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What will the US defense industry do when China cuts off rare earth supplies?

On June 17, Chinese state-controlled media again threatened disruption of rare earth supplies to the United States — this time targeting U.S. defense contractors. The astonishing threat noted that “military equipment firms in the United States will likely have their supply of Chinese rare earths restricted” and follows calls just weeks ago to shut off rare earth supplies to the United States.

The latest comments follow a meeting of China’s state economic planner, the National Development and Reform Commission, or NDRC, which announced the study and formulation of new export controls to go into effect “as soon as possible.” These controls differ from previous embargo and boycott threats by singling out U.S. defense manufacturers, along with contractors that refuse to do business with Huawei.

For years, supply chain experts warned about the potential for China to cut off access to the critical materials found in almost every major weapon system, from fifth-generation fighters to precision-guided munitions. Even a modest decrease in the availability of rare earth materials results in increasing prices for the elements, but severe and sustained shortages could threaten the ability of American defense contractors to produce systems vital to our national security.

These concerns were often downplayed by free-trade theorists and policymakers who claimed that China would not take such aggressive action to upset the market. However, the NDRC statement shows that China is sophisticated enough to target critical sectors and supply chains in order to gain leverage in the ongoing U.S.-China trade negotiations.

The Chinese strategy is based on a harsh calculus: Depriving only defense contractors of rare earth supplies will drive costs and production lead times up for the U.S. military and cause concern within the U.S. government, but it will not lead to widespread public discontent. Any student of Clausewitz can see the targeting of a particular center of gravity in the U.S. with this move. The strategy threatens U.S. military supplies rather than cheap consumer goods in what may be an attempt by China to force U.S. policymakers to abandon efforts to counter abusive Chinese trade practices in favor of addressing greater national security concerns.

Reportedly, the NDRC has held three meetings with industry experts on future rare earth element regulations, just weeks after Chinese President Xi Jinping pointedly toured a rare earths production facility. This follows the “Don’t say we didn’t warn you” statement from official Chinese media. That phrase has previously been used in reference to disputes significant enough to the Chinese government to warrant military action. None of these statements or events are coincidence.

Fortunately, the U.S. government is already taking steps to secure supplies of rare earths and other critical materials. The June 4 Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals, which follows on last year’s report on the defense-industrial base, begins operationalizing the identification and mitigation of supply chain gaps.

In the fiscal 2019 National Defense Authorization Act, Congress took a huge step in the right direction by limiting the ability of defense contractors to use rare earth magnets from China (and other non-allied countries). And recently, the U.S. Department of Defense has been querying American contractors about their ability to begin rebuilding pieces of the supply chain, including rare earth separation and magnet production.

All these actions are prudent and necessary, but there is more to be done, particularly in Congress, to defend against hostile foreign actions. Mine-permitting reform would help get U.S. supplies of critical minerals flowing again, and Alaska’s Republican Sen. Lisa Murkowski’s American Mineral Security Act and Nevada’s Republican Rep. Mark Amodei’s mine-permitting reform bill both provide strong momentum forward on that effort.

Pentagon programs such as the Defense Production Act Title III — which was responsible for the inquiries into rare earth separation and magnet production — and the Industrial Base Analysis and Sustainment are both good avenues through which the government can directly invest in promising American manufacturers. Congress now must provide them with adequate funding: The $34 million requested by the Pentagon is inadequate for the task, and even the $64 million provided by the House Appropriations Committee is inadequate in the face of the challenge.

China has spent decades building the supply chains for rare earths and other critical materials into a weapon aimed directly at U.S. supply chains. The latest statement from the NDRC is the most significant threatened use of this weapon to date, but we should not expect that it will be the last. The U.S. needs to seriously address its critical materials vulnerabilities, which it has begun to do with recent reports. But reports can only show the way forward; it is now time for Congress to enact prudent policies and to provide the resources to finally blunt the rare earth and critical materials trade weapon once and for all.

This post originally appeared in Defense News on July 8, 2019.

Jeff Green