Reducing the United States’ risks of dependency on China in the rare earth market

Abstract

Rare earth elements (REE) are crucial in supporting multiple industries with new technologies. Thus the U.S.’ demand for rare earth oxide (REO) is on the rise. Yet, most of the REO supply comes from China, which exposes the U.S. to supply risks similar to that observed by the export quota imposed by China in 2010–2011. This paper uses supply and demand models to evaluate the effects of the U.S. government's proposed strategies to reduce supply risks associated with potential export restrictions from China. We show that there are multiple policies available to mitigate the impact of China's dominance in the market by attenuating the price increases and supply shortfalls, with the size of the changes depending on the price elasticity of demand and supply for REOs. In addition, there are varying degrees of welfare gains from each proposal. Specifically, reducing domestic demand for newly-extracted REEs through substitution (such as recycling or finding alternatives to REEs in production) provides the largest welfare gains. The next best welfare-improving proposal is discovering new domestic supplies of REOs, followed by plans to gain access to foreign REO sources.