In 1973, the oil embargo hit the West like a car crash — sudden, loud, impossible to miss. China’s control of critical minerals is the opposite. It is cancer. It grew for thirty years, and most of the West only noticed once it started to hurt.
That contrast comes from Tomasz Nadrowski, CFA, portfolio manager at Amvest Terraden (opens in a new tab) and author of Mineral War: China’s Quest for Weapons of Mineral Destruction. He runs an equity strategy that begins with geopolitics rather than geology, and he argues that what is happening in critical minerals is not a trade dispute and not a competition. It is a war in the strict Clausewitz sense — and it only became one when the West finally reacted.
Why This Is a War, Not a Trade Dispute
Nadrowski takes his definition from Carl von Clausewitz, the Prussian strategist of the Napoleonic era, who held that a war is defined not by the initial aggression but by the reaction to it. His analogy is the nineteen thirties in Europe: Nazi Germany absorbed one country after another without a kinetic conflict, and the war did not begin until Poland resisted.
Map that onto critical minerals and the timeline separates into three distinct phases:
- Monopolization: decades in the making, largely uncontested.
- Weaponization: a 2020s development, as export controls became an instrument of statecraft.
- Reaction: more recent still — and this is the phase that converts a conflict into a war.
Monopoly Is Normal. Weaponization Isn’t.
One of the more clarifying arguments in the conversation is that resource monopolies are not scandals in themselves. As Nadrowski puts it, when mineralization was distributed across the planet, nobody consulted the humans who would later draw the borders. Geology and sovereignty were never going to line up.
He spent years working in South Africa, which held a quasi-monopoly in platinum while platinum was indispensable to catalytic converters. That was never treated as a crisis. The line gets crossed at weaponization — and by his count there are only two modern examples:
- 1973, the first oil embargo: Middle Eastern producers imposed an export embargo on the West for political rather than commercial reasons.
- China, the 2020s: escalating export restrictions on rare earths and other critical inputs.
The difference is how each one felt. Citing Columbia University’s Tom Moerenhout, he calls the oil embargo a car crash. This one is cancer — invisible at onset unless you are reading every restriction coming out of MOFCOM, and obvious only once it has spread.
The Push Factor: Forty Years of Western Capital Saying No
Daniel pushes the point that the West handed this over rather than losing it, and Nadrowski agrees without hedging. Every industrial migration needs a pull factor and a push factor. China supplied the pull. The West supplied the push, in two forms.
Policymakers were warned and did nothing
The G7 raised critical-minerals dependency in 2003. Congressional reports were flagging it by 2012. The warnings were not the missing piece.
Capital markets refused the midstream
Nadrowski is blunt about his own industry. Foundational research, applied research, labs, pilots, demos — all of it happened in the West. Then, at the moment of scale-up, it left, chasing labor arbitrage and arbitrage on environmental externalities. And the middle of the value chain is the hardest part to fund, because margins there are thin and only volume makes it work. Once that gate opened, it did not close.
Cost of Capital: The One Advantage the West Can Actually Beat
Asked what he would tell a US president, Nadrowski goes straight to low-hanging fruit — anything with a short duration to cash — and then to the structural fix. He lists five Chinese advantages: cheap labor, cheap or state-owned land, cheap capital, a managed currency, and subsidies. The West cannot beat four of them. It can beat one.
His illustration is Lynas. He visited the Malaysian plant two months before recording and held the terbium, dysprosium, and samarium oxides himself. Dysprosium and terbium production rose to roughly nineteen tons in the quarter, up from eight — real progress. The stock still sold off, because capex on the heavy rare earths plant in Kuantan came in about a third higher than expected. The reason is simple: you can no longer buy Chinese equipment, so it has to be reverse-engineered in Finland, Canada, or Sweden and shipped in.
Lynas can absorb that, sitting on roughly A$1.2 billion in cash. A pre-revenue company cannot. And no pre-revenue Western processor competes with a Chinese company borrowing at effectively zero.
His preferred mechanism is not government winner-picking — the supply chain leaks in too many places at once for that to work. Instead:
- Externalize the tax code: adjust tax treaties so US capital is rewarded for funding projects in Australia and Canada, already Defense Production Act Title III countries whose output counts as domestic.
- Or bring the companies here: let allied developers re-domicile in the US and access the deepest capital market in the world. Either Muhammad comes to the mountain, or the mountain goes to Muhammad — or both.
