Back in the US Defense Industrial Base: the Case of Rare Earths

Journal of Public and Environmental Affairs April 2020 Volume 1 Issue 1 Putting the “Us” Back in the U.S. specifically, undercut U.S. global preeminence. According to the Department of Defense (2018), this Defense Industrial Base: The Case problem stems from two macroeconomic factors: (1) of Rare Earths the decline of U.S. civilian manufacturing base capabilities and (2) the rise of competitor nations. The DOD report (2018) placed great Raeanna L. Carrell1 1 emphasis on China as the primary revisionist power [email protected] threat to U.S. national security via the defense industrial base. China’s strategy of economic As a nation, the United States is committed to expansion has for many years employed both legal the ideals of a free market economy—that and illicit means to undermine free market principles competition among firms leads to greater levels of and increase its global market share of critical efficiency. The operation of the U.S. defense materials and technologies (United States Trade industrial base is no exception. It relies on both Representative 2018). As a result, the U.S. is public-sector (government owned/operated) and dependent on China for many materials critical to the private-sector (commercial) firms for the health and function of the defense industrial base. procurement of materials, products, and services Rare earth minerals represent a particularly necessary to properly equip America’s Warfighters. significant example of U.S. dependence on China. Indeed, the defense industrial base is diverse, Indeed, rare earths can be considered a critical case complex, and global. As such, the Department of study (Yin 1994) of foreign dependence—if the U.S. Defense (DOD) has always relied to some extent on can successfully lower the national security risk for production that takes place in foreign firms, 1 this class of compounds, then it can successfully particularly at the sub-tier level . manage other cases of foreign dependence that pose a The end of the Cold War led to a reduction in similar or less significant threat. This paper describes U.S. military spending and a greater reliance on a discrete set of policy options for increasing the market forces (and private sector firms) to support resiliency of the U.S. defense industrial base to the defense industrial base. The foreign share of the supply shocks from China and a strategy formulation defense industrial base grew. Today, the defense process based on these discrete options. industrial base is totally reliant on foreign nations for the procurement of each of the following: electronics (Department of Defense 2018); high-tenacity, military grade polyester fiber (Department of Defense 2018); certain specialty chemicals for munitions and missile use (Metal/Center News 2013); proprietary carbon fibers used in missiles, satellites, space launches, and other purposes (Department of Defense 2018); and image intensifier tube core glass critical to U.S. night vision systems (Department of Defense 2018). A contemporary national security problem is U.S. dependence on strategic competitor nations— those nations (e.g., Russia and China) that aim to upset the current international order and, more Figure 1. Source: Rare Element Resources (Rare Element Resources 2016) 1 Suppliers, distributors, vendors, or firms that furnish supplies or services to or for a prime subcontractor or another sub-tier contractor 1 Journal of Public and Environmental Affairs April 2020 Volume 1 Issue 1 elements domestically after the Mountain Pass mine in California was put on care and maintenance status in the fourth quarter of 2015 (U.S. Geologicial Survey 2018). Consequently, the U.S. was entirely reliant on foreign nations for the procurement and supply of rare earth elements. In 2018, the Mountain Pass mine restarted and the U.S. produced 15,000 metric tons of rare earths (United States Geological Survey 2019); however, most of those rare earths had to be sent overseas to be refined and processed into usable product (Gabriel 2019). In particular, the United States is almost entirely reliant on China—a strategic competitor, as China has captured 90-95% of the world’s market for mining and refining rare earths Figure 2. Source: Stratfor Worldview (2019) (Grasso 2013). Rare earths are critical components in more than 200 high-tech WHAT ARE RARE EARTHS? electronics and devices produced both for consumer Rare Earth Elements (REEs) are a set of 17 and military use (Grasso 2013), and are critical for metallic elements (Figure 1) which are abundant in the functionality of several defense applications such number but occur in low concentrations in the Earth’s as lasers, guidance systems, and radar and sonar crust. Mining and refining REEs is economically systems (American Geosciences Institute 2018). costly; however, due to their unique magnetic, They are critical in every domain—air, land, sea, luminescent, and electrochemical properties, rare space and cyberspace. earths are responsible for breakthroughs in producing technologies that are lighter, smaller, more