China has weaponized its critical minerals monopoly, on which the entire Western industrial base depends.

According to the European Council of Foreign Relations experts, Doctor Tobias Gherke, This dependency is even worse than Europe's 2021 dependance on Russian gas, which led to a massive energy crisis in 2022.

So if China cuts its critical minerals completely today, our industry is not prepared.

Vast elements of our base industry in Europe, but also in other places, rely on these UN access to permanent magnets, most importantly.

So if that would stop tomorrow, quite frankly, some of these industries, like the automotive industry, would grind to a halt.

There would be no more production very quickly, and that would have incredible cascading effects.

Imagine that 13 million people are employed in the car industry in Europe.

Imagine, 95% of them would stop production.

I mean, we are talking, an economic crisis of historic proportions.

No wonder governments ranging from Europe to the US to India, are scrambling to reduce their dependance on Chinese minerals like rare earths, copper and lithium.

But this will be incredibly hard.

China's mineral monopoly is protected by its massive scale, massive government subsidies, lax environmental regulations, and China churns out hundreds of thousands of academics and PhDs in mining and geology.

And, you know, in Europe, it's a drop in the ocean.

And so, even if you're now wouldn’t want to reverse this, you know that, the deck is stacked against us.

But there is hope for the West in the 1980s and 1990s, the West dominated all of these industries, and China was able to break through the Western monopoly through clever policies.

So can the West learn from China to take back its sovereignty?

Yes, absolutely.

In this video, I'll show you how they can do it in five steps.

But before getting into the specifics, let's do a quick recap of why critical minerals are so important.

For simplicity, let's start with the critical minerals that have been in the news the most.

We are discussing, critical minerals and rare earths.

Probably heard people talking recently about rare, what is so special about these rare earths?

Sure.

The F-35 jet, state of the art US Navy destroyer nuclear attack submarines. I found they all contain thousands of pounds of rare earths.

But what for the main product that is made out of refined rare earths is our permanent magnets.

These are magnets that do not need an external power source to generate their magnetic field.

They allow modern wind turbines, for example, to transform wind into electricity.

They are at the core of loudspeakers, microphones, and all of our headphones.

The new Nintendo Switch to has super snappy magnetic attachments that sound like this sounds good, but perhaps more crucially, modern cars cannot be made without permanent magnets.

They power your car's trunk sense or your car's steering system, its air conditioning actuator, the window lifting motor and for electric vehicles, even its entire motor.

So this is why it really matters to that. China holds holds a global share of earth refining and permanent magnet production, somewhere around 95%.

And worryingly, China has recently introduced a licensing system that requires any firm in the world to apply for a Chinese license to use these magnets.

And need to go to Beijing and say, hello, I'm Volkswagen. I need that permanent magnet. Do I get a license if Beijing says no? Volkswagen. Stellantis for the entire western car industry ground to a halt.

And even if they can replace all the permanent magnets all over Western cars, that will be so expensive that they would soon be crushed by competitors that do have a license from Beijing.

China has already shown that it is willing to use economic weapons like this to devastate local industries.

For example, in 2023, China no longer granted Chinese firms licenses to export graphite to Sweden.

It wasn't exactly clear why it did this, but publications like The Economist have mentioned that it may have been triggered when a Swedish free speech group gave an award to a Chinese dissident.

Although the reason could also have been strategic for a while, Sweden's promising battery startup Northvolt seemed like the only company that could be competitive against Chinese producers.

But two years after China's ban, Sweden's Northvolt shut its doors for good in Sweden only 10 to 15 years ago, this would be unthinkable.

Only 10 to 15 years ago, this would be unthinkable.

Back then, the dominant idea was that the global free market just determines everything.

If a battery company wants to buy minerals and it is in short supply, the price will just go up for everyone at the same time. And the highest bidder, well, they will buy.

The only job of the government was still at the free market. Function as efficiently as possible.

This logic no longer works today.

Governments are increasingly realizing their role is no longer just about making markets efficient.

It's also about protecting domestic industries from foreign manipulation.

Therefore, governments have now been forced to think carefully about critical minerals and critical materials more broadly, which are defined as any materials that have, number one, a high risk of supply chain disruption. And number two, serve an essential function in one or more technologies.

By this definition, a rare earths are clearly a critical material.

China now has a massive power over foreign manufacturing firms because it has a monopoly or near monopoly in the two other parts of the supply chain mining and refining.