- Harmonize tariffs by HS code, rather than blunt country-wide Section 301 and 201 actions that then require carve-outs, and use the revenue to give downstream manufacturers a reason to diversify.
The Frankfurt Problem: Procurement Always Wins
The most vivid scene in the episode happens in a conference hallway. At a rare earth industry conference in Frankfurt — sited there specifically to draw German OEMs — every presentation pointed in the same strategic direction. Then came the coffee breaks.
Nadrowski asked a procurement executive from a very well-known German car brand how he saw the situation. The answer: it was all very interesting, but we will always buy from the cheapest source. Meaning China.
His reply: then your brand will be gone in five years.
The gap he is describing is organizational, not intellectual. The CEO understands the exposure. The procurement department is a cost center paid to protect the margin. And at the far downstream end sits an industry with far more political weight than mining has — one that has already pushed back successfully, on steel tariffs under the first Trump administration and on graphite under Biden. Sometimes that pushback is forty-one thousand players. Sometimes it is just Tesla. Either way it works.
It Isn’t Just Magnets
The section most likely to be news to a supply-chain professional is Nadrowski’s insistence that magnets are the smaller half of the problem. China holds the middle of the value chain — what Austrian economists called roundabout goods — and without those capital goods there is no final product, car or otherwise.
- Inverters and capacitors
- Refining equipment and coating hardware
- Legacy chips — the lesson Europe learned the hard way with Nexperia
- Automatic track-laying equipment
Rare earths, tungsten, and antimony are the headline. The equipment layer is the leverage nobody budgeted for.
Innovation Centers: What Gets Invented in China Stays in China
Under the 14th Five-Year Plan, investing in the PRC effectively obliges a foreign company to build an R&D center there. Bosch has one. So does IFF. Umicore recently opened one. Nadrowski’s concern is not the scale-up migration that already happened — it is that foundational science now follows.
The economics are hard to argue with. DNA sequencing runs $500 to $1,000 in the West. In China, subsidized, it is closer to $50. A scientist facing that spread packs a suitcase.
Add reports that Chinese scientists may be discouraged from publishing in Western journals, and the direction is clear. LFP chemistry and sintered magnets were Western and Japanese inventions that China scaled. The next generation may be invented there and stay there. No Western legal framework currently prevents it.
China’s Own Constraints — and Its Strategic Error
Nadrowski is not a collapse theorist. Asked how long the system can run, his answer is that it is a large economy, so a long time. But he does put numbers on the constraint: 360% debt to GDP, growing roughly 11% a year. Large and slow is not the same as infinite.
The assets exist to deleverage — sell state holdings to private operators and release the wealth — but that means surrendering party control, which is the one thing not on the table. His island analogies are Rapa Nui, which cut down every tree and then could not build a boat to leave, and Madagascar, still deforesting for centuries.
Meanwhile, the export solution creates its own problem. Citing Keynes, he notes that persistent current account surpluses paired with import substitution are a way of exporting unemployment, and denting the middle class abroad makes those systems more fragile, not more compliant. A country with 17% of global GDP and 32% of global manufacturing, heading toward 40%, cannot keep running that trade.
And the tactical error, in his read: the restrictions were universal rather than aimed at the United States. Apart from one December 2024 embargo targeting US exports specifically, the April and October measures squeezed Europeans, Canadians, and Northeast Asians at the same time. Instead of isolating one adversary, China galvanized everyone at once.
Key Takeaways
- The monopoly isn’t the scandal — the weaponization is. Commodity monopolies are normal; South Africa held one in platinum for decades without incident.
- This arrived as cancer, not a car crash. That is why the West was slow, and why most people only noticed after it hurt.
- The West built the conditions. The G7 flagged the risk in 2003; capital markets declined to fund the midstream for forty years.
- Cost of capital is the winnable fight. Cheap labor, cheap land, a managed currency, and subsidies are not beatable. Zero-cost financing is.
- Lynas’s Kuantan capex ran about a third over for one reason: Chinese equipment is off the table, so it has to be rebuilt elsewhere.
- Downstream OEMs are the obstacle, not the mining sector — and they out-lobby it. Procurement is paid to protect margin.
- The exposure extends past minerals to inverters, capacitors, coating hardware, refining equipment, and legacy chips.
