Rare earths are China’s bargaining chip in the trade war — the U.S. is trying to fix that

Rare earths refer to 17 elements on the periodic table whose atomic structure gives them special magnetic properties. They're also the most important bargaining chip in the U.S. and China trade war.

That's because these rare earth magnets power everything from electric vehicles and wind turbines to defense equipment, data centers and high-tech consumer electronics. The United States used to be an industry leader of rare earth production, but for the last several decades, the U.S. and the rest of the world have largely depended on China for the majority of their rare earths — China mines around 70% and processes around 90% of rare earths.

"China has had the monopoly in this market for a really long time, and that monopoly has only increased," said Neha Mukherjee, rare earths research manager at Benchmark Mineral Intelligence. "The cost of production of these separated rare earths and magnets is very low in China, and any producer outside of China cannot enter the market because these prices are what we called as sub-rational prices."

In the last several months, rare earths have transformed into a powerful weapon in the trade war between the U.S. and China. The export controls that China placed on rare earths in April disrupted a number of industries, with the auto sector being particularly hard hit.

"China has slowly built out this export control toolkit, really mimicking and copying U.S. export controls to hit back at U.S. and other countries for actions that China believes are unfair," said Dewardric McNeal, a managing director at Longview Global and a CNBC contributor. "Although we are seeing it actualized over the last seven months, China has spent the last several years building out this tool kit."

The United States seems to be getting serious about establishing a domestic rare earths supply chain. In July, the Department of Defense announced a $400 million investment in MP Materials, an American rare earth miner and producer. MP Materials owns the only operational rare earth mine in the U.S. at Mountain Pass, California. Goldman Sachs and JPMorgan also backed the company with a $1 billion loan to fund the expansion of MP Materials magnet-making operations.

Other projects are also advancing. Energy Fuels began refining rare earths about five years ago at its White Mesa facility in Utah. The company has historically mined and refined uranium, a radioactive material, and realized it could use a similar process to extract rare earths from monazite. The company produces neodymium-praseodymium oxide, or NdPr material, at commercial scale for use in permanent magnets, but says that it can expand its offerings to include other rare earth elements with the right financial support. The company is already running pilot scale production of some of those other rare earth oxides.

"Right now, we have the capability to process up to a thousand [metric] tons of NdPr. Our plans are in what we call phase two, to increase that up to 6,000 [metric] tons of NdPr, which would be up to 6 million electric vehicles," said Energy Fuels CEO Mark Chalmers. "We also have the capabilities, and are advancing our abilities to produce a number of the other heavy rare earths, mainly dysprosium, terbium and samarium and other elements as required by the United States government. If they choose to have us recover those products in due course with the proper incentives."

Despite such progress, experts say that the U.S. is far from breaking its dependence on China for rare earth materials. Watch the video to learn more.