Solutions for the U.S. Industrial Base




America must secure its supply chains against a vulnerability of its own making

Over the past few decades, through an intentional dominance of the global rare earth market, China has cultivated immense leverage over the United States. As the current trade war escalates, China is poised to capitalize on its strategic plan — and indeed recent brinkmanship via Chinese President Xi Jinping’s visit to a major rare earth processing facility suggests it may.

If China’s rare earth leverage over the U.S. is one part strategic foresight, it is two parts American strategic miscalculation and shortsightedness. Today’s U.S. defense-industrial base is reliant on a globally integrated supply chain. Over the last 20 years, an embrace of the “free market” has created a fragile network of supply for countless critical materials that are the backbone of many major defense systems.

A failure by the U.S. to take the long view of history — as has been taken by the Chinese for centuries — is manifesting itself in an uncomfortable realization that past industrial policy has left our military glaringly susceptible to supply chain disruption. As Chinese philosopher Sun Tzu wrote: “He will win who, prepared himself, waits to take the enemy unprepared.” Alarmingly, U.S. lack of preparation is now evident in the latest rare earth crisis, the second of the past decade.

The first crisis occurred in 2010 when a dispute over the Senkaku Islands resulted in an “unofficial” embargo on rare earth exports from China to Japan. That embargo shocked global supply chains, spiking rare earth prices. However, confident that trade ties between the U.S. and China would obviate any direct threat to the U.S., administration officials adopted a policy to “reduce, reuse, recycle and substitute” rare earths, while waiting for Wall Street to leverage the price spike into a “mine to magnets” supply chain. To promote this strategy, the U.S. government awarded a few small research and development contracts, conducted studies, and filed a World Trade Organization case against China.

In retrospect, this light-touch strategy was a national security disaster. Reduction, reuse and substitution efforts arguably took some of the best materials away from our defense engineers and resulted in no new domestic production. Relying on private investment resulted in over 200 rare earth “projects” on stock exchanges, the vast majority never producing anything.

The U.S. exception, Molycorp, imploded in less than five years, crashing from a $6 billion market cap to a bankruptcy worth less than $500 million (where most of its technology was dismantled or sold off, including to Chinese interests). The WTO case seemingly accelerated the Molycorp implosion by driving down Chinese rare earth costs, undercutting fledgling American and Australian producers.

Since 2010 I have been arguing that the U.S. needs to adopt a national security and production-focused strategy to break the Chinese monopoly. This strategy would secure the defense supply chain by producing enough to sustain limited defense demand, creating new supply to support future commercial demand. The steps are simple.

Mine-permitting reform would improve the predictability and economics of the mining industry, allowing investments to occur immediately, rather than years or even decades after a crisis. Rare earth investment evaporated after the Molycorp collapse, in part because of mine-permitting delays. Reducing bureaucratic hurdles would lower barriers to entry, making U.S. mining more attractive to private investors, ultimately reducing government cost.

The government should encourage — either through direct investment, tax incentives or tariffs — the development of high-value-added domestic oxide and metal production. Commentators lament the Chinese monopoly on rare earth mining but fail to recognize China has even greater dominance in the separation of oxides and metal making. Addressing only one aspect of the supply chain would be ineffective.

Direct government investment in items used by the U.S. military, starting with rare earth magnets, is also necessary. Novel rare earth magnet recycling techniques show significant promise in the near term. Last year, Congress recognized the importance of sourcing domestic magnets by prohibiting U.S. Defense Department use of Chinese magnets (and tungsten) — Section 871 of the National Defense Authorization Act is stimulating defense demand and encouraging upstream growth of non-Chinese alloys and metals as well. These were steps needed to reinvigorate an entire supply chain.

The current administration and Department of Defense are taking welcome steps to finally address the issue, pursuant to Executive Order 13806; they should work with Congress to fully resource the Defense Production Act Title III program as well as assist new producers in securing needed qualifications, in addition to other actions to incentivize production.

Implementing these recommendations will significantly reduce supply chain risk for the military, improve manufacturing strength and mitigate vulnerability. All these steps can be implemented but will require readdressing old assumptions about how to maintain our industrial base in a global economy.

While heeding the lessons of Sun Tzu, today’s Pentagon might find inspiration from former U.S. Marine Corps Commandant Robert Barrow — “Amateurs think about tactics, but professionals think about logistics” — and take the steps necessary to secure our supply chains against a vulnerability of our own making.

This post originally appeared on Defense News.

Jeff Green