- R&D is following manufacturing. China’s innovation-center requirement risks locking up foundational science, not just scale-up.
- China’s universal restrictions may have been its biggest mistake, unifying the West, Canada, and Northeast Asia in one move.
FAQs
Why does Tomasz Nadrowski call this a “mineral war” instead of a trade dispute?
He borrows Carl von Clausewitz’s definition: a war does not begin with the initial aggression, it begins with the reaction to it. China’s monopolization of critical minerals happened over decades, the weaponization of that monopoly is a 2020s development, and the West’s reaction is more recent still. It is the reaction that turns a conflict into a war — the same way the Second World War in Europe began when Poland resisted, not when Germany began annexing its neighbors.
Is China’s dominance in critical minerals unusual?
No. Nadrowski argues resource monopolies are natural, because geology does not respect borders. South Africa held a quasi-monopoly in platinum for decades while platinum was essential to catalytic converters, and nobody treated it as a crisis. What is unusual is weaponization — he counts only two modern examples: the 1973 oil embargo and China’s current export restrictions.
Why didn’t the West see this coming?
Because of how it arrived. He compares the 1973 oil embargo to a car crash — sudden and impossible to miss — and the current situation to cancer, which you do not notice at onset unless you are tracking every restriction coming out of MOFCOM. He also assigns blame at home: Western capital markets refused to fund the midstream for forty years, letting every innovation get scaled somewhere with cheaper labor and looser environmental rules. The G7 first raised critical-minerals risk in 2003.
What is the single most effective thing the West could do?
Attack the cost of capital. China’s advantages are cheap labor, cheap or state-owned land, cheap capital, a managed currency, and subsidies. Nadrowski argues the West cannot beat four of those, but it can beat the fifth — pre-revenue Western processors cannot compete against Chinese companies borrowing at effectively zero. He would rather see the market incentivized broadly than the government pick individual winners, because the supply chain leaks in too many places at once.
Why does he say the problem goes beyond magnets?
Because China controls the middle of the supply chain, not just the minerals. He lists inverters, capacitors, refining equipment, coating hardware, legacy chips, and automatic track-laying equipment — what Austrian economists called roundabout goods. Without those capital goods you cannot build the final product, even a car. Europe learned this with Nexperia and legacy chips.
What are China’s “innovation centers” and why do they matter?
Under the 14th Five-Year Plan, foreign companies investing in China are effectively required to establish an R&D center there. Nadrowski notes Bosch, IFF, and Umicore have all opened them, and worries the result is that foundational research — not just scale-up — migrates to China permanently. He points to reports that Chinese scientists may be discouraged from publishing in Western journals, and to DNA sequencing costing $500 to $1,000 in the West versus roughly $50 subsidized in China.
Why does he think China made a strategic mistake?
Because its export restrictions were applied worldwide rather than only to the United States. Instead of isolating one adversary, the measures squeezed Europeans, Canadians, and Northeast Asians simultaneously — which galvanized the entire world to act at once.
What policy changes does he recommend?
Externalizing the US tax code and adjusting tax treaties so American capital is rewarded for funding projects in allied countries like Australia and Canada; harmonizing tariffs at the level of specific HS codes rather than blunt country-wide Section 301 and 201 actions; using that tariff revenue to give downstream manufacturers a reason to diversify; and building tighter government–private-sector coordination on the model of Japan’s JOGMEC.
Transcript
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Dustin Olsen (00:41)
Hey everyone, welcome to the Rare Earth Exchanges Podcast. I'm your host, Dustin, joined by my co-host Daniel, and our special guest for today is Tomasz Nadrowski, portfolio manager at Amvest Terraden. And probably more importantly, you are the author of Mineral War: China's Quest for Weapons of Mineral Destruction. That book is what really brings us together today. So Tomasz, welcome to the show. How are you doing?
Tomasz Nadrowski (01:15)
Thanks Dustin. Thanks Daniel. Thanks for having me.
Dustin Olsen (01:17)
Tomasz, in your book, you've called what's happening right now in the market a mineral war — not a trade dispute, not a competition, but an actual war. So I'm curious to know what the case is for framing it that way.
