China’s Strategic Control Over Critical Rare Earth Elements
In the escalating tech rivalry between the United States and China, Beijing holds a commanding advantage in rare earth elements—a group of 17 critical minerals essential for manufacturing semiconductors, AI chips, industrial magnets, and solar panels. China currently produces 60% of the world’s rare earth mineral supply and controls an overwhelming 90% of global refined output, giving it unprecedented leverage in the ongoing trade war.
Since December 2023, China has systematically tightened its grip on this critical sector. Beijing banned the export of rare earth processing technologies and, in recent months, implemented mandatory tracking requirements for exporters to monitor how these minerals flow through global supply chains. Under new regulations, China’s rare earth resources now officially belong to the state, with two Canadian-owned refineries being acquired by state-owned companies.
Impact on AI Chip Manufacturing and Supply Chains
These restrictions pose significant risks to the AI industry, particularly for companies like Nvidia and AMD, which depend on advanced chips manufactured by Taiwan Semiconductor Manufacturing Company (TSMC). Taiwan produces over 60% of the world’s chips and more than 90% of the most advanced ones—the same chips powering the AI revolution. TSMC serves as the primary supplier to Nvidia, the dominant force in AI chip manufacturing.
The US has already moved to block exports of advanced chips and chipmaking equipment to China. Analysts warn that if trade tensions escalate further, China could weaponize its rare earth dominance as retaliation. Louise Loo, lead economist for Greater China at Oxford Economics, noted that “China’s dominance in the battery supply chain accords policymakers with leverage to withhold industry-specific inputs from Western manufacturers, which could prove inflationary and economically disruptive.”
Historical Context and Future Implications
This isn’t China’s first use of rare earth restrictions as a geopolitical tool. In 2010, Beijing imposed strict export quotas that sent prices soaring and prompted a successful WTO complaint from the US, EU, and Japan. While China lifted those quotas in 2015, diversification efforts have been limited due to high costs and environmental concerns.
The US is now investing heavily to reduce dependence: the Department of Defense awarded $45 million to MP Materials in 2022 and over $288 million to Lynas USA in 2023 to establish domestic rare earth processing capabilities. However, these efforts will take years to materialize, leaving the US vulnerable to supply shocks in the near term—a critical concern as AI development accelerates.
Key Quotes
The Middle East has oil, China has rare earths.
This prescient statement from Deng Xiaoping in 1992 demonstrates that Chinese leadership recognized the strategic importance of rare earth elements decades ago. The late Chinese leader who spearheaded economic reforms understood these minerals would become as geopolitically significant as oil, a prediction now proving accurate in the AI chip era.
China’s dominance in the battery supply chain accords policymakers with leverage to withhold industry-specific inputs from Western manufacturers, which could prove inflationary and economically disruptive.
Louise Loo, lead economist for Greater China at Oxford Economics, explains how China’s control over critical minerals creates economic leverage that extends beyond simple trade disputes. This warning is particularly relevant for AI chip manufacturers who depend on these materials for production.
I think the heart of the issue is concern about how China will use AI chips for military applications and surveillance. It’s a different type of Cold War.
Chris Tang, a UCLA professor and expert in global supply chain management, articulates why this tech rivalry differs from traditional trade disputes. The focus on AI chips specifically relates to their dual-use nature for both commercial AI applications and military/surveillance systems, making this conflict fundamentally about technological supremacy.
When we stop transacting horizontally with each other, that’s only creating a larger conflict. And then with a South China Sea conflict, the geopolitical conflict could turn into a larger conflict, which can lead to a major situation that leads up to a war.
Nick Vyas, founding director of USC Marshall’s Randall R. Kendrick Global Supply Chain Institute, warns about the dangerous trajectory of US-China decoupling. His concern that economic separation could escalate to military conflict underscores the high stakes of the rare earth and AI chip rivalry.
Our Take
The rare earth dimension of the US-China tech war reveals a critical vulnerability in the Western AI ecosystem that most industry observers have overlooked while focusing on chip design and manufacturing. China’s systematic consolidation of rare earth control—from mining to refining to export restrictions—represents a multi-decade strategic play that’s now reaching maturity precisely when AI demand is exploding. The irony is stark: while the US restricts AI chip exports to China, China controls the raw materials needed to make those chips. This creates a mutual dependency that could either force cooperation or trigger a devastating supply chain rupture. The US investments in domestic rare earth processing are necessary but insufficient—they won’t bear fruit for years, and even then may not match China’s scale or cost efficiency. For AI companies and investors, this geopolitical chess match introduces a new category of risk that goes beyond typical business considerations, potentially determining which nations lead the AI revolution.
Why This Matters
This development represents a critical inflection point in the global AI race, as China’s rare earth dominance could effectively throttle Western AI advancement. The minerals China controls are irreplaceable inputs for manufacturing the advanced semiconductors that power AI systems, from large language models to autonomous vehicles. If Beijing restricts exports further, companies like Nvidia—which has become synonymous with AI infrastructure—could face severe supply constraints that ripple throughout the entire AI ecosystem.
The implications extend beyond individual companies to national security and economic competitiveness. The White House has explicitly warned that China’s control over critical mineral processing leaves “the US and our allies and partners vulnerable to supply chain shocks and undermining economic and national security.” As AI becomes increasingly central to military applications, surveillance systems, and economic productivity, whoever controls the supply chain for AI chips effectively controls the pace of AI development globally. This “tech Cold War” dynamic is creating parallel technological ecosystems that could fragment global innovation and potentially escalate into broader geopolitical conflict, fundamentally reshaping how AI technology develops and who benefits from it.
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Source: https://www.businessinsider.com/rare-earths-tech-war-explainer-chips-ai-china-us-2024-11