In a report published this month by the Council on Foreign Relations, LBJ Professor and Strauss Center Distinguished Scholar Eugene Gholz analyzes the case of China and Rare Earth Elements (REEs) and identifies lessons for policymakers in instances of raw materials imports. In his report, Rare Earth Elements and National Security, Gholz explains that while Chinese dominance in production of REEs should serve as an example of a “most-dangerous case,” the risk to global markets and national security posed by alleged Chinese dominance is far lower than many fear.

First, Gholz explains what REEs are, how they are produced, and where. He highlights that China “produced 97 percent of the world’s REEs” by the early 2000s, to the consternation of Australia, Japan, the U.S., and other nations. Gholz examines China’s alleged embargo against Japan in the wake of the Japanese capture of a Chinese fishing trawler to determine if these fears of Chinese market power are founded. However, rather than demonstrate China’s market power, the case instead exposes its limits and illustrates China’s inability to impose high costs on supply chains.

Gholz argues that the case of China’s alleged REE market power is limited by three constraints: increases in non-Chinese REE supplies, administrative difficulties in maintaining such an embargo, and real-time adjustments in the market. Given their use in products ranging from cellular phones to hybrid electric vehicles, many countries and companies had planned investments in REEs. Furthermore, officials in Beijing had a hard time constraining Chinese exporters who were driven by profit motives. Gholz predicts these difficulties in exploiting market power will continue as additional production from Molycorp in the U.S. and Lynas in Australia will alleviate supply constraints and reduce dependency on China and processing capabilities developed outside of China will further reduce their market power.

Furthermore, Gholz points to the “continuation of U.S., European, and Japanese technological leadership” to counter fears of Chinese technical dominance. Gholz also points to pragmatic policy responses, including the U.S. government’s support for basic and applied research to reduce REEs in green energy products, as further evidence that market dynamics for REEs are and will continue to shift. The report, noted in Foreign Policy’s Situation Report and covered in the Financial Times, ultimately concludes that despite perceived and potential vulnerabilities, China’s grip on the REE market is likely to diminish.

Gholz’s report has been picked up by a number of media outlets, a list of which is found below:

• Ed Crooks, “China’s grip over rare earther market wanes,” Financial Times, 20 October 2014
• David Francis and Nathaniel Sobel, “Situation Report,” Foreign Policy, 22 October 2014
• Brad Plumer, “China no longer has a stranglehold on the world’s supply of rare earth metals,” Vox, 22 October 2014
• Sam Reynolds,”Report Shows China’s Dominance of Rare Earth Market Subsiding,” VR World, 23 October 2014
• Mark Strauss,”How China’s “Rare Earth” Weapon Went From Boom To Bust,” io9, 3 November 2014