Tomasz Nadrowski (01:37)
There's a reason for that. I think we should always distinguish between different social operating systems, and I think it goes back to European philosophical traditions. There are three different traditions. One is Kantian cooperation. Another is more about competition — that's John Locke. And then of course there's Thomas Hobbes and the idea of conflict, and all the philosophy of conflict that followed since then.
I called that particular conflict a war following a very different thinker, a strategist: Carl von Clausewitz, the Prussian military strategist during Napoleonic times. Because he defined a war not as the effect of initial aggression, but as the result of a reaction to it.
I give the example from the nineteen thirties, ninety years ago in Europe, as Nazi Germany was swallowing one country after another without a kinetic conflict — and the war didn't start until Nazi Germany invaded Poland and Poland reacted, and that started the European part of the Second World War.
And that's why I compare it to the current situation in critical minerals. The monopolization of this space by China happened many years ago, over many years and decades really. The weaponization is more recent — it's really the twenty twenties. And the reaction to this weaponization is even more recent. But it's this reaction that turns this conflict into a war.
Dustin Olsen (03:01)
Very fascinating. And you're right — what we're seeing unfold isn't something that happened overnight, but rather the byproduct or the makings of something that's been going on for decades. And I think for some who are tuning in more recently, they probably feel a bit surprised by it. Would you say that's true?
Tomasz Nadrowski (03:26)
Yes, and there's a reason for that. Monopoly in commodities is not that unusual. I tend to quip that when God decided where to put mineralization in different parts of this planet, he didn't consult the humans who are actually drawing borders. And therefore there is a low correlation between how countries have been created in the current post-Westphalian system of nation states and where the geological opportunity lies.
And so monopolization is natural. I worked for many years in South Africa, and South Africa was and has been a quasi-monopoly in platinum. Of course for ICE cars, for catalytic converters, platinum was absolutely essential. It was never a problem.
The problem starts when you start weaponizing this monopoly. And really this current conflict is only the second case that I can think of in modern times. The first case was in 1973, the first oil embargo. This was a case where the dominant producers in the Middle East decided to slap an export embargo on the Western world — not for a trade dispute, but for a political dispute, or geostrategic dispute if you wish.
The difference between that case and what causes the surprise now — people are surprised that we are in this current situation of aggravated conflict and weaponization — is that the oil embargo was sudden. As my friend Tom Moerenhout at Columbia University compares it, it was a car crash. Whereas this particular conflict is more like cancer. You don't actually see it immediately when it starts, unless you follow every single piece of restriction coming out of MOFCOM and Beijing, and then slowly the picture unfolds.
But not many people follow this with that kind of detail. We have to, because we run a fund that uses geopolitics as a starting point to invest in critical minerals. So we have to be aware of exactly what the restrictions are, and which products and materials they affect most, because that's part of the thesis we develop to invest in the equities of those companies.
Daniel O'Connor (05:32)
Tomasz, I wanted to just chime in here — and I really appreciate your work. We started Rare Earth Exchanges, this podcast, the website, to really democratize the information out there about what's going on, because it's just not covered in the media.
But I have to share: China has done this in plain sight. We gave this to them. They didn't take it. We readily and gladly outsourced all of this activity for the last twenty, thirty years. In fact, I've seen reports in Congress as early as two thousand twelve where we're saying, hey, we've got to do something, we've got to do something — and people don't seem to care. So can you really blame China for just capitalizing on an opportunity?
Tomasz Nadrowski (06:20)
There's a lot of blame all around. For every migration, including migration of industry, you need a push factor and a pull factor. There's no doubt that there was a pull factor in China, but the push factor — you're right on target.
There were two. One is the policymakers. You mentioned Congress. The G7 spoke about it in two thousand and three for the first time. Two thousand and three. But it's also the capital market. And I'm coming from the capital market side, and I think the complete negligence and lack of foresight to spot the opportunity, if not the risk, to invest in this space —
What did the capital market do? Every single innovation that came through foundational research, applied research, labs, pilots, demos — the moment it was scaled up, it wasn't scaled up here. It was scaled up out there, with labor arbitrage and arbitrage for negative externalities and what have you.
And when it comes to metals, once you open this gate you don't stop it, because for everything in the middle of the value chain you need a lot of volume, otherwise you're not going to make any money. The margins are just too tight. And so the dam opened, and over thirty, forty years this left. But you're right, there's a lot of regulatory and legal framework that was imposed in the West, including in the United States, that contributed to the push factor.
