The US government is certainly doing its part to bring more critical minerals home. They are under increasing pressure from both government and capital markets to cut their outsized dependence on foreign, particularly Chinese, suppliers. In 2022, the US identified 50 critical minerals essential for economic and national security, many of which are dominated by China. In fact, on July 20, 2017 President Donald Trump signed an executive order to review the domestic supply chain of these minerals. Such a move would lead to increased tariffs on raw materials.
China is leading in the production of critical minerals, with over 50 percent of the total identified supply. In addition, it has a near-monopoly over refining rare earth elements, processing about 90% of the world’s supply. That dominance places the US in a precarious strategic position. Beijing recently imposed export restrictions on a number of critical minerals including germanium, gallium, antimony, and magnets.
Executive Order and Defense Production Act
President Trump signed the executive order invoking the Defence Production Act, which enables the government to provide essential support such as financing and loans to domestic mineral production sectors. Others view this move as a short-term outcome of China’s supply chain hegemony. It takes aim at the very control over these essential resources.
“Processed critical minerals and their derivative products face significant global supply chain vulnerabilities and market distortions due to reliance on a small number of foreign suppliers,” an industry expert stated. The executive order seeks to reduce these vulnerabilities by calling for the use of more locally-sourced food and production.
The Defence Production Act empowers the US to prioritize the extraction and processing of minerals necessary for technological advancement and national defense. Thought leaders feel building up US domestic capabilities will be key for the US moving forward in its current and ongoing trade war with China.
Market Response and Future Implications
Given all that’s happened, it’s understandable that markets have responded with confusion at best. Iron ore futures on the Singapore Exchange (SGX) closed down 0.35%. Copper futures were down 0.91%. The order sent the markets into a panic, sending them into a tailspin. Unsurprisingly, investors are spooked by what a prolonged, escalating trade war would mean to an already fragile economy.
With the US relying on imports for 15 critical minerals, 70% of which come from China, diversifying sources for industrial materials has become imperative. America’s lack of domestic rare earth mines and smelters lays bare the country’s vulnerability. This woeful state of affairs endangers both the nation’s long-term economic prosperity and national security interests.
“Critical minerals, including rare earth elements, in the form of processed minerals are essential raw materials and critical production inputs required for economic and national security,” another industry analyst noted. This makes all the more urgent the US government’s recent steps to improve self-sufficiency.
Strategic Importance of Critical Minerals
The investigation into strategic/critical minerals will make some of those much-needed clarifying steps. These results would ultimately bring about huge tariffs on key industrial resources, straining trade relations with China. Like the US, Europe and other countries are looking to domestic production to protect their economic competitiveness. Beyond helping their COVID-19 response, this move is to bolster its strategic interests in global markets.
With the US-China trade war intensifying, the time to build a more robust, diversified supply chain has never been more urgent. The US government has begun an initiative to increase self-reliance on the production of critical minerals. Of course, this dramatic shift is likely to affect trade patterns with China and other countries moving forward.
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