U.S. and Japan Reshape Rare Earth Supply Chains Amid EV Race
As the global transition to clean energy accelerates, strategic competition over rare earth elements—critical to electric vehicle (EV) motors, wind turbines, and defense systems—has intensified. The United States, in concert with key allies like Japan, is aggressively restructuring the global rare earth supply chain to reduce reliance on China, the dominant producer of both raw materials and high-performance magnets. This strategic recalibration is not merely an economic maneuver but a geopolitical realignment with far-reaching implications for the future of clean technology, industrial sovereignty, and international trade norms.
At the heart of this shift lies the convergence of U.S. domestic legislation and alliance-based industrial policy. The Inflation Reduction Act (IRA), the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act—collectively known as the “three major acts”—form the legislative backbone of America’s effort to reclaim leadership in strategic resource chains. These laws provide unprecedented subsidies for domestic production of critical minerals, including rare earths, while imposing strict sourcing requirements that effectively exclude Chinese inputs from eligibility for federal support. For example, to qualify for the IRA’s $7,500 EV tax credit, automakers must ensure that at least 40% of battery and magnet materials originate from the U.S. or countries with free trade agreements—a threshold set to rise to 100% by 2027. This policy framework functions as both an industrial incentive and a geopolitical instrument, compelling global manufacturers to reconfigure their supply networks along U.S.-defined lines.
Japan’s role in this emerging architecture is pivotal. Historically dependent on China for over 80% of its rare earth imports, Japan began diversifying its supply sources following the 2010 Senkaku/Diaoyu Islands dispute, which briefly disrupted rare earth exports from China. That episode served as a strategic wake-up call, prompting Tokyo to invest heavily in alternative sources and technologies. Japanese trading houses—Mitsubishi, Mitsui, Itochu, Sumitomo, and Marubeni—have since acquired stakes in mining projects across Australia, Southeast Asia, and Africa. Notably, Japan has become a major shareholder in Lynas Rare Earths, the Malaysian-based company operating the Mount Weld mine in Australia, the only significant non-Chinese source of rare earth oxides at scale.
Beyond resource acquisition, Japan is leveraging its technological edge in downstream processing and magnet manufacturing. Japanese firms, particularly Hitachi Metals (now Proterial), hold the foundational patents for neodymium-iron-boron (NdFeB) magnets—the most powerful and efficient permanent magnets used in EV traction motors. These patents, many of which are deemed “essential” or “unavoidable,” grant Japan substantial control over global magnet production. Chinese manufacturers must either pay licensing fees—often amounting to 20–30% of export revenue—or risk exclusion from key markets. In response, China has initiated compulsory licensing proceedings and filed patent invalidity suits in U.S. courts, but with limited success. This patent asymmetry enables Japan to act as a gatekeeper in the value chain, reinforcing its strategic alignment with U.S. objectives while safeguarding its own industrial interests.
The U.S.-Japan partnership extends beyond bilateral cooperation. Both nations are active participants in the Minerals Security Partnership (MSP), a U.S.-led coalition of 14 countries—including Canada, Australia, the EU, South Korea, and the UK—dubbed the “metal NATO.” The MSP coordinates investments in mining, processing, and recycling infrastructure, aiming to create a resilient, Western-aligned supply chain for critical minerals. In 2023, a symbolic milestone was achieved when Mountain Pass rare earth concentrate—historically shipped to China for separation—was instead sent directly to Japan’s Sumitomo for refining. This marked the first time in decades that a non-Chinese entity performed full-spectrum rare earth processing outside China, signaling a tangible shift in supply chain dynamics.
Yet, the path to a de-Sinicized rare earth ecosystem is fraught with challenges. Technologically, alternatives to rare earth magnets remain underdeveloped. While companies like Toyota and BMW experiment with ferrite-based or reluctance motors that use less or no rare earths, these designs typically sacrifice power density and efficiency—critical metrics for EV performance and range. Current “rare-earth-free” motors achieve energy densities below 2 kW/kg, compared to 4–6 kW/kg for NdFeB-based systems. As the International Energy Agency (IEA) notes, even with aggressive recycling and substitution, global demand for rare earths in clean energy applications could grow sevenfold by 2040.