Daniel O'Connor (07:34)
Well, there was an ideology. There was a particular global ideology of efficiency over resilience — that everybody would work together, Adam Smith, Wealth of Nations, the pin factory, everybody would do their piece. And the market would bring it all together. Was that not the ideology that drove a lot of this?
Tomasz Nadrowski (07:59)
Well, then we sort of get pickled in our own conviction, right? What if the counterparty doesn't have that ideology and follows a different one? Then of course you have to assume that maybe those rationalities differ a little bit.
So we lived in a simplistic pickle, believing that the commercial rationale that we in the Anglo-Saxon world have historically excelled in is the one that really primes. That's not necessarily the case when it comes to national security, and it was no different during the first Cold War. We were not as wedded to just the market and Adam Smith's invisible hand during the first Cold War, and we won't be during the second Cold War either.
Daniel O'Connor (08:38)
Yes. So I get your point. Your point is that we sort of projected these values onto the Chinese as we were giving them all this business. And we were telling ourselves, they're going to become just like us, because we're so great, and our approach is the best approach — and naturally when you get richer, you become more like us. Was that not the assumption that was made? I'm simplifying.
Tomasz Nadrowski (09:07)
That's the most bizarre thing. That's the most bizarre thing. Because wealth is created in a variety of different ways. And so, richer — where do you start from? Do you inherit this? Have you just created it? Is it just luck, a lottery or something? That will impact your decisions on how to invest, save or spend your money.
And unfortunately in a system like the communist system in China, it's not necessarily consumers who decide. It's a much more constrained source, because of financial repression and the way the monetary system is structured.
But I think there's a more fundamental difference in terms of how value is structured. We believe generally that value is created at the moment of exchange, the moment of transaction. And so that's where the value of the product is defined, which by extension defines the value of the capital goods that go into the production of this product, and then from the capital goods all the way to economic factors.
Marxists don't believe so. Marxists believe that the value transfer goes the other way around. You first infuse economic factors — labor, capital, land, technology if you consider that endogenous — and then into capital goods, and then into products.
The question that I always ask of Friedrich Engels, who invented this labor theory of value: what happens if you don't sell the product? Where is the value then? Well, that's exactly the problem. Then you have to flood the rest of the world with your product, because you just don't have domestic consumption. And it's a big problem.
But coming back to the wealth, because it's important. The misunderstanding here was how the creation of the middle class would operate in such a system — such a deeply controlled system, especially everything that comes to midstream and upstream industry.
The middle class in China is predominantly either people in the urban centers who worked initially for foreign-invested companies, or those who work for the state-owned companies and the state system. And this is a much larger group. They would never cut the branch on which they were sitting just because they were well-to-do.
These are not the struggling mom-and-pop shops that work day and night in the corners of the streets in China. They're not developing any middle class. It's paupers, unfortunately — that's the real capitalist of day-in, day-out China. So that's the problem: the structure of the industry itself.
And the control that the Communist Party had over how the productive forces were structured, to use the Marxist term, prevented any growth of radicalization of that wealthier group of the population, because they were just so dependent on the survival of the system.
Daniel O'Connor (11:50)
Right. I just have to throw this in here though. They accumulated, with this hybrid model — part capitalist, part communist — an unprecedented wealth surge in human history. Unprecedented. Is that a true statement?
Tomasz Nadrowski (12:12)
This is a true statement. And who controls this wealth? Not the consumers. The producers. That's the biggest difference.
The difference here is that the misallocation of capital that has created this huge wealth, urbanization and so on, has generated an economy that sits on 360% debt to GDP. This is amazing growth on an amazing borrowed dime.
At a level of development which is still somewhat below the levels of, say, the US and Japan — which have their own problems of debt to GDP, as we know, and we agonize over that all the time. So it is unfinished business.
There is no doubt that there is a massive set of assets that could be liquidated, for example sold to private operators, to release that wealth and pay off a lot of this debt. But unfortunately that would mean the loss of control by the dominant party. So there are institutional constraints on how to dig yourself out of that pickle.
Daniel O'Connor (13:13)
Well, let's talk about that, and this race. We find that unfortunately a purely market-centered approach here in the West may not work at this point, Tomasz, if we want to catch China. Already President Trump is investing in companies — we bring in some hybrid industrial policy to this very, very difficult situation.
