NCPA - National Center for Policy Analysis

The Defense Implications of Rare Earth Shortages

August 2, 2012

Rare earth elements are essential in a number of products crucial to the operations of the U.S. military. Indeed, rare earth phosphors, metals, alloys and magnets are regularly used in laser designators, jet aircraft engines and missiles, to name a few applications, says Jeffery A. Green, the founder of the Strategic Material Advisory Council and an adjunct scholar with the National Center for Policy Analysis.

For the supply of these resources, the Department of Defense (DOD) said in recent statements that it will rely upon international markets. However, rare earth elements are just that -- rare -- and the world's limited supply is concentrated in a country that is solidifying its reputation as a trade manipulator.

  • The Chinese central government has offered direct support to the rare earth elements industry since the 1980s, allowing it to come to dominate global production.
  • China produces more than 94 percent of the world's rare earth oxides, virtually 100 percent of all commercially available rare earth metals, and more than 90 percent of the rare earth alloys.
  • China manufactures approximately 75 percent of the world's samarium-cobalt magnets and 60 percent of the neo magnets -- crucial tools for DOD production needs.

While relying upon Chinese manufacturers to meet demand (the United States has almost no domestic production in this market anymore) may not be an inherently bad idea, Chinese trade practices lend little reliability to this supply line.

  • China has leveraged its quasi-monopoly to extract rents from the market by manipulating production and export quotas.
  • In 2002, the export quota for rare earth oxide-equivalents was 40,000 metric tons for domestic Chinese companies, and there was no quota for joint ventures with foreign companies.
  • Since 2002, the quota has declined to 22,712 metric tons annually for domestic Chinese companies and 7,472 metric tons for joint ventures.
  • China also imposes substantial duties on the exportation of these resources.

The resulting volatility in prices, unavailability and two-tiered pricing structure (for exports versus domestic consumption) cast doubt upon the ability of today's supply chain to fulfill U.S. commercial or military requirements.

Furthermore, while appeals to the World Trade Organization could bring some relief to this blatant market manipulation, such a resolution would not be reached for some time. Thus, authorities over DOD supplies will need to be proactive in seeking alternative sources.

Source: Jeffery A. Green, "The Defense Implications of Rare Earth Shortages," National Center for Policy Analysis, August 2, 2012.

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