US-China Economic and Security Review Commission: China’s Strategic Aims in Africa,” May 8, 2020, https://www.uscc.gov/sites/default/files/de_La_Bruyere_Testimony.pdf 3 For example, in December 2019 the US Army announced plans to fund construction of a rare earths processing facility for weapons development – a response to the Trump Administration’s order for the military to develop greater supply chain resilience in niche materials. (Ernest Scheyder, “Exclusive: US Army will fund rare earths plant for weapons development,” Reuters, December 11, 2019).

4 Though Chinese strategists have recognized the potential for concrete US action, and voice concerns about Washington’s “anti-globalization.” (Fan Hongda, Be Wary of "de-Chinese" Under Anti-Globalization (警惕反全球 化下的“去中国化”), Shanghai International Studies University, May 21, 2020.)

5 Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市场新格局与中国稀土产业战略选择), International Trade Issues, 2019.

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existed. Beijing’s first rare earths project and accompanying industrial plans date back to 1953.

Rare earths are a pillar priority across the landscape of China’s industrial plans, including the Strategic Emerging Industries Initiative, Made in China 2025, and China Standards 2035. Beijing has also developed a dedicated rare earths policy apparatus in order to ensure support for, control over, and consolidation in rare earth mining, processing, and key industrial applications.

Beijing’s rare earths ambitions extend internationally. The “Go Out” national plan, and corresponding Belt and Road Initiative, incentivize Chinese companies to invest in foreign rare earth reserves, extraction, and processing. Beijing positions not simply to be the dominant producer and consumer of rare earths, but also to use international presence to ensure absolute pricing power 6 – with it, coercive leverage. Beijing wants to extend its control upstream and downstream, across the industries and industrial processes built on and around rare earths.7 In rare earths – as in critical global resources more broadly – Beijing works to influence, external markets while protecting and controlling China’s own, domestic resources. Foreign markets come to depend on China. China remains, relatively, autonomous. This logic is codified in the CCP’s “Two Markets, Two Resources” strategic theory.8 First cited in official Chinese policy in 1981, Two Markets, Two Resources serves as a dominant framing for Beijing’s entire ecosystem of economic and security plans, including those focused on rare earths.9 Chinese sources frame dominance in rare earths as a strategic input in today’s great power contest.

Rare earths are supply-limited feedstock across modern industry. Their critical commercial and military applications make them directly relevant to Beijing’s “military-civil fusion” (军民融合) program. Beijing’s rare earths positioning fits within a broader global strategy that converts economic and technological integration into global power projection.

Both US commercial champions and the US defense industrial base need to understand the severity and nuance of China’s rare earths threat and respond. The United States needs to invest consistently to make its limited number of rare earths projects viable and ensure its ability to meet critical needs.

And the US should serve as a global leader in developing a consortium of allies and partners jointly to pursue trusted rare earths supply chains, from the point of extraction through downstream processing. US policy makers should also develop both defensive and offensive approaches to retaining escalation dominance, accounting for Beijing’s constant threat to deny or manipulate access to critical raw and refined inputs.

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See, for example, Zhou Ming and Liu Xiangling, Analysis of Chinese Rare Earth Production, Trade and Reserves ( 中国稀土生产、贸易与储备分析), Foreign Trade and Economics, 2017.

7 See, for example, Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市场新格局与中国稀土产业战略选择), International Trade Issues, 2019.

8 Emily de La Bruyère, “Testimony before the US-China Economic and Security Review Commission: China’s Strategic Aims in Africa,” May 8, 2020, https://www.uscc.gov/sites/default/files/de_La_Bruyere_Testimony.pdf.

9 See, for example, the Ministry of Industry and Information Technology’s Rare Earth Industry Development Plan (2016-2020), June 29, 2016.