Very few people in America know just how bad it is and how much leverage China actually has, especially with the November 10th deadline. I think you're going to find that probably we're not going to ship our usual arms to Taiwan. They were warned when they were visiting China not to do so.
We're years away from really being able to effectively mine both heavy and light rare earths, separate at scale, and produce magnets to specifications. We're five years away, at least. So let's say you were advising President Trump today — how would you manage this situation? Because it's not easy.
Tomasz Nadrowski (14:31)
I would focus on what I'm focusing on by running a fund: low-hanging fruit. So everything that has a relatively short duration to cash. Boosting operations where that's possible.
I'll give you an example. Yesterday morning, Lynas comes up with its results. And I was fortunate, because I visited the plant in Malaysia two months ago, so I actually held in my hands the terbium oxide and the dysprosium oxide and samarium oxide. Proud to have seen that.
Now, we have the production of dysprosium and terbium coming up — I think nineteen tons in that quarter, the fourth Australian quarter. That's up from eight tons in the previous quarter. That's very positive. It's very positive for those dysprosium-doped magnets that will be made, of course, in Japan and then sold to Lockheed or someone here. But it's insufficient.
Yet the market sold off. The company got sold off. Why? Because now we know that the capex for that full plant for heavy rare earths in Kuantan in Malaysia will be about one third higher than we thought it would have been.
Why? Because of course you cannot use Chinese equipment. You have to somehow reverse-engineer this Chinese equipment in Finland, Canada, Sweden, somewhere, and install it. It's going to be a lot more expensive.
So this is our direction of travel. We have to help the companies. Lynas will figure it out — they sit on one point two billion Australian dollars in cash, so it's not a problem for them. But for everybody who is a pre-cash company, we have to help them reduce the cost of capital. There's no other way. They cannot compete against Chinese companies with zero cost of capital. So that's the number one thing.
And then, how do you do it? The problem here in the United States is that we don't have a very well-developed mining industry, even less a smelting industry. And therefore we have to rely on our allies — in this case not just Japanese, but Australian and Canadian and others.
And there is a mismatch between the capacity of our extremely efficient and deep and liquid capital market, and their lack of interest in this space. And this space being very often foreign — foreign to a degree, because Canada, Australia and the UK are Defense Production Act Title III countries, so their product is considered domestic product for the United States. But we haven't seen an incentive, tax incentive or otherwise, for US capital to invest over there.
So one of two things has to happen. Either Muhammad comes to the mountain or the mountain goes to Muhammad. Either those companies come and re-domicile here and then get all the premium and start competing properly at a much lower cost of capital, or our capital has to go there. Or maybe both. Somehow we have to match those.
It's not going to be solved by the government just picking and choosing the winners here and there. The entire supply chain is full of holes. We have to incentivize the market to do the job itself, but at a lower cost of capital, because the adversary has used this as the highest weapon.
Now, I mentioned the economic factors that Marxists believe in. This is of course cheap labor, cheap land — or zero land, it ultimately belongs to the state in China — cheap capital, a low currency, plus subsidies. You can't beat them across all of these things. But on cost of capital you might actually. And so that would be the message.
Daniel O'Connor (17:58)
Now, we write a lot about this, and we've come up with a thesis called Great Powers Era 2.0. In a nutshell, when we started this venture at the start of two thousand twenty five, our message to President Trump was: take a cue from Ronald Reagan, build tight Cold War–style alliances, Five Eyes, Europe.
Trump did the exact opposite. He talked about Canada as a 51st state. He talked about invading Greenland. And so that shook up everything. And now Canada's doing its own thing. It's a free-for-all.
Now, our thesis is that's going to break the Chinese monopoly — believe it or not, unbeknownst to probably Donald Trump himself. This free-for-all that we call Great Powers Era 2.0 is going to unseat the Chinese monopoly faster than the older way. The reason being, it's a true competitive free-for-all now. Everybody wants to go up the value chain. Malaysia wants to keep things and add value. Vietnam does.
So it's a fascinating point in history. That's why we call it Great Powers Era 2.0, because it's almost like we're going back to the pre–World War I world in some ways.
Before, China could simply waltz into any country it wanted, bring suitcases full of cash, maybe build a hospital, whatever, and it got what it needed. Those days are over.