Environmentally, the U.S. and its allies face a paradox. Rare earth extraction and separation are notoriously polluting, involving toxic tailings, radioactive thorium byproducts, and significant water consumption. Strict environmental regulations in Western democracies have historically discouraged domestic production—a key reason why China came to dominate the sector. The IRA acknowledges this dilemma by offering long-term regulatory certainty and financial incentives to offset environmental compliance costs. Still, local opposition persists. In California, Indigenous groups and environmental activists have contested the expansion of the Mountain Pass mine, citing legacy contamination and water scarcity concerns. This “not in my backyard” (NIMBY) sentiment could bottleneck U.S. ambitions, pushing the more hazardous stages of the supply chain to developing nations with weaker regulatory frameworks—such as Malaysia, Vietnam, and potentially parts of Africa—raising ethical and sustainability questions.
Economically, the cost implications are substantial. Building an integrated rare earth supply chain outside China requires massive capital investment and decades of process optimization. China’s dominance stems not just from resource endowment—though it still holds about 30% of global reserves—but from economies of scale, skilled labor, and a tightly coordinated industrial cluster centered in Inner Mongolia and Jiangxi provinces. Replicating this ecosystem elsewhere will likely result in higher input costs, which could inflate EV prices and slow adoption rates. Japanese automakers, caught between U.S. market access and Chinese supply efficiency, are particularly vulnerable. Toyota, which champions hybrid and hydrogen vehicles partly to minimize rare earth exposure, finds its strategy increasingly misaligned with U.S. policy favoring battery-electric vehicles (BEVs). To maintain competitiveness in North America, Japanese firms may be forced to localize production or accept margin erosion—a strategic bind reflective of broader alliance pressures.
For China, the U.S.-led decoupling effort represents both a threat and an opportunity. On one hand, exclusion from Western supply chains could erode China’s export revenues and technological influence. On the other, it may accelerate China’s pivot toward self-reliance and South-South cooperation. Chinese firms are already investing in rare earth magnet plants in Vietnam and deepening resource partnerships in Africa and Latin America. Moreover, China retains potent retaliatory tools. In 2023, Beijing imposed export controls on gallium and germanium—key semiconductors metals—demonstrating its willingness to weaponize its material dominance. While the long-term efficacy of such measures is debatable, they underscore the mutual vulnerabilities inherent in globalized industrial ecosystems.
Looking ahead, the rare earth contest is emblematic of a broader trend: the instrumentalization of economic interdependence. Once viewed as a stabilizing force in international relations, supply chain integration is now increasingly treated as a domain of strategic competition. The U.S. doctrine of “de-risking”—a euphemism for selective decoupling—reflects this paradigm shift. Yet, as scholars have warned, complete bifurcation is neither feasible nor desirable. Instead, the world may be heading toward a “dual-chain” system: one anchored in the U.S.-led alliance network, the other centered on China and its partners. Such a split would fragment technical standards, inflate costs, and complicate global climate cooperation—ironically undermining the very clean energy transition that rare earths are meant to enable.
In this high-stakes game, Japan’s balancing act will remain crucial. As both a U.S. treaty ally and a deeply integrated economic partner of China, Tokyo must navigate competing imperatives with finesse. Its investments in alternative supply routes and next-generation motor technologies position it as more than a passive follower; Japan is an active architect of the emerging order. Whether this new architecture enhances global resilience or deepens strategic fragmentation will depend on the choices made in Washington, Tokyo, and beyond in the coming years.
YANG Danhui¹,², GAO Fengping³,⁴,⁵, LIU Siyi⁶, GONG Yufeng³,⁴,⁵
¹Institute of Industrial Economics, Chinese Academy of Social Sciences, Beijing 100006, China
²School of Applied Economics, University of Chinese Academy of Social Sciences, Beijing 102488, China
³School of Economics and Management, Inner Mongolia University of Science and Technology, Baotou 014010, China
⁴Key Research Institute of Humanities and Social Sciences at Universities of Inner Mongolia Autonomous Region, Baotou 014010, China
⁵Key Laboratory of Green Extraction & Efficient Utilization of Light Rare-Earth Resources (Inner Mongolia University of Science and Technology), Ministry of Education, Baotou 014010, China
⁶Law School, University of International Relations, Beijing 100091, China
Journal: China Population, Resources and Environment
DOI: 10.12062/cpre.20231203