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THE MIDDLE EAST HAS OIL At a press conference in June 2019, China’s National Development and Reform Commission (NDRC) played coy. Tensions with the United States were running high. A reporter asked if Beijing would consider cutting off rare earth exports. The NDRC pointedly did not say no: Regarding whether the rare earths you mentioned will become a countermeasure in SinoUS economic and trade friction, what I want to say is that the current global industrial chain is closely intertwined. There will be no development and progress without cooperation. …

However, mutual benefit and win-win outcomes require the sincerity of all parties. Certain countries ignore world trade rules and undermine the global industrial chain. We are firmly opposed to it. If anyone attempts to use the products made by China’s rare earths resources to contain and suppress China’s development, we will oppose it, firmly.10 A Chinese government-funded research project on rare earth policy is more explicit yet: “Amid the heated trade conflict between China and the United States, China will not rule out using rare earth exports as leverage to deal with the situation.”11 Chinese sources frame dominance in rare earths as a strategic input in today’s great power contest.

Rare earths are critical, supply-limited inputs across modern industry. As the chief analyst for Jingsu Media puts it, “the world is moving from the petroleum era to that of rare earths.”12 Yang Danhui of the Chinese Academy of Social Sciences explains that “as important raw inputs for advanced manufacturing, the high-tech industry, and the defense industry, rare earths are strategic resources for fierce international competition.” 13 He continues: Historically, the rise of great powers will inevitably be accompanied by the evolution in global supply and demand of mineral resources and the reconstruction of mineral product trade rules. With the rise of a new round of scientific, technological, and industrial revolution, the wrestling of major industrial countries in the fields of new economy and new industry will extend to the front end of the industrial chain. A fierce competition over rare earths will launch.14

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National Development and Reform Commission: to Play a Special Role of Rare Earth as a Strategic Resource (发 改委：要发挥好稀土作为战略资源的特殊价值), China News, June 17, 2019.

11 Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市场新格局与中国稀土产业战略选择), International Trade Issues, 2019.

12 Cai Enze. Protect China's Rare Earth Strategic Resources (守护好中国稀土这一战略资源), Shanghai Enterprise, 2019.

13 Yang Danhui, National Strategy for Resource Safety, Competition among Major Powers, and Development and Utilization of Rare Mineral Resources (资源安全、大国竞争与稀有矿产资源开发利用的国家战略), Study and Exploration, 2018.

14 Yang Danhui, National Strategy for Resource Safety, Competition among Major Powers, and Development and Utilization of Rare Mineral Resources (资源安全、大国竞争与稀有矿产资源开发利用的国家战略), Study and Exploration, 2018.

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China has a dominant position in rare earths. Deng Xiaoping famously declared, “The Middle East has oil and China has rare earths.”15 Per Cai Enze: China’s rare earths industry has many leading positions in the world. It has the greatest resource reserves, accounting for about 70 percent of the world’s. It has the greatest output, accounting for 80 to 90 percent of the world’s. It has the greatest sales volume, accounting for 60 to 70 percent of the rare earth products exported to foreign countries. Rare earth consumer countries such as the United States and Japan all rely on imports from China.

Americans even say with great jealousy, ‘China has such a wealth of rare resources that it is the equivalent of holding a money printing machine. This is really beautiful.16 Such dominance is in part the result of China’s natural endowments.

Distribution of Rare Earth Production in China

But it is also the product of careful, decades-old government policy and planning: dedicated efforts to protect and develop China’s rare earth’s resources, to capture those of other countries, and to dominate the upstream and downstream supply chain. Yang Danhui explains China’s rare earths goal in terms of “two strategic fulcrums.”17

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Cai Enze, Protect China's Rare Earth Strategic Resources (守护好中国稀土这一战略资源), Shanghai Enterprise, 2019.

16 Cai Enze, Protect China's Rare Earth Strategic Resources (守护好中国稀土这一战略资源), Shanghai Enterprise, 2019.

17 Yang Danhui, National Strategy for Resource Safety, Competition among Major Powers, and Development and Utilization of Rare Mineral Resources (资源安全、大国竞争与稀有矿产资源开发利用的国家战略), Study and Exploration, 2018.

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First, Beijing develops the “base” of rare earth production, at home and overseas. It works to secure dominance and control over rare earths reserves and their extraction – so that it can govern international trade rules and prices. Yang Danhui is explicit on the subject: Beijing is capturing “international supply chains for rare mineral resources, and gradually mastering the leading power of rare earth trade rules and international pricing.”