And in our thesis — you tell us if we're wrong — that's going to mean inflationary trends, because all of these things are going to cost more. Globalism with the Chinese model made Walmart full of good stuff that people could buy for a dollar or two dollars. That model's changing.
And companies don't yet — the accounting of companies, Tomasz, doesn't take into account the geopolitical value of that magnet that's in that motor. General Motors does it slowly, but the accounting profession has not.
So how is the accounting of multinational corporations going to start incorporating this and adjusting their expectations? That'll adjust the whole system, but I think that's what has to happen. Tell me if I'm wrong.
Tomasz Nadrowski (20:27)
I think slowly they're actually coming around to this. I wish I was more optimistic about it. And the reason why I'm not is that I was recently at a rare earth industry conference in Frankfurt.
There were some government people, and we all look in roughly the same direction — roughly what you mentioned. It was in Frankfurt for one reason: to invite a lot of OEMs. German OEMs, car makers, Bosch, Siemens, I don't know who else was there.
Ex cathedra, all of our presentations were very similar, strategically pointing in the same direction. What was really interesting was the breaks between the sessions, because during the breaks you could engage with Mr. and Mrs. OEM — from some very famous car brand from Germany.
And the question is, so how do you see this situation, Mr. Beschaffungsabteilung — procurement department? And he says, it's all very interesting what you said, Mr. Nadrowski, today at the session. However, we will always buy from the cheapest source. Meaning China.
And I say: you know what? I'm sorry to say, but your brand will be gone in five years from now.
And the problem is there is such a hierarchy, such a gap between the CEO who gets it — and he's going to follow Merz and Brussels with their coercion ideas against China — and then the procurement department, which is considered a cost center, and he's paid for keeping the margin.
And so the biggest issue here is that, on the mining side and metals side, we always think about upstream. What's good for us? What kind of price floor to bring? What would incentivize investment? How to facilitate qualification between different nodes in the value chain?
The biggest thing is that at the far downstream end, there is a much more powerful, politically powerful industry still in the United States, in Germany, in Japan and elsewhere — which has much stronger lobbying power than, say, the mining industry in the United States, and which can push back against our ideas of weaning ourselves off China.
And they did, on a number of occasions. It's not new. There was the same problem with the first steel tariffs during the first Trump administration. There was a problem with graphite under the Biden administration. The pushback from downstream — sometimes forty-one thousand players, like in the case of steel, or sometimes just Tesla, as in the case of Biden and graphite — but sufficient pushback against that.
So what needs to happen between carrots and sticks: there needs to be an incentive for downstream to start moving gradually away from that. Gradually, because you rightly pointed out, this is not something that's going to be solved before November of this year. But we have to do this.
And it actually goes beyond critical minerals. Because what happens when countries like the United States or the European Union try to push back against this predatory mercantilism? They're trying to push back partly because we are flooded by these things in Walmart. This lopsided current account deficit is just too much to bear.
But because the center of the value chains, of the supply chains, is so welded to Chinese components — what Austrian economists used to call roundabout goods — they cannot push back.
It's not just about critical minerals. We know it's about magnets, but it's also about inverters, it's also about capacitors, it's refining equipment, it's coating hardware, it's legacy chips, it's automatic track-laying equipment. All of these things are made in China. And without these capital goods, you cannot create the final good, even if it's a car.
And so that is the source of this pushback. We know the story of rare earths and tungsten and antimony and so on. But Europe learned the hard way the story of Nexperia last year and legacy chips. So China is keeping that middle of the supply chain as the card of leverage. Some of them really powerful — we know the numbers on rare earths. Some of them less powerful, but just as scary for the downstream industry that still exists in the West.
Daniel O'Connor (25:05)
So Tomasz, I tend to agree with you that that is the mindset today. And we've been told, for example — I won't say which car companies, but let's just say one major car company in the West has decided they're just going to go with China. They're not going to deal with this stuff. And they don't do defense anyway.
But the problem is President Trump might enlist you to do defense. And if he does that, China's going to put you on a dual-use list. And guess what? You're not going to get anything. And you're going to be the new BYD front office. Which is the whole goal. That's the goal.
Tomasz Nadrowski (25:54)
I think it's worse than that. I'm sorry to be a little dramatic here. The fourteenth five-year plan instituted something that we now all know: the innovation centers in the PRC. So if you have an investment in the PRC, you're now constrained to build an R&D center.