thermally THE 2010 SENKAKU ISLAND DISPUTE durable, and more efficient or emissions friendly, Should China choose to flex its soft power by among other improvements (Rare Earth Technology restricting rare earth element (REE) exports, the U.S. Alliance 2018). Figure 2 lists modern-day products defense industrial base could be significantly made from rare earth elements. The largest segment disrupted in the near term. Such concern is based on of consumption for rare earth elements (and fastest history: the Japanese and Chinese governments have growing segment) is permanent magnets, which long disputed which of the two countries is the represent 31% of global consumption in 2016 rightful sovereign over a group of uninhabited (Gayonnet 2018). Permanent magnets based on rare islands, the Senkaku Islands. In 2010, China earth elements are used in virtually all high-tech embargoed REE’s to Japan in response to a maritime products (e.g., smart phones and other electronics), dispute over jurisdiction of the Senkaku Islands in the including those used in aerospace and defense South China Sea (Grasso 2013). This supply applications. disruption had spillover effects in the U.S. as well. Ensuring that the defense industrial base has a The United States relied—and relies still—on Japan secure and adequate supply of rare earth elements is a for the procurement of permanent magnets and other matter of national security. Between 2016 and 2017, REE components (Bradsher 2010). The 2010 the United States did not mine any rare earth embargo lasted for nearly two months. In that time, 2 Journal of Public and Environmental Affairs April 2020 Volume 1 Issue 1 Japan experienced significant shortages, China has changed in the market landscape: China retains refused to increase REE exports to any other country market power as a supplier of rare earths, controlling to make up for the gap in supply, and the price of roughly 90% of the market (Gayonnet 2018). REE experienced a global price spike of nearly ten times greater than pre-embargo prices (Bradsher IDENTIFYING POLICY OPTIONS 2010). Since the Senkaku Islands dispute in 2010, The price spike, initiated by Chinese action Congress has pushed the Department of Defense to and driven by market speculation, was temporary. By develop a strategy to reduce its dependence on China the end of 2010, prices tumbled as the market for rare earth elements (GAO 2016). Most recently, adjusted and other nations reclaimed the ability to in the 2019 National Defense Authorization Act (i.e., produce their own supply of rare earths. Starting in the John S. McCain National Defense Authorization the 1980s, China scale up its rare earth mining Act for Fiscal Year 2019), Congress prohibited DOD capabilities dramatically. By the 1990s, the strategy from procuring the two major types of rare earth had paid off. China essentially controlled the global magnets—samarium-cobalt and neodymium-iron- rare earth market (Plumer 2012). Vekasi (2019) boron—from “non-allied foreign nations”: Russia, attributed China’s dominant market share in rare China, Iran, or North Korea (Government Publishing earths to low production costs (e.g., labor costs), Office 2018). The new law allows exceptions in cases lower environmental standards, and its state-directed where the U.S. cannot procure materials listed in the investment strategy. statute elsewhere, because they are either not The 2010 incident resulted in demand available or are not affordable2. Since China destruction for the Chinese-controlled rare earth continues to corner approximately 90% of the rare market, proving that it did not possess monopoly earth market, it is reasonable to think that the U.S. power. Japan developed a method for recycling rare will use this exception to continue to procure rare earth elements from used electronics. In the U.S., the earth magnets from China, at least in the short term. Mountain Pass mine in California resumed operation How can DOD enhance its resiliency to future (it closed again in late 2015). Other companies supply shocks from China? A review of government started substituting other materials for rare earths in reports and the academic literature suggest four products, suggesting that rare earths were not always options from which a strategy can be crafted: necessary. The United States, followed by the 1. Maintain the status quo European Union and Mexico, filed a World Trade 2. Develop domestic supply Organization (WTO) case against China, alleging that 3. Partner with strategic allies its rare earth export quotas violated the rules. The 4. Innovate (through substitution and/or WTO agreed, and forced China to abandon the recycling) practice (Bradsher 2012). The 2010 embargo and its aftermath Maintain the Status Quo demonstrate the power of the market to adjust to The 2010 Senkaku Islands incident and its abrupt changes in supply and demand. Nevertheless, aftermath have led some observers to suggest that it also demonstrates the threat of supply shocks to China has less power over global supply than its U.S.

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