Second, Beijing positions to capture the industry chains above and below rare earths. It extends its leverage from the resources themselves up to the advanced, strategic industries built on the raw inputs – as well as down through the industries that permit their extraction and processing. Per Yang, China “continuously taps the application value of rare earth resources in advanced manufacturing and defense industries, extends the industrial value chain, and accelerates the development from China’s superior rare earth mineral resource advantage to industrial advantages and economic advantages.”

“In short,” he summarizes the overall strategy, “one of the two strategic fulcrums is the development of rare earths resources. The other is the strengthening of high-end applications of rare earths; the use of the rare earths national strategy to support the industrial strategy.”18

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Yang Danhui, National Strategy for Resource Safety, Competition among Major Powers, and Development and Utilization of Rare Mineral Resources (资源安全、大国竞争与稀有矿产资源开发利用的国家战略), Study and Exploration, 2018.

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A LONG TIME COMING The People’s Republic of China (PRC) has been focused on rare earths for as long as it has existed.

“Scientists and national leaders foresaw the importance of rare earths at the beginning of the founding of the PRC,” writes Huo Zhijie of Inner Mongolia Normal University.19 In 1953, under the guidance of national science and technology policy, the Chinese Academy of Sciences (CAS) and Ministry of Metallurgical Industry jointly launched the development of China’s first rare earth plant, the China Baotou Number One Steel Rare Earth Factory. That plant was completed in 1959.

Ten years later it would be assigned to Chinese State-owned champion Baosteel. “This marks the start of China’s rare earth industry,” declares Huo.20 “Even as the most economically difficult time hit in 1961,” she continues, referencing the withdrawal of Soviet assistance that year, Beijing continued to focus on rare earths. “A larger development plan was in the making.” In 1963, the PRC established the Baotou Metallurgical Research Institute to lead research into and production of rare earths. “China set off down the innovation road of a ‘rare earth power.’”21 In 1988, China’s output of rare earth products officially surpassed that of the United States.22 Throughout the 1990s, China exported its rare-earth products at low cost to, as Yang Danhui puts it, “meet the needs of US industry and national defense. US rare earth mining declined sharply.

Its rare earth output fell to zero in 2003.” The US became dependent on China’s rare earth production.23 China also moved in on key US players in the rare earths industrial chain: In 1995, a consortium of Chinese State-owned companies purchased a majority stake in Magnequench, 24 a General Motors subsidiary that had pioneered, and continued to dominate in, rare earth magnets. 25 In 19

Huo Zhijie, The Establishment and Early Development of My Country's First Rare Earth Production Plant (19531963) (我国第一个稀土生产工厂的创建及早期发展 1953-1963), Dialectics of Nature, 2019.

20 Huo Zhijie, The Establishment and Early Development of My Country's First Rare Earth Production Plant (19531963) (我国第一个稀土生产工厂的创建及早期发展 1953-1963), Dialectics of Nature, 2019.

21 Huo Zhijie, The Establishment and Early Development of My Country's First Rare Earth Production Plant (19531963) (我国第一个稀土生产工厂的创建及早期发展 1953-1963), Dialectics of Nature, 2019.

22 Wang Denghong. Research Significance of Key Minerals, Determination of Mineral Types, Resource Attributes, Prospecting Progress, Existing Problems and Main Direction of Attack (关键矿产的研究意义、矿种厘定、资源 属性、找矿进展、存在问题及主攻方向), Acta Geologica Sinica, 2019.

23 Yang Danhui, National Strategy for Resource Safety, Competition among Major Powers, and Development and Utilization of Rare Mineral Resources (资源安全、大国竞争与稀有矿产资源开发利用的国家战略), Study and Exploration, 2018.

24 Zhang Hong, son-in-law of Deng Xiaoping, took over as the company’s chairman. (John Tkacik, “Magnequench: CFIUS and China’s Third for US Defense Technology,” The Heritage Foundation, May 2, 2008.)

