Beijing and Moscow could retaliate against the West by creating a rare earth metals cartel that would deprive certain industries of critically necessary materials.
Members of a Chinese honor guard prepare for a welcome ceremony for Russian Prime Minister Dmitry Medvedev held at the Great Hall of the People in Beijing on December 17, 2015. Photo: AP
Russia and China are two very different countries, yet they might be united in their commitment to depose the U.S. from the post of world superpower. The Russian military is flexing its muscles from the North Atlantic to the Middle East, while China seems to oppose U.S. foreign policy to a greater extent. As confrontation in the Pacific becomes a more realistic scenario, the question emerges: How can the Russians and Chinese hurt the U.S. by means of economic warfare?
Seemingly, the answer appears to be unsatisfactory for both Moscow and Beijing: the U.S. is not dependent on trade with Russia, while China could suffer much more from the disruption of its exports. The oil and gas market is favorable to the U.S. and there is enough domestic production in case some 1973-style embargo takes place. So is there any way for the Russians and Chinese to hurt the U.S. economy hard? Surprisingly, there is a way.
The U.S. remains highly dependent on the import of rare earth metals, just like any other developed economy. China and Russia together could form a powerful cartel, which would control the lion’s share of the world market and manipulate it to achieve their respective foreign policy goals.
Rare earth metals: Why developed countries need them
Seventeen specific chemical elements (including scandium and yttrium) are critical for all sophisticated industries: from manufacturing of high-tech products and the energy sector to healthcare and the military.
Growing market demand for rare earth metals have made them irreplaceable in key sectors of the economy. The U.S. Armed Forces are particularly affected by supply of rare earth metals, because of their emphasis on technological superiority.
The following aspects of the U.S. warfare are dependent on a continuing supply of these minerals: guidance and control systems (this list includes Tomahawk missiles, smart bombs, and Predator drones), laser technology (laser weapons and the laser targeting on the ground and in the air), electronic means of defense (jamming devices, metal-hydride batteries, acoustic weapons, advanced means of antiaircraft defense), electric motors, communication tools (radar, sonar transducers, advanced sensors that determine the level of radiation, a multi-purpose system determining the level of chemical contamination).
One of the latest U.S. Navy projects, the electro-magnetic gun, also depends on the supply of rare earth metals. It is also worth mentioning that the most sophisticated defense systems of U.S. allies, such as Israel’s “Iron Dome,” also cannot be built without rare earth materials.
Most of the U.S. Army’s rare earth elements come from a few countries, most notably China. Its heavy reliance on China in this area is expected to fall by 2025. However, there is still not much the U.S. can do about it, since production of rare earth metals inside the U.S. remains small by Chinese measures due to environmental concerns.
The case for creating a cartel
China accounts for 86 percent of all rare earth metal production on the planet, which seemingly gives it a monopoly. However, its dominance is not quite complete.
Most of the needed rare earth metals can be found in deposits of bastnasite and monazite. The former ones can be found in great quantity only in the United States and China, but the latter is scattered relatively well around the world. China has formidable deposits of bastnasite and monazite – about 55 million tons, which is almost 48 percent of the world’s reserves.
17 percent (or 19 million tons) can be found across the post-Soviet space, with most of the deposits in Russia and Kyrgyzstan. The U.S. has 13 million tons – 11 percent of the world’s share. After the U.S. there is no single country with deposits comprising more than 3 percent of the world’s share.
An incident that took place in 2010 has shown that it is relatively easy to bypass the Chinese monopoly. In 2010 China stopped shipments of rare earth metals to Japan after an incident with the arrest of the captain of a Chinese fishing boat by Japanese authorities in the area around the disputed Senkaku islands.
It was expected that this embargo would disrupt the work of Japanese industry, but eventually it had little effect for the Japanese economy because Japanese companies quickly established an agreement with Australian rare earth metal suppliers, whose reserves in the Mount Weld mine were sufficient to cover Japanese demand.
Moreover, as a result, investments in production of rare earth metals outside China have increased rapidly in the 2010-2011 period (most notably, in Australia, Malaysia and India) and in the course of a few years, the world price for these minerals collapsed by 60 percent.
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Standing alone, China cannot take advantage of its rare earth reserves, because of the availability of other market players, such as Australia, India and Malaysia, which allows rivals to avoid China. Therefore, it is quite expected that Beijing will eventually seek opportunities to form a coalition with other major suppliers, so it could manipulate the costs with greater effect and to its own benefit.
In a situation like this, China might be inclined towards the formation of an international cartel, where it would be able to use its monopoly more effectively. One of the major partners for this cartel could be Russia.
