China’s rare earth dominance fuels USA-China tariff fight over critical minerals

China’s control over rare earth output gives it leverage in the ongoing tariff standoff as these minerals are essential for electronics and defence, yet extraction imposes heavy environmental costs. Rare earths are scarce non-renewable resources: their limited supply means China can set export quotas (a form of supply restriction) and influence global prices. But mining them involves habitat destruction, water pollution and high remediation costs—externalities that are generally unpriced. Economically, the U.S. sees China’s dominance as a strategic supply-chain bottleneck and is imposing tariffs to shift demand and incentivise domestic substitution.

Trump trade war: Inside the rare earth metals China controls | News UK Video News | Sky News (NB: The youtube video clip lasts about 11 minutes)

1. Using information from the video, explain how the four factors of production are involved in the rare earth industry. Which factor of production do rare earth minerals themselves belong to? Give one example of a rare earth element used in modern technology.

2. Rare earth mining creates significant environmental damage. Explain how this represents a negative externality of production. Use an MSB/MSC diagram to show why the market may fail to allocate resources efficiently in the presence of such external costs.

3. Assess whether China’s dominance in rare earth production could allow it to offset or counter the impact of U.S. tariff increases.