On average, China controls 54% of rare earth mining.

But far more importantly, it controls about 77% of rare earth refining.

This is the pattern that we see all across industries that power the modern, increasingly electrified global economy.

For example, if we look at copper, which is the main conductor of electricity, we can see that mining is relatively diversified.

Even though Chile, the Congo and Peru are the biggest producers.

But when it comes to refining, China is much more dominant.

But the West's critical material vulnerability is not purely limited to China.

Think, for example, nickel, which is a key input in steel production, and it is one of the most promising metals to be used in batteries.

However, supply is not secure at all.

Given that Indonesia is the epicenter of global nickel production and now also refining what you see, like China, Indonesia has shown that it is more than willing to use its nickel dominance as an economic weapon, as it has banned all raw nickel exports to ensure that it also dominates the nickel refinement industry.

However, so far, China has smartly moved in to make sure many of the best Indonesian based nickel refineries are in fact Chinese companies.

But nickel is a rare exception where a country other than China dominates.

If you look at the most common element used in batteries, lithium, we can again see that in mining.

Sure, China is a big player, but Australia is actually more important.

However, Australian mines largely depend on Chinese refining capacity, making Western battery manufacturers again largely dependent on China.

This pattern holds for almost all critical minerals graphite, cobalt, you name it.

Mining dominance is different for a mineral, even if China almost always plays a big role.

But the real story is about refinery.

China dominates almost all critical mineral refinery, giving it an insanely powerful economic weapon that it is now starting to use to get both Western and non-Western countries like India to do what it wants.

But before we get to how the West can respond, this, of course, raises the question why is China so dominant in mineral refinement?

Because it really wasn't always like this just a few decades ago.

In fact, after the Second World War, the dominant rare earth player was actually the United States thanks to the massive mountain pass mines in California.

So, ironically, as US Treasury Secretary Scott Bessent recently said, the technology, especially in rare earth magnets, it's being used against us.

It was U.S. technology, but Japan and Europe also played a major role.

France, Germany, Portugal, Spain all of them had strong mineral mining industries and not.

So what happened?

The answer actually consists of two parts.

The first part is Chinese strategy.

Interestingly, there are some rumors that China's rare earth monopoly was a result of a grand geo economic strategy set out already by Deng Xiapeng in 1992.

But according to Michaela Roibu. I hope I pronounced correctly who was doing her doctoral research on China's rare earth monopoly. China's current dominance is probably and ironically, a result of industrial protection by Japan and the US in the 1990s, which excluded Chinese firms from obtaining the know how to refine critical minerals.

Now to counter this, they were forced to attract a lot of foreign investment and talent and knowhow into minerals and to the mineral space, mostly from Europe.

And they did this by giving foreigners all sorts of juicy advantages, like tax credits that gave lax environmental protection.

Crucially, the Europeans let them do this. Why?

Well, two reasons.

The first is the increasingly dominant free market philosophy in the 1990s.

If European firms could produce more cheaply in China, then of course they were free to do it.

The second reason was environmental protection.

You see, refining critical minerals is really a really dirty business.

You will need a lot of a big chemical mix to clean, to wash off the actual mineral that you want.

The 1990s was also a time of rising environmental regulations in the West.

Western firms could dodge these regulations by moving to China.

And politicians were actually quite happy to be rid of these highly polluting industries. Bye bye.

However, just as with Western car firms moving to China, the Chinese had regulations in place that all foreign firms needed to set up local joint ventures where they had to transfer knowledge to China if they wanted to work cheaply in China.

The thing is, businesses care about profits in the next couple of years.

They do not strategize about competition in 40 years time.

So they happily moved their production to China.

But today, after 3 or 4 decades, just as German car manufacturers now struggle to compete with the Chinese firms, the rare earth mining and especially refinery business is now dominated by Chinese firms, giving the Chinese government their incredibly powerful economic weapon.

So, of course, Western governments are now struggling to respond and actually, it may be too late.

For at least four reasons.

Environmental regulations, this is, number one, are still much stricter in the West than in China.

Reason number two Chinese firms now have massive, massive scale advantages.

Reason number three Chinese firms in strategic sectors are often heavily subsidized by the government if they need it.

And then finally, number four, China churns out hundreds of thousands of academics and PhDs in mining and geology.

And, you know, in Europe it's a drop in the ocean.

And so even if you and I wouldn't want to reverse this, you know, that the, the deck is stacked against us.

