Rare Earth Rivalries: Not Mercantilism-But Industrial Power in the Great Powers Era 2.0

Highlights

• US and China are converging on strategic intervention in rare earth markets, abandoning pure market orthodoxy to secure critical supply chains through direct investment and industrial policy.
• True dominance in rare earths comes from midstream separation, refining, and downstream magnet manufacturing—not from mining—where China controls 90% of global processing capacity.
• This represents Great Powers Era 2.0 industrial competition: end-to-end manufacturing capability and supply chain control, not resource ownership, will determine strategic winners.

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A study (opens in a new tab) by Lachlan Polefka analyzes how the United States and China are competing over rare earth elements, arguing that both nations are embracing “neo-mercantilist” strategies to secure critical supply chains. The paper contrasts China’s centralized, state-driven model—built on state-owned enterprises, export controls, and subsidies—with the United States’ market-based approach supplemented by targeted government intervention and investment. Despite these differences, both nations now treat rare earths as strategic assets essential to national security, advanced manufacturing, and defense systems.

Study Methods: Comparative Political Economy Approach

The study uses a qualitative comparative framework that combines economic theory with policy analysis. It evaluates how each country operates across the rare earth value chain—mining, separation, refining, and downstream manufacturing—while incorporating recent policy actions such as U.S. Department of Defense investments and China’s consolidation of production into state-backed entities.

Key Findings: Different Systems, Same Strategic Direction

China dominates through system-level industrial control. It consolidates production, subsidizes operations, and uses export controls to influence global supply. Critically, China processes roughly 90% of global rare earths—giving it leverage far beyond mining.

The United States, while still market-oriented, is shifting:

• Investing directly in companies like MP Materials
• Funding processing and separation facilities (e.g., Lynas partnerships)
• Building alliances to diversify upstream supply

The convergence is clear: both nations are intervening because markets alone cannot secure strategic materials.

REEx Analysis: Why “Mercantilism” Misses the Point

The study’s “neo-mercantilism” framing captures rising state intervention—but historically, it falls short.

Classical mercantilism (16th–18th century) focused on trade surpluses, bullion, and colonial extraction. Today’s competition is fundamentally different:

• It is post-industrial, not pre-industrial
• It is about industrial systems, not trade balances
• It is about technological and manufacturing dominance, not colonial accumulation

In REEx terms, this is Great Powers Era 2.0—a system defined by control over chokepoints in industrial supply chains.

The Critical Reality: Midstream and Downstream Win the Game

The study correctly identifies policy divergence—but it underemphasizes the most decisive factor:

Winning the rare earth race is not about mining. It is about industrial capability.

Specifically:

• Midstream separation and refining
• Industrial-scale solvent extraction (SX) remains the only proven method
• This is a complex, capital-intensive process manufacturing
• Downstream alloying and magnet production
• Rare earth oxides must be converted into metals, alloys, and ultimately permanent magnets
• This is where value, qualification, and strategic leverage concentrate

These stages are:

• Highly technical
• Environmentally challenging
• Capital intensive
• Time-consuming to scale

China’s dominance is rooted here—not in geology, but in decades of industrial buildout across these stages.

The United States and allies are only now attempting to replicate this system (ironically, one they first started)—and timelines, costs, and execution risk remain significant.

Implications: Industrial Strategy, Not Resource Nationalism

The findings reinforce a key REEx principle:

Access is not control. Ownership is not a capability. Mining is not dominant.

True independence requires:

• Scalable separation capacity
• Refining expertise
• Alloying and magnet manufacturing
• Customer qualification across defense and commercial sectors

Without these, upstream gains remain strategically incomplete.

Limitations and Gaps in the Study

The study’s main limitation is conceptual framing. By emphasizing mercantilism, it:

• Understates the industrial complexity of midstream processing
• Oversimplifies the transition from raw materials to finished components
• Does not fully capture the engineering and execution bottlenecks

Additionally, the AI comparison—while directionally useful—remains illustrative rather than deeply integrated into the rare earth analysis.

Conclusion: This Is an Industrial War, Not a Trade Theory

Polefka identifies a real shift: both China and the United States are abandoning pure market orthodoxy in favor of strategic intervention. But this is not a return to mercantilism—it is something more advanced and more consequential.

This is industrial competition at the system scale.

Control over rare earth supply chains will not be determined by who mines the most—but by who can:

• Separate
• Refine
• Alloy
• Manufacture

End-to-end industrial capability as part of supply chain leverage and control—not resource ownership per se—will define the winners.

Citation: Polefka, Lachlan. Rare Earth Rivalries and the Return of Mercantilism.