In the rare earth dispute between US and China, Australia may be the winner

“I never thought it would come to this,” Donald Trump wrote on the weekend, Australian time. China last week announced strict, new controls on its exports of rare earths. And the gear needed to refine them.

Trump found it “impossible to believe that China would have taken such an action” and described it as “very hostile”. It is certainly a striking exercise of raw power against the US by a very confident Xi Jinping.

Rare earths are the essential elements of the 21st-century economy, as indispensable as oil had been to the 20th. Without them, there are no modern computers, no smartphones, no radars, no MRI scanners, no electric cars, no wind turbines, no jet engines, no guided missiles.

But how could Trump claim to be surprised? The father of China’s long boom, the late Deng Xiaoping, observed as long ago as 1987 that “the Middle East has oil. China has rare earths.”

It was a warning. Just as the Arab oil-producing countries banned exports to some major Western nations in 1973, creating the world’s first “oil shock”, China had the power to shock the world with its domination of rare earths.

It has now administered that shock. “China tries shock-and-awe on Donald Trump” read the headline in The Economist magazine on Sunday. This may look like trade. It’s not. This is geopolitics.

Beijing digs up 61 per cent of all rare earths mined in the world, according to the International Energy Agency. More importantly, it has painstakingly amassed control of 92 per cent of all refining of rare earths.

Rare earths are not terribly rare. Many are more common than gold. But they are notoriously difficult to refine – and environmentally damaging in the process. Australia is a superpower in the world of rare earths, as well as the broader category of critical minerals. But mining output is small and refining is minimal. Like most of Australia’s national potential, it remains largely untapped.

Many other warnings followed Deng’s aphorism. The most potent was an actual cut-off of China’s exports to Japan. This was potentially fatal to Japan’s high-tech manufacturing. Beijing was punishing Tokyo for detaining the crew of a Chinese fishing boat that violated Japan’s territorial waters. China relaxed the ban after just a couple of months. Japan stopped detaining Chinese crews. And Tokyo learned to create a new supplier.

Japan decided to give critical support to Lynas Corporation, an Australian company that refines Australian rare earths in Malaysia. Lynas is now one of the world’s most important suppliers of refined rare earths outside China.

The Americans also tried to learn from the ban on Japan. They spent $US1 billion to rehabilitate a Californian rare earths mine, the only one in the US. But it operated for only a year, shut down because it couldn’t compete with China on price.

This is no accident. As a matter of policy, China keeps its export prices ultra-low to discourage competitors from producing. Tom O’Leary, chief executive of Australia’s Iluka Resources, last year told a mining conference that “China’s dominance of the rare earths supply chain has led to market failure, and this presents an existential threat to manufacturing” in the Western world.

The US made other efforts to protect itself, including $US439 million for the Pentagon to develop domestic supply chains. Some individual companies have their own internal stockpiles, which gives them a buffer to cope with interruptions, but they have no solution to a permanent dearth.

Trump failed to absorb his country’s vulnerability. Even as recently as April this year. Two days after Trump’s so-called Liberation Day tariff extravaganza, Xi imposed export controls on seven types of rare earths, from the total menu of 17. Now, in last week’s announcement, Xi imposed export controls on the rest.

Beijing says it will issue some export licences but none for military applications. Further, its latest pronouncement imposes draconian export controls over China’s equipment, materials and technologies used to refine rare earths. The aim? To lock down monopoly control over the global refining of rare earths even when conducted in other countries.

The Financial Times quotes a University of California expert on computer chip supply chains, Jimmy Goodrich: “If enforced, and the US doesn’t respond strongly, Beijing could have complete control over the entire advanced semiconductor supply chain. Even US AI chips made in a US lab sent to a US AI lab would need Beijing’s permission.”

Trump’s response? Tariffs, imaginatively enough. He’s threatened 100 per cent tariffs on all Chinese exports to the US, on top of the existing 35 per cent. Meaning that just about everything China exports to America would be priced out of the market. China’s economy, already struggling, would be thrown into a downturn.

Equally, the US economy would suffer. Growth would be hit and inflation would leap, forcing the Federal Reserve to raise interest rates. The result would be stagflation – stagnant growth plus inflation, the worst of both worlds. On Friday, a frightened Wall Street suffered its biggest loss since April’s “Liberation Day” insanity.

Economically, it’d be mutually assured destruction. This is why Trump delayed the starting date of his tariffs to November 1 – in the hope of making a deal.

Xi, no doubt, assumes that the TACO rule will apply – Trump always chickens out. In the meantime, the timing is most convenient for Anthony Albanese, who is due in the White House next week.

Australia has had an offer in front of the Trump administration since April – a proposal for a guaranteed supply chain of rare earths and critical minerals from Australia, jointly developed between the US and Australia. The text of a “framework” agreement is in the works for next week’s summit.

Canberra has done a good deal of work already to realise Australia’s potential, against the odds of China’s predatory pricing. For instance, the taxpayer is paying Iluka $1.25 billion to build a WA refinery to meet about half the Western world’s rare earth oxides demands by 2030. The government offers a tax offset for critical minerals miners and processors. And Albanese is creating a critical minerals reserve.

All of this puts Albanese in a position to shake Trump’s hand with an offer. Australia’s ambassador to Washington, Kevin Rudd, might even draft a line for the prime minister, something along these lines: “My name’s Anthony, I’m from Australia and I’m here to help.”

Peter Hartcher is international editor.