China tries to stop smuggling of Rare Earths as shortages loom abroad

Beijing" The Chinese government has begun an intensive campaign to prevent rare earths from leaving the country without Beijing's permission, a step that is making shortages even more severe for these minerals, which are crucial to automakers, military contractors and many other businesses.

The anti-smuggling campaign, which Chinese state media described this week, is a cornerstone of Beijing's move this spring to assert tighter control over the rare earth industry as a tool in Chinese statecraft.

Beijing halted legal exports on April 4 of seven kinds of rare earths and magnets made from them. Beijing said any further shipments of these rare earths and magnets, which are processed almost entirely in China, would require export licenses.

Few licenses have been issued, as Beijing exerts pressure on the United States and others to lower tariffs on Chinese goods and to allow the sale of sensitive military technology to China.

Many companies in the United States, Europe and elsewhere have long depended on China for rare earth metals and now find themselves fast running out of supplies.

China's anti-smuggling push amounts to a double whammy for these businesses: Beijing has halted legal exports and is cracking down very hard on illegal exports at the same time.

Widespread smuggling eroded the effectiveness of China's previous restrictions of rare earth exports. Beijing imposed a two-month embargo on Japan during a territorial dispute in 2010 and intermittent restrictions from 2009 to 2013 to put pressure on global manufacturers to move factories into China.

Until 2010, when Beijing began early attempts to limit smuggling, Chinese organized crime syndicates smuggled up to half of China's annual rare earth production out of the country. Beijing's efforts had limited success at first. Multinational companies such as Boeing, Volkswagen and Toyota relied on long supply chains in which legal and illegal production were mixed together.

Even before the recent crackdown, however, the scale of illegal shipments had been greatly reduced. "Smuggling is not as easy as it once was," said David Abraham, a rare earths specialist at Boise State University.

Senior officials from China's customs, commercial, police and spy agencies met May 9 to plot strategy for the crackdown. Officials from 11 national ministries and seven provinces met three days later and issued a joint statement through the Ministry of Commerce.

"Strategic mineral export control is related to national security and development interests, and strengthening the control of the entire export chain is the key," the statement said. It also called for comprehensive tracking of rare earths at every stage of production and transportation.

China's Ministry of Commerce has said its new licensing system was aimed at limiting military use of rare earth metals. U.S. military contractors rely heavily on rare earth magnets and other critical minerals from China to build missiles, drones, tanks, artillery and fighter jets.

China's Ministry of Commerce now requires Chinese producers to submit elaborate documentation for each request to export restricted rare earths or magnets. To prevent resales, the application requires Chinese companies to certify not just who is buying the material but how it will be used in subsequent steps of production, sometimes including photos of products, three rare earth industry leaders outside China said.

These documents may provide Beijing with a detailed map of how rare earths are used abroad, and could make it easier for China to target specific companies and countries in the future.

"It's essentially becoming an intelligence gathering effort," said James Litinsky, chair and CEO of MP Materials, an American company that owns the sole U.S. rare earths mine, located in Mountain Pass, California.

Securities Times, a Chinese state-owned news outlet controlled by People's Daily, the flagship publication of the Communist Party, said in a report this week that Guangxi, a region in southern China that borders Vietnam, was tightening its scrutiny of rare earths trafficking in particular.

Before the COVID-19 pandemic, smugglers routinely moved large quantities of rare earths across the border with Vietnam. A tiny refinery in northern Vietnam was the only facility outside China that could undertake the complicated steps needed to chemically process so-called heavy rare earths.

But China built an elaborate system of fences with motion detectors along its southern border during the pandemic, after a series of incidents in which infected people entered China. The fences have since proved an obstacle for smugglers.

The small refinery in Vietnam closed more than a year ago because of a dispute with the country's tax authorities.

Another smuggling method, employed during China's embargo against Japan in 2010, was to melt rare earths into steel beams. The beams were then exported and remelted at their destination to extract the rare earths.

But China has tightened its surveillance of the steel sector, and many small mills have closed, replaced by fewer, larger mills with greater state supervision.

As shortages of rare earths outside China worsen and prices surge, the potential profits are huge for smugglers willing to take the risk.