It is worth remembering that Russia already has successful experience of causing huge market shocks by halting the supply of rare earth materials. Being one of the principal suppliers of palladium, in 1997 Russia stopped shipments of this metal. This action caused world prices to increase almost threefold.
Taking into account the considerable deposits of rare minerals in Russia and neighboring states in Central Asia, the idea of initiating the formation of such a cartel along with China looks more than promising. The fact that China has an overwhelming superiority in deposits ownership and production does not mean that Russia can’t show initiative, as the BRICS example has shown.
Of all economies from this bloc, Russia never was the major one, but nevertheless it took the lead on the initial stages of the formation of BRICS (Brazil, Russia, India, China and the South Africa) in its first years.
From 2006-2008, Russian Foreign Minister Sergey Lavrov arranged a number of intergovernmental meetings and before the accession of South Africa, Russia seemed to be an informal leader of the bloc. The BRICS example shows that the Kremlin does not usually seek a permanent leading role – as long as needed institutions and concepts are realized, it could resort to a behind-the-scenes role.
Possible partners for a Russia-China cartel
There can be little doubt that Russia and China can succeed in persuading the states of Central Asia to join a potential cartel: Russia’s overwhelming political influence in the region and the rapidly growing Chinese economic presence will ensure the cooperation of local ruling regimes since these states lack other major economic and political partners.
As the result, such a cartel will gain control over roughly 65 percent of the world’s known reserves, which may be a good start for bargaining later.
Of course, this cartel will be looking for new members because development of earth surveying methodology will help to find new deposits all around the world – just as China’s rare earth metal reserves in 1996 were considered to be just two-thirds of its current value.
India and Australia, with their formidable deposits, look like perfect partners for this cartel, but it’s obvious that membership in such an organization would require particular political affiliations rather than pure economic interests.
South Africa and Brazil might find this option particularly attractive if their foreign policy diverge from that of the United States – the former country is showing more and more willingness to cooperate with Russia and China in economic and political issues, while Brazil is highly likely to pursue regional hegemony in South America. In fact, membership in the proposed cartel would strengthen Brazil’s existing bargaining position: its Araza mine, which produces 85 percent of niobium in the world, was listed by U.S. diplomats as infrastructure of critical importance.
The growing need for renewables and green technologies will strengthen the bargaining position of cartel members in the long term, because there is no substitute for rare earth minerals in this area yet.
If this experience will be a success, then it will have the necessary potential to evolve into a bigger cartel, which will concentrate on raw materials, which are crucial for any developed industrial economy.
China and Russia will be on board again because of advanced production of these resources at home (for example, Russia has 27 percent of all platinum group metals in the world), with the perspectives of joining for Kazakhstan (20 percent of chromium), Democratic Republic of Congo (56 percent of cobalt), South Africa (43 percent of chromium and 61 percent of platinum) and Brazil (92 percent of niobium).
Turkey could also join (38 percent of borates), but because of current tensions with Russia, the coexistence of these two countries in one politically sensitive cartel is not very likely. Market dynamics favors members of a future “Critical Raw Materials” cartel over the long term: by 2050, demand for cobalt, tungsten and lithium is expected to outpace current reserves.
It is important to bear in mind that the merger of China and Russia in a cartel could be only a start for both countries, as they will look to expand their reach by incorporating new members or acquiring mines elsewhere – they will need to ensure that developed economies won’t be able to bypass their monopoly easily by buying rare earth metals elsewhere.
While attempts to create such a cartel did not provide much of a political incentive for great powers to do so – today China and Russia have enough reasons to use rare earth metals in their foreign policy.
Prospects of the rare earth metals cartel
Difficulties facing cartel members are serious enough, and if exploited, they could force it to collapse. There would be difficulties enforcing rules of a blockade among cartel members, ensuring control over a substantial share of the world market and being able to sustain a blockade mode for long enough to achieve desired results.
However, there are arguments for strengthening the bargaining position of the cartel. If demand for these resources will grow along with economic projections, expected supply should be 5-10 times higher than now.
Use of military force against major cartel members as a punitive measure is highly unlikely: There was no invasion of the Gulf countries in the 1970s at a time when they did not present a serious military threat to the U.S. or any other developed country. Russia and China do not pose a challenge to U.S. military might, but unlike Gulf states, they have developed serious armed forces, ranking after the U.S. in the list of the world’s top armies.
Taking into account the reliance of the U.S. military forces on rare earth metals, a joint Sino-Russian cartel would have additional advantage in any potential dispute. And, unlike oil-exporting countries, exporters of rare earth metals won’t suffer substantial losses: Trade in rare earth metals is very low, something on the order of $4 billion a year – but there are industries in the developed world that rely on a steady supply and together they are worth about $4 trillion. That presents an opportunity for economic leverage in today’s interconnected global economy.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.