25 Neodymium magnets are necessary for everything from precision guided missiles to advanced computer data storage. Magnequench supplied some 80 percent of neodymium and rare-earth oxide powders used in neodymium magnets globally. It also produced some 85 percent of the neodymium magnets used in US precision-guided missiles. (John Tkacik, “Magnequench: CFIUS and China’s Third for US Defense Technology,” The Heritage Foundation, May 2, 2008.)

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September 2001, Magnequench’s US production lines were shut down. Two years later it transferred its research operation to Asia.26 But the early 2000s saw development of novel rare earths mining and processing technologies as well as discovery of new rare earths sources. Global prices began to drop. Beijing’s absolute dominance began to shrink. Concerned at these trends, and corresponding decreases in influence over international markets, Beijing set about strengthening its rare earths control, at home and abroad.

In 2006, Beijing implemented export quotas and controls over rare earths. In 2007, Beijing’s Ministry of Land and Resources heightened its regulation of rare earth output.27 In 2008, Beijing began integrating and consolidating its rare earth industry. In 2009, the Ministry of Industry and Information Technology (MIIT) launched development of the Special Plan for the Development of the Rare Earth Industry and the Policy for the Development of the Rare Earth Industry.28 MIIT also joined with the Ministry of Commerce in strengthening China’s export management system for rare earths “The quota allocation method,” explains Cai Enze, “controls China’s rare earth exports and prevents the loss of resources.”29 In 2010, Beijing explicitly used its dominance over global rare earth supply for the first time.

During a diplomatic standoff with Japan over the Senkaku Islands dispute,30 Beijing temporarily cut off rare earth exports to Japan. China showed the world its potential coercive leverage. At home, it continued consolidating industrial control.

Over the subsequent decade, Beijing launched a series of high-profile, national-level industrial plans: The Strategic Emerging Industries Initiative in 2011, Made in China 2025 in 2015, and, forthcoming in 2020, China Standards 2035. Every one of those plans treats rare earths as a critical pillar – in their own right, and in support of the strategic industries built on top of them. Wang Denghong of the Chinese Academy of Geological Sciences notes that rare earths “play a key role in seven strategic emerging industries,” including new generation information technology, highend equipment manufacturing, new materials, biology, new energy vehicles, new energy, energy conservation, and environmental protection.31

John Tkacik, “Magnequench: CFIUS and China’s Third for US Defense Technology,” The Heritage Foundation, May 2, 2008 27 Wang Denghong. Discussion on Strategic Key Mineral Related Issues (战略性关键矿产相关问题探讨), Chemical Mineral Geology, 2019.

28 Wang Denghong. Discussion on Strategic Key Mineral Related Issues (战略性关键矿产相关问题探讨), Chemical Mineral Geology, 2019.

29 Cai Enze, Protect China's Rare Earth Strategic Resources (守护好中国稀土这一战略资源), Shanghai Enterprise, 2019.

30 Keith Bradsher, “Amid Tension, China Blocks Vital Exports to Japan,” The New York Times, September 23, 2010, https://www.nytimes.com/2010/09/23/business/global/23rare.html.

31 Wang Denghong. Discussion on Strategic Key Mineral Related Issues (战略性关键矿产相关问题探讨), Chemical Mineral Geology, 2019.

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Alongside those overarching plans, Beijing has also developed parallel policies focused directly on rare earths. On May 10, 2011, the State Council issued “Several Opinions on Promoting the Sustainable and Healthy Development of the Rare Earth Industry.”32 The opinions laid out a plan to establish a standardized program for, and monitoring system of, the rare earths industry in China.

They also required the establishment of a rare earth strategic reserve system.33 The State Council explained that China’s rare earth strategic system “includes a combination of national reserves and enterprise (commercial) reserves.”34 In 2012, Beijing launched the Measures for the Management of Special Funds for the Adjustment and Upgrade of the Rare Earth Industry.35 The measures instituted a special fund to support rare earth resource mining, and processing, as well as research and development, standard promotion, industrialization of new technologies, and construction of public technical service platforms. The fund is jointly organized by Ministry of Finance and Ministry of Industry and Information Technology. The first allocates the funds and the second determines strategic priorities. 36 Consistent with and to provide further policy context on this expanded set of activities, the State Council Information Office published a white paper on "China's Rare Earth Conditions and Policies" in 2012.37 China’s wave of export controls – and their aggressive application in the Senkaku dispute -prompted the US, Japan, and the European Union jointly to launch a World Trade Organization case against China for trade blockade in 2012.38 “This just showed the importance of rare earths resources,” writes Cai Enze. “China is engaged in the integration and control of rare earth resources and in the right way. It is an issue of national strategic interests.”39 Beijing lost the case and its appeal of the case. The WTO ruling obligated China to cancel its rare earths export quotas.40 Ostensibly, Beijing did so.41 But it replaced those quotas with consolidated State control of the rare earths industry that allowed Beijing, quotas or not, to retain influence over A translation of this State Council guidance – along with several other foundational documents – is included in the Appendix of this report.