And yet the deck was also stacked against China in the 1990s, when all of the knowhow and technology was in the West.

So what can the West learn from China?

Here's how the West should respond.

And actually, this is not just applicable to the West.

It's applicable to any country that wants to remain independent in the new age of geo economics, where great powers, including those in the West, I have to say, will not hesitate to use economic weapons to achieve political goals.

Any country that wants sovereignty in this age needs a grand geo economic strategy in which they set themselves a goal for how independent they want to be.

Importantly, such a strategy is not just about critical minerals.

It considers minerals. It considers oil. It considers cloud computing infrastructure. It considers an entire economy.

Having a ground geo economic strategy does not mean every country should be independent in everything.

Giving it complete independence is often simply impossible and in all cases extremely inefficient.

So any Western strategy should focus on achieving the right balance between full free market type specialization and autarky for critical minerals.

This means the following step number one is that Western governments should learn from China who is, by the way, already stockpiling oil, grain and even pork.

Then, in the age of geo economics, every nation needs some buffers.

In this case of critical minerals, for the most part, Western governments are already starting to do this. Or planning to do this.

Step number two.

Most Western governments need to realize that gaining some more independence from Chinese minerals can best be done in a big alliance.

Europe and Japan don't have many minerals, but they do have some knowhow left and they have lots of money to invest.

Australia and Canada have lots of minerals, but they almost completely rely on Chinese refineries.

Therefore, Western governments like Japan, Australia, Canada and EU, the US and Australia and many more are already forming mineral alliances between individual countries.

But in my opinion, these individual alliances are likely much less effective than a concerted big group effort.

Just as NATO as a big alliance is far more effective than a patchwork of defensive alliances between individual states, and Mineral Alliance is also far more effective if it is big.

Still, even with a big, very big alliance, step number three is needed.

We know that Chinese industrial advantages are now just too big for private Western companies to overcome.

On top of that, as Scott Bessent recently said, any time anyone tries to stand up one of these rare earths critical mineral facilities, Chinese come in, they flood the market.

In other words, the Chinese state is actively coordinating its industry to prevent foreign competition from rising.

Therefore, a free market approach just will not work.

Instead, governments need to study and copy China's industrial policy approach.

As a group, they should use industrial policy tools like subsidies, price floors and tariffs to help the mineral, mining and, crucially, refinery industries recover in allied countries.

On top of that, in step number four, Western countries should use industrial policy tools like subsidies and tariffs strategically to speed up the development of alternative and recycling technologies as well.

And yes, this is already happening.

For example, France is building a massive magnet recycling plant in the south.

And when it comes to technological replacement, BMW, BMV and Renault are already experimenting with the new electric motors that do not rely on rare earths.

But these are just small initiatives.

There is no big strategic effort yet.

The potential of Chinese retaliation then brings us to step five.

Western countries should develop a portfolio of other technologies and materials on which China relies, and they should create a doctrine that determines what happens if any ally faces a geo economic attack.

Because even mineral poor regions like Europe are not powerless.

Imagine Europe would say, in response to China threatening to cut roads in Europe would respond and say, and then we will cut off the maintenance and servicing of Airbus aircraft in China.

It would be huge.

Similarly, like Russia did in 2020, China holds almost all of its financial reserves in Western currencies.

So in this step five, it's clear that there is enough leverage in the West to make a doctrine that essentially makes clear in geoeconomic terms that if you do X, I will do y, and our y needs to be very large and painful because you want to escalate in order to de-escalate.

And while, of course, it is clear that when it comes to critical minerals, these five steps are intended to counter China.

But I personally think Western countries should develop their geo economic strategy not just to target critical minerals, and also not just to target China.

We have to be honest.

China is not unique in using geo economic weapons to get others to do what they want.

Under Trump, the US is doing this as well, and as we've seen throughout history, the West has done this from time to time as well.

But yeah, that's my take.

Have I been unfair to China?

Do these steps make any sense?

Am I forgetting something?

Let me know in the comments below and if you are interested in in-depth follow up analysis, I highly recommend you check out our advertising sponsor, The Economist, specifically, I recommend you check out this, detailed analysis about how China's licensing system is actually using America's own trade weapons to beat it.

Specifically, I recommend you check out this, detailed analysis about how China's licensing system is actually using America's own trade weapons to beat it.

Then follow up with this analysis about why China's power over rare earths may not be as great as it seems.

And finally, how all of this so far means that arguably, China is winning the trade war.

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