October 5, 2018
Today the Pentagon released the report Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States. It is a comprehensive report that addresses a number of topics surrounding defense, including America’s reliance upon China for rare earth elements. The full report can be obtained here: Pentagon Manufacturing and Defense Report
A key finding of this report is that China represents a significant and growing risk to the supply of materials deemed strategic and critical to U.S. national security. In addition to China dominating many material sectors at the upstream source of supply (e.g., mining), it is increasingly dominating downstream value-added materials processing and associated manufacturing supply chains, both in China and in other countries. 156 Areas of concern to America’s manufacturing and defense industrial base include a growing number of both widely used and specialized metals, alloys and other materials, including rare earths and permanent magnets.
As part of the increasingly global manufacturing and defense industrial base, imports of strategic and critical materials, such as rare earths, have increased, causing a trade-off between supply dependency and lower costs. Rare earths are critical elements used across many of the major weapons systems the U.S. relies on for national security, including lasers, radar, sonar, night vision systems, missile guidance, jet engines, and even alloys for armored vehicles.38 A 2016 study by the Department of Commerce’s Bureau of Industry and Security reported that 66% of respondents, the majority of whom are vendors to DoD, indicated they imported rare earth or related materials.
China’s domination of the rare earth element market illustrates the potentially dangerous interaction between Chinese economic aggression39,40 guided by its strategic industrial policies and vulnerabilities and gaps in America’s manufacturing and defense industrial base. China has strategically flooded the global market with rare earths at subsidized prices, driven out competitors, and deterred new market entrants. When China needs to flex its soft power muscles by embargoing rare earths, it does not hesitate, as Japan learned in a 2010 maritime dispute.
A key finding of this report is that China represents a significant and growing risk to the supply of materials and technologies deemed strategic and critical to U.S. national security; a challenge shared by key allies such as Germany88 and Australia.89 In addition to China dominating many material sectors at the upstream source of supply (e.g., mining), it is increasingly dominating downstream value-added materials processing and associated manufacturing supply chains, both in China and increasingly in other countries. Areas of concern to America’s manufacturing
and defense industrial base include a growing number of widely used and specialized metals, alloys and other materials, including rare earths and permanent magnets.
China is also the sole source or a primary supplier for a number of critical energetic materials used in munitions and missiles. In many cases, there is no other source or drop-in replacement material and even in cases where that option exists, the time and cost to test and qualify the new material can be prohibitive – especially for larger systems (hundreds of millions of dollars each).
From commodity materials to rare earths,90 Chinese investment in developing countries in exchange for an encumbrance on their natural resources and access to their markets, particularly in Africa and Latin America,91 adds an additional level of consideration for the scope of this threat to American economic and nationalsecurity.
The report further reports about China’s restriction of rare earth exports to Japan following the Senkaku Islands dispute in 2010;98 persistent economic intimidation against Taiwan;99 and the recent ceding of a Sri Lankan port.
China’s trade dominance and its willingness to use trade as a weapon of soft power increases the risks America’s manufacturing and defense industrial base faces in relying on a strategic competitor for critical goods, services, and commodities.
China’s aggressive industrial policies have already eliminated some capabilities with critical defense functions, including solar cells for military use, flat-panel aircraft displays, and the processing of rare earth elements.113 China’s actions seriously threaten other capabilities, including machine tools; the production and processing of advanced materials like biomaterials, ceramics, and composites; and the production of printed circuit boards and semiconductors.
As part of China’s One Belt, One Road doctrine to project Chinese soft and hard power,115 China has sought the acquisition of critical U.S. infrastructure, including railroads,116 ports,117 and telecommunications.118
China’s economic strategies, combined with the adverse impacts of other nations’ industrial
policies, pose significant threats to the U.S. industrial base and thereby pose a growing risk to U.S. national security.
Unlawful and otherwise unfair foreign trade practices (mostly by China) are injuring U.S. strategic and critical material manufacturers. Predatory practices – including state-sponsored dumping, public subsidies, and intellectual property theft – are destroying commercial product lines and markets of domestic DoD suppliers. The loss of commercial business can lead to the loss of domestic production capabilities essential to U.S. defense and essential civilian needs.
Impacted materials are widely used across multiple DoD systems and all major defense sectors (land, sea, air, and space systems).
In multiple cases, the sole remaining domestic producer of materials critical to DoD are on the verge of shutting down their U.S. factory and importing lower cost materials from the same foreign producer country who is forcing them out of domestic production.
Without relief from unlawful and otherwise unfair trade practices, the U.S. will face a growing risk of increasing DoD reliance on foreign sources of vital materials.
Materials are vital to national defense and economic security. While defense demand may often represent a small fraction of overall domestic and foreign supply, there are important subsectors that are heavily defense dependent. It is imperative that producers and supply chains of materials deemed essential to U.S. defense and civilian demand are robust, resilient, competitive, and responsive to support current and long-term economic security, current military operations, future wartime mobilization, and unanticipated surge demand.
The sector includes both raw and “downstream” materials produced by a global supply chain of value-added processing and manufacturing companies. These and other materials are combined into intermediate, semi-processed, and finished materials and eventually produced into end-items (e.g., parts, components, or structures) and incorporated into subsystems and integrated systems.
The range of materials is broad and includes metals and nonmetallic minerals produced from mining of primary materials or as a byproduct (e.g., rhenium from copper mining), or reclamation (e.g., recycling rare metals from electronics).150 Of equal or greater importance to raw material supply is industrial-scale capabilities and sustainable capacity to extract elements from mined materials and to produce value-added products. Examples include separating elements, processing compounds, smelting metal, alloying, and further downstream production (e.g., castings, forgings, and rolled products), particularly for the processing of rare earth elements. Important defense applications include high-performance aluminum and steel for ground vehicles and Navy ships; titanium and beryllium for military aircraft; tungsten for radars and communication systems; rare earths for guided munitions and computers; and ceramics for body armor and microelectronics. Another sub-sector is highly engineered synthetic materials and their composites, such as carbon fibers for missiles, aircraft, and space system structures; fibers and textiles for protective apparel and vehicle survivability; and synthetic materials including energetics for explosives and propellants. Newer materials of increasing importance include carbon nanotubes and additive manufacturing materials.151
Within the materials sector, risk includes shortfalls that impact the production of defense items to support current military operations; high U.S. import reliance on foreign countries who may become adversaries and cutoff supply during conflicts (e.g., trade embargo or war damage);152 reliance on single foreign sources of proprietary materials that would be difficult to replace; injurious foreign trade impacts (e.g., dumping and illegal subsidies) on key DoD suppliers; DoD reliance on commercial materials that become obsolete; and dependence on domestic single- point-of-failure producers.