33 Zhou Ming and Liu Xiangling, Analysis of Chinese Rare Earth Production, Trade and Reserves (中国稀土生产、 贸易与储备分析), Foreign Trade and Economics, 2017.

34 Zhou Ming and Liu Xiangling, Analysis of Chinese Rare Earth Production, Trade and Reserves (中国稀土生产、 贸易与储备分析), Foreign Trade and Economics, 2017.

35 A full text translation is provided in the Appendix of this report.

36 Wang Denghong. Discussion on Strategic Key Mineral Related Issues (战略性关键矿产相关问题探讨), Chemical Mineral Geology, 2019.

37 A full text translation is provided in the Appendix of this report.

38 “EU, US, Japan Launch Rare Earth WTO Case against China,” Reuters, March 3, 2012, https://www.reuters.com/article/china-trade-eu/eu-us-japan-launch-rare-earth-wto-case-against-chinaidUSB5E8DS01T20120313.

39 Cai Enze, Protect China's Rare Earth Strategic Resources (守护好中国稀土这一战略资源), Shanghai Enterprise, 2019.

40 China loses appeal of WTO ruling on exports of rare earths, Reuters, August 7, 2014.

41 Though the National Development and Reform Commission announced in June 2019 that it was considering reimplementing export controls. (China Stokes Rare Earths Concerns with Possible Export Controls, Bloomberg News, June 4, 2019.)

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production and trade, including through tightly policed annual production ceilings. 42 In 2015, Beijing began re-organizing its rare earths apparatus accordingly. The PRC integrated the rare earth industry according to the Guiding Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening the Reform of State-owned Enterprises (2015), increasing state-owned control of the strategic resources. 43 The Ministry of Commerce’s 2019 Catalogue of Export License Management Goods clearly stipulates that special licenses are required for the export of all rare earths from China.44 Horizontally, Beijing consolidated around six major rare earths enterprises: State-owned Chinalco, North Rare Earth, Xiamen Tungsten, China Minmetals, Guangdong Rare Earth, and South Rare Earth Group. By the end of 2015, those six State-owned companies had merged 77 of the country’s 99 rare earths companies. “This curbed the losses of cheap exports of strategic resources and reduced the oversaturated market supply and disorderly competition among Chinese rare earth companies,” writes the government-funded project on rare earth policy.45 As of 2016, only those six companies are eligible to be awarded rare earths mining rights.46 Vertically, Beijing directed its champions to capture both upstream resources and downstream applications. “Taking Northern Rare Earth (also known as Baosteel Rare Earth) as an example, Baosteel owns rare earth resources and iron ore resources and is responsible for integrating Northern Rare Earth and transforming it into a resource-based enterprise. China North Rare Earth High-Tech Co., Ltd focuses on rare earth applications, technology development, and mergers with small businesses. Baosteel Co., Ltd is located in the national strategic resource area…Northern Rare Earth Technology Co., Ltd focuses on commercial application.”47 All of China’s rare earths policy moves came with, and continue to come with, significant subsidization and special tax treatment.48 Research on the Inner Mongolia Autonomous Region – China’s main source of rare earths – found, based on provincial data, that the industry’s profit in the region in 2015 was less than 1.2 billion RMB, while state-funded subsidies exceeded 1 billion

Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市场新格局与中国稀土产业战略选择), International Trade Issues, 2019.

43 Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市场新格局与中国稀土产业战略选择), International Trade Issues, 2019.

