‘Rare earths are a very useful weapon for China’: Former Commerce Secretary Wilbur Ross on the big economic danger

Former U.S. Commerce Secretary Wilbur Ross warns that China is weaponizing its near-monopoly on rare earth processing, controlling 90% of global capacity, through new export licensing requirements that he describes as a "disguised rationing system." This poses an immediate economic threat, potentially causing U.S. factory shutdowns within 6-12 months across high-tech sectors like electric vehicles, semiconductors, and defense, with Ford already indicating such risks. Ross is skeptical of a trade resolution and cautions that further U.S. restrictions, such as on AI chip exports, could provoke a catastrophic Chinese blockade of Taiwan, given TSMC's critical role in advanced chip production, while U.S. efforts to build domestic processing capacity are not fast enough to mitigate short-term supply risks.

Analysis

China's dominant position in rare earth processing, controlling 90% of global capacity, is being weaponized through new export licensing requirements, which former U.S. Commerce Secretary Wilbur Ross describes as a "disguised rationing system." This strategic leverage poses an immediate economic threat to U.S. supply chains, particularly impacting high-tech sectors reliant on these critical materials. Ross warns that this could lead to U.S. factory shutdowns within 6-12 months if trade tensions persist.

The vulnerability extends across key industries, including electric vehicles, advanced semiconductors, and national defense applications like F-35 fighter jets and guided missiles. Ford Motor Co. (F) has already indicated potential factory idlings due to tightening rare earth supplies, highlighting the direct impact on the automotive sector. The reliance of modern manufacturing on advanced chips, which utilize rare earths, makes this a single point of failure for both clean energy transition and defense.

Ross expresses skepticism regarding a near-term trade resolution, noting China's perceived lack of incentive to negotiate. Furthermore, he cautions that potential U.S. restrictions on advanced AI chip exports could provoke a severe escalation, including a catastrophic Chinese blockade of Taiwan. Such a move would cripple global technology markets given Taiwan Semiconductor Manufacturing Co.'s (TSM) production of over 90% of the world's most advanced chips, including those for U.S. defense systems.

While domestic processing plants are being developed in the U.S. and Europe, Ross emphasizes a "timing disconnect," stating these efforts are not fast enough to mitigate short-term supply risks. This suggests a prolonged period of vulnerability for U.S. industries as China actively employs its rare earth leverage, contributing to a strongly negative sentiment and high market impact concerns.

Key Decisions for Investors

• Investors should closely monitor rare earth supply chain indicators and China's export policy changes for potential disruptions to manufacturing across affected sectors.
• Evaluate portfolio exposure to companies heavily reliant on rare earth elements, particularly in automotive (F), semiconductor, and defense industries, considering potential supply chain diversification or inventory strategies.
• Assess geopolitical risk, specifically the potential for escalation regarding Taiwan (TSM) and its implications for global advanced chip supply, which could severely impact technology portfolios.