[Market Pulse]The Foreseeable Gray Rhino: China's Weaponization of Rare Earth Elements

Tae-Seok Oh, President of the Korea Institute of S&T Evaluation and Planning (KISTEP)

As the trade dispute between the United States and China continues to drag on, China's recent move to tighten export controls on rare earth elements was a highly predictable strategy. Nevertheless, the practical responses from countries around the world have been insufficient. A crisis that is predictable due to its "massive tremors and noise" but still not properly addressed is metaphorically referred to as a "gray rhino." Like global warming, the rare earth issue is cited as a representative example of a gray rhino.

The strategic risks associated with rare earth elements have been consistently raised since the early 2000s. In particular, the world witnessed their impact in 2010, when Japan detained a Chinese fishing vessel near the Senkaku Islands and China responded by halting rare earth exports to Japan as a retaliatory measure. Since then, countries have made various efforts to diversify raw material supply chains, develop alternative materials, and promote recycling. However, even after 15 years, global dependence on Chinese rare earth elements remains high.

China has recognized rare earth elements as strategic assets and has implemented robust national policies to dominate the supply chain. Since Deng Xiaoping remarked in 1992, "The Middle East has oil, China has rare earths," China has fostered rare earths as a national strategic industry for over 30 years. As a result, China now accounts for about 70% of the world's rare earth production and 90% of its refining. China independently manages the entire process from mining to high-purity refining, and especially for heavy rare earths such as dysprosium and terbium, it holds an almost monopolistic position.

This latest tightening of export controls by China closely resembles the Foreign Direct Product Rule (FDPR) that the United States applied when restricting semiconductor exports to China. The new regulation requires export permits not only for products manufactured within China but also for overseas products containing more than 0.1% Chinese rare earth elements. This is seen as an attempt to reset the very rules of global trade.

The United States has reopened previously closed rare earth mines and is expanding rare earth production facilities with government support through agencies such as the Department of Defense. Japan has also achieved significant results in diversifying its supply chain. South Korea has designated 33 types of strategic minerals as core management targets and participates in the multilateral Mineral Security Partnership (MSP), but dependence on China remains high. China's new regulations will place a heavy burden on key Korean industries, including semiconductors and batteries, and could trigger a supply chain crisis similar to the one caused by Japan's export restrictions on semiconductor materials at any time.

What should we do to secure economic security and technological sovereignty? First, we must clearly establish the stable procurement of rare earths and other rare metals, the development of alternative materials, and the strengthening of recycling capabilities as core national strategic objectives. A sustainable, long-term strategy lasting at least 10 years is required, regardless of political changes. We must pay attention to how China has recognized the strategic value of rare earths for decades and accumulated national capabilities accordingly.

Second, to develop alternative materials for rare earths and advance core material recycling technologies, we must significantly expand mission-oriented government research and development (R&D). The establishment of supply chains for core materials in future industries such as next-generation semiconductors, quantum computers, and nuclear fusion power must also be meticulously considered at the stage of national strategy formulation.

Third, the development of rare earth-related technologies must be promoted in parallel with nurturing the domestic industrial ecosystem. In particular, the field of material recycling is an area where market failure frequently occurs due to the difficulty of resource recovery, high initial production costs, and uncertain demand. Strategic stockpiling policies linked to national security should be implemented in parallel, and institutional support must be strengthened to ensure the sustainability of the recycling industry.

The rare earth issue has emerged as a key variable in the competition for technological hegemony, going beyond a simple resource problem. While a temporary compromise between the United States and China may be sought, the "weaponization of rare earths" remains an economic strategy card that China can play at any time. If we ignore this gray rhino, the impact of the next collision will be even greater.

Tae-Seok Oh, President of the Korea Institute of S&T Evaluation and Planning (KISTEP)

This content was produced with the assistance of AI translation services.