Trump Strikes a Good Rare-Earth Deal
The cooperation with Australia shows the value of allies to unite to counter Chinese mercantilism.
China is using its dominance in rare-earth mineral production as a political and economic weapon, and the U.S. needs alternatives. President Trump took an important step to getting them this week with an agreement with Australian Prime Minister Anthony Albanese to increase cooperation on mining and production. See how trade allies can be useful, Mr. President?
Beijing has spent decades building its dominance in rare-earth production, with the goal of increasing its military and economic leverage against the West. During a 2010 confrontation with Japan over the Senkaku Islands, Beijing restricted rare-earth exports. This month China escalated, saying it will now require manufacturers worldwide to get its permission to export goods that use even trace amounts of Chinese rare earths. This includes electronics, computer chips, defense equipment, autos, medical devices and more.
China mines about 70%, and refines 90%, of the world’s rare earths. Beijing has achieved this dominance by heavily subsidizing its rare-earth industry. This includes purchases of mines in developing countries as part of its Belt and Road initiative.
Chinese companies spent $22 billion last year acquiring overseas mines, often outbidding Western competitors. China’s lax environmental standards mean it can process rare earths at lower cost and larger scale than Western countries that have rules against dumping hazardous byproducts.
Refining rare earths requires 22 times more water and energy than mining the ore. By flooding global markets with low-priced rare earths, China has made it difficult for producers in developed countries to compete. Given China’s stranglehold and the high national-security stakes, this is a (rare) example when U.S. government support may be needed to develop alternative sources.
Enter Australia, which is a natural partner with the U.S. as the world’s fourth largest rare-earth producer. (The U.S. is second and Myanmar third). Australia was also the world’s top destination for rare-earth exploration last year and accounted for about 45% of global investment, according to the Center for Strategic and International Studies. Oz hosts 89 active rare earth exploration projects, compared to 12 in the U.S.
The U.S. and Australian governments on Monday announced several joint rare-earth investments. Alcoa and Sojitz Corporation will develop a gallium plant in Western Australia with the backing of the Japanese, Australian and U.S. governments. The U.S. Export-Import Bank will provide $2.2 billion to boost mineral supply chains in Australia.
Another goal of the deal is to create more pricing certainty for producers to encourage more investment. The deal floats an alternative system for free-trading countries that agree to minimum environmental standards. Price floors would help producers recoup their investment, which often takes 30 to 40 years.
Price intervention is dangerous in any private market because it gives politicians a chance to meddle. But a price floor to encourage production is better than the price cap that politicians usually want. The trick will be ending the price interference once more abundant rare-earth supply comes on stream. The U.S. and Australia also plan to use diplomatic tools to deter more foreign mine sales to China, as Washington has sought to do for other Belt and Road projects.
Chinese mercantilism poses a unique threat to the West, and one way to counter its predatory behavior is to join with free-market democracies to oppose it. This is one reason Mr. Trump’s tariffs on allies are so counterproductive. The Aussie rare-earth deal is one example of the better way to go.
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