Research Questions

  1. What is the nature of the critical materials problem?
  2. How did the current rare earth element (REE) supply chain form and what lessons learned are applicable to other critical materials, such as those found in LIB materials?
  3. What are the potential risks of a disruption to the critical material supply chain?
  4. What should be the aim of policies used to prevent or mitigate the effects of shocks to critical material supply chains?

The ongoing coronavirus disease 2019 pandemic and Russian invasion of Ukraine highlight the vulnerabilities of supply chains that lack diversity and are dependent on foreign inputs. This report presents a short, exploratory analysis summarizing the state of critical materials — materials essential to economic and national security — using two case studies and policies available to the U.S. Department of Defense (DoD) to increase the resilience of its supply chains in the face of disruption.

China is the largest producer and processor of rare earth oxides (REOs) worldwide and a key producer of lithium-ion battery (LIB) materials and components. China's market share of REO extraction has decreased, but it still has large influence over the downstream supply chain–processing and magnet manufacturing. Chinese market share of the LIB supply chain mirrors REO supply bottlenecks. If it desired, China could effectively cut off 40 to 50 percent of global REO supply, affecting U.S. manufacturers and suppliers of DoD systems and platforms.

Although a deliberate disruption is unlikely, resilience against supply disruption and building domestic competitiveness are important. The authors discuss plausible REO disruption scenarios and their hazards and synthesize insights from a "Day After . . ." exercise and structured interviews with stakeholders to identify available policy options for DoD and the U.S. government to prevent or mitigate the effects of supply disruptions on the defense industrial base (DIB) and broader U.S. economy. They explore these policies' applicability to another critical material supply chain — LIB materials — and make recommendations for policy goals.

Key Findings

  • China has used a variety of economic practices to capture a large portion of the REE supply chain. It has used this disproportionate market share to manipulate the availability and pricing of these materials outside China.
  • Economic coercion by China has usually been executed through denying access to the domestic markets. REOs have been the lone exception: China threatened to restrict access to Chinese exports to manipulate U.S. partner nations (Japan) to geopolitical ends.
  • Projects planned to increase the extraction and processing capacity of REOs fall short of meeting estimated future demand outside China; there is not enough supply outside China to mitigate a disruption event.
  • China could effectively cut off 40–50 percent of global REO supply, which would affect manufacturers and suppliers of advanced components used in DoD systems and platforms. The DIB has a limited time frame in which to respond to a disruption before industrial readiness suffers.
  • The potential risks associated with a disruption could affect the broader U.S. economy and the DIB's ability to procure critical materials, as well as interrupt military operations in some cases.
  • DoD has a variety of policies available to mitigate the effects of disruption. They can be categorized as proactive or reactive policies, or both. These policies have an effective time to impact, or the time needed for implementation and benefits to materialize.
  • Policy options used thus far have yielded mixed results.

Recommendations

  • Proactive policies should aim to diversify critical material supply chains away from Chinese industry by expanding extraction capacity or increasing material recycling efforts.
  • Proactive efforts should aim to co-locate the upstream and downstream sectors to better leverage industrial efficiencies.
  • Reactive policies should aim to increase the DIB's resiliency in the face of supply disruption by reducing its time to recover and increasing its time to survive.
  • Both proactive and reactive policy options with the longest time to impact should be implemented sooner rather than later to realize benefits.
  • Policies, planning, and coordination should also aim to reduce the time to impact for both proactive and reactive policies.
  • Both proactive and reactive policies should leverage U.S. ally and partner capabilities, or build relationships with nontraditional countries, to establish free access to critical materials at a fair market price wherever possible.
  • Working with nontraditional partners will be necessary because these countries have geographic access to critical materials and extraction capacity. Depending only on traditional allies and partners may only divert part of the supply chain away from Chinese industry.
  • Chinese disinformation campaigns should be expected in other critical material supply chains. This sector should work with cybersecurity experts and the U.S. intelligence community to educate executives and local governments about risks. Businesses should communicate their plans — and any influence operations underway — to local communities. The intelligence community should educate policymakers, U.S. allies and partners, and the public about the extent of Chinese interference in critical material supply chains.

This research was sponsored by the Office of Secretary of Defense and conducted within the Acquisition and Technology Policy Center of the RAND National Security Research Division (NSRD).

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