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2019 Export License Management Goods Catalog (2019 年出口许可证管理货物目录), China Ministry of Customs, 2018.

45 Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市场新格局与中国稀土产业战略选择), International Trade Issues, 2019.

46 Ministry of Industry and Information Technology, Rare Earth Industry Development Plan (2016-2020), June 29, 2016.

47 Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市场新格局与中国稀土产业战略选择), International Trade Issues, 2019.

48 See, for example, the State Administration of Taxation on the Issues Concerning the Management of Chinese Character Anti-counterfeiting Projects for Invoices Issued by Rare Earth Enterprises in the Value-added Tax Anticounterfeiting Tax Control System (State Administration of Taxation Announcement No. 17 of 2012) Effective June 1, 2019.

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RMB.49 In the next three years, from 2016 until 2018, “the State’s supporting funds have provided about 4 billion RMB ….In this way, the accounting costs of rare-earth raw materials for enterprises can be offset.”50 “The good news,” writes Cai Enze in 2020, “is that the integration of the rare earth industry, which began in 2008, is now beginning to bear fruit … The price of rare earths has increased significantly.”51 In 2016, Premier Wen Jiabao chaired an executive meeting of the State Council to study and deploy policies and measures to promote the rare earth industry. The result was the Rare Earth Industry Development Plan (2016-2020) issued by MIIT in June 2016.52 “The strategic position of rare earths is more prominent,” reads that plan. “The major industrialized countries attach great importance to the strategic value of rare earths and the development and application of related fields.” Moreover, the 2015 launch of Made in China 2025 had “injected new momentum into the development of the rare earth industry.” Correspondingly, MIIT’s plan laid out a program to continue consolidating China’s rare earth industry, “strengthen the protection of rare earth strategic resources, standardize rare earth mining, expand development of rare earth high-end applications, and give full play to the strategic value and supporting role of rare earths.”53 The plan stipulated that the annual output of rare earths would not exceed 140,000 tons.54 The plan also called for the strengthening of “rare earth international cooperation.” Beijing would “promote rare earth enterprises to Go Out and cooperate in the development of overseas resources and deep processing of products.” Beijing would also “encourage rare earth companies to cooperate with overseas new material companies and technology research and development institutions.” In doing so, Beijing would internationalize its rare earth standards and create a new value chain.55 Those efforts point to the international thrust of Beijing’s rare earths strategy. While working to develop and control its rare earths industry at home, Beijing has also sought to expand its rare earths presence globally. “For China, the world’s largest producer of rare earths,” reads a 2016 Belt and Road research report, “the discovery of major rare earths mines outside China will undoubtedly have a profound impact on the future development of the rare earth industry. Simply In 2015, that region accounted for almost 68 percent of China’s rare earths production. (Gao Fengping et al., New Pattern of International Rare Earth Market Share and Strategic Choice of China’s Rare Earth Industry (国际稀土市 场新格局与中国稀土产业战略选择), International Trade Issues, 2019.)

50 Yang Zhencai et al., China Strategic Resources Import and Export Analysis (中国战略资源进出口分析), Fortune Times, 2020.

51 Cai Enze, Protect China's Rare Earth Strategic Resources (守护好中国稀土这一战略资源), Shanghai Enterprise, 2019.

52 A full text translation is provided in the Appendix of this report.

53 Ministry of Industry and Information Technology, Rare Earth Industry Development Plan (2016-2020), June 29, 2016.

54 Ministry of Industry and Information Technology, Rare Earth Industry Development Plan (2016-2020), June 29, 2016.

55 Ministry of Industry and Information Technology, Rare Earth Industry Development Plan (2016-2020), June 29, 2016.

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relying on China’s domestic rare earth mining is unrealistic. It is critical for Chinese companies to Go Out and seek rare earth resources.”56 Chinese Assessment of Global Rare Earth, Tungsten, and Aluminum Deposits

That report cites a 51 percent stake in an Australian mining company secured by East China Nonferrous Geological Prospecting Bureau in April 2011; Ganzhou Qiandong Rare Earth Group Co., Ltd’s August 2011 investment in South Africa’s extraction production line project; Baosteel’s negotiations in May 2012 to purchase and mine rare earths in Kazakhstan. “It can be seen that under the dual pressure of increasingly strict national production and export control of rare earths – and the gradual decrease of domestic resources – the strategic thinking of Chinese rare earth enterprises to Go Out has gradually formed,” explains that Belt and Road project.57 The project also explains that investment in overseas mines and mining rights is just the first half of the rare earths Go Out approach. The second is “to export leading rare earth extraction technologies.”58 The author cites Ganzhou Qiandong Rare Earth’s export of refining technology to South Africa.

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Wang Yuan and Mo Xiujie. The Impact of China's Rare Earth Industry "Going Global" Development Strategy on My Country's Rare Earth Trade (中国稀土产业“走出去”发展战略对我国稀土贸易的影响), Inner Mongolia Coal Economy, 2016.

57 Wang Yuan and Mo Xiujie. The Impact of China's Rare Earth Industry "Going Global" Development Strategy on My Country's Rare Earth Trade (中国稀土产业“走出去”发展战略对我国稀土贸易的影响), Inner Mongolia Coal Economy, 2016.

58 Wang Yuan and Mo Xiujie. The Impact of China's Rare Earth Industry "Going Global" Development Strategy on My Country's Rare Earth Trade (中国稀土产业“走出去”发展战略对我国稀土贸易的影响), Inner Mongolia Coal Economy, 2016.

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And he explains that the overall result of these two prongs is international market control: Encouraging rare earth companies to “Go Out” and mine not only reduces the burden of rare earth supply in China, but also obtains overseas investment rights by exporting more advanced rare earth processing technologies, allowing China to have a certain degree of control over rare earth minerals outside of China, and enhancing its control over global rare earth pricing.59 Zhu Mingyue, et al. of the Shanghai Rare Earth Association echoe the point: “Chinese rare earth enterprises shall actively establish economic and trade cooperation relationships with countries along the course of the Belt and Road, and further expand cooperation concerning the selection and marketing, as well as scientific and technological innovation, of functional materials made from rare earths.”60 They continue: “As an important resource, the rare earth industry is of special significance to China. Its particularity lies in China’s absolute competitive advantage in the upstream and middle of the rare earth value chain.”61

59

Wang Yuan and Mo Xiujie. The Impact of China's Rare Earth Industry "Going Global" Development Strategy on My Country's Rare Earth Trade (中国稀土产业“走出去”发展战略对我国稀土贸易的影响), Inner Mongolia Coal Economy, 2016.

60 Zhu Mingyue et al., “’Belt and Road’ Initiative and Development of Rare Earth Industry,” Journal of Shanghai Normal University, 2019.

61 Zhu Mingyue et al., “’Belt and Road’ Initiative and Development of Rare Earth Industry,” Journal of Shanghai Normal University, 2019.

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CONCLUSION Japan in 2010 was no accident. The CCP sees its rare earths dominance as a means of escalation dominance in trade wars with the United States. The military applications of rare earth inputs assign economic leverage kinetic implications. China’s rare earths planning fits within the larger strategic umbrella of military-civil fusion (军民融合). And Beijing defines its rare earths approach according to the longstanding Two Markets, Two Resources strategic orientation: The open, global system – and its resources – are to be penetrated while China’s market and resources are protected.

Rare earth elements are critical, limited supply inputs with applications spanning new and emerging technological domains. The US needs to define its vision for resolving immediate supply vulnerabilities and pursue it with conviction. Allies, partners, and private sector actors will need to be marshaled: China’s rare earths positioning both implicates and threatens the entire global system. The current geopolitical moment provides an opportunity for Washington to take the lead and initiate collective action.

Any US effort would be well served by seizing a global leadership role in developing a consortium of allies and partners jointly to pursue trusted rare earths supply chains, from the point of extraction through downstream processing and industrial applications. US policy makers should also develop both defensive and offensive approaches to retaining escalation dominance – spanning diplomatic, military, and economic measures – accounting for Beijing’s constant threat to deny or manipulate US access to critical raw and refined inputs.

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Actionable Geopolitical Insight

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