And some of these we know. Bosch has one, and of course life science companies have one, because you have access to all the genome.
Daniel O'Connor (25:58)
That's a huge shift. And by the way, that's an area of expertise for me. That's a huge shift that's happening. But keep going.
Tomasz Nadrowski (26:29)
That's a massive shift. And you know why? Because your DNA sequencing in this part of the world, or in Switzerland, costs you between five hundred and a thousand dollars. The Chinese government will subsidize you and it's fifty. So if you're a scientist in the West, you're now packing your suitcases and you go to China. That's dramatic.
But let's come back to industry — those innovation centers. German car makers have their R&D centers in China. IFF, a US company, in China. Umicore, a Belgian metals company, innovation center just opened in China. One after another after another after another, moving all the R&D to China.
Now, I fear very much — and we know it from rare earths — that this is going to fall under the Las Vegas headline: what gets innovated in China stays in China.
There are already rumbles from the Chinese Communist Party that Chinese scientists would not be allowed to publish papers in Western science journals. So it is extremely troubling that we have not created a legal framework that would constrain our companies, Western companies, from giving away even foundational research to China.
Historically, as we all know, we made all the LFP, sintered magnets — that was all Western, slash Japanese. UK, German, French, American invention, Israeli sometimes, and then scaled up in China. We're moving to a different world where even foundational science will be done there, and then applied science as well. That's really troubling.
Daniel O'Connor (27:57)
That's right. And we've seen — I come out of the biotech pharma space — we've seen an acceleration of original research happening over there now, and now most Western companies are going over there to license their IP. So it's a profound change.
I don't think, Tomasz, that the elites in this country — let's just take the United States, the elite class, government, corporate executives — I don't think they understand what's coming. I think they're starting to pick it up. I think Trump kind of intuitively knew, so he acted out on impulse to try different things. But I don't think anybody's thinking holistically about what it really means five, ten years from now. What are your thoughts?
Tomasz Nadrowski (28:53)
Well, I'll tell you what it means. The problem is that five, ten years from now, if it continues like this, you and I will not be able to have this conversation anymore online.
Daniel O'Connor (29:04)
And what makes you say that? What do you envision?
Tomasz Nadrowski (29:07)
Because they will determine our digital future.
Have you heard of the World AI Cooperation Organization in Shanghai? Did you see the picture? António Guterres is standing there. This is twenty-nine countries initially signing up, with such luminaries — beacons of digital freedom — as Russia signing up to this. This is for China to define what the standards of AI use will be worldwide. And with little tidbits offered to what we call the global south, the global south will go with this.
Daniel O'Connor (29:43)
Well, I think what they would do to us in that kind of situation — we'll have a social credit score and we would get low marks as troublemakers. So we'll be relegated to somewhere obscure.
Tomasz Nadrowski (29:56)
And you know what it means. That means that in the morning you go to a coffee shop and they find out: I'm sorry, your credit score is just too low for your coffee today.
Daniel O'Connor (30:08)
That's right. You're not good for a cup of coffee anymore. Of course, by then Starbucks will be thirty, forty dollars for a cup.
So if we look at current policy — let's talk about real policy. We do have people from Washington, DC and others that go to our website and such. Current policy today: I think something you say that really makes a lot of sense is, if we would externalize our tax code and say, look, if you're going to do something in Australia or Canada or somewhere else, but it benefits us, you're going to benefit from that tax policy. I think that's a very smart idea. How hard would it be to do something like that?
Tomasz Nadrowski (30:58)
Well, we have tax treaties with those countries, so it would require some tweaks to the tax treaties. I think you're right, the companies would have to be monitored. Not every single mining company in Australia would be our friend — many of them sell things to China. So that would require a sort of closed loop of annual reviews or whatever.
But part of that story: tariffs would be part of the story. And tariffs would have to be somehow harmonized over specific HS codes — specific harmonized system items at the customs level. That's why I'm not very comfortable with using 301s and 201s for entire countries. Because then you have to carve out, for example, critical minerals from that, rather than, for example, protect us against the deflationary blow, which is sometimes the strategy that China uses for certain materials to disincentivize investment.
So that would be a source of revenue. And that source of revenue could then be used, for example, to incentivize downstream to move away from that dependency.
But it is of course much more complex if you have to do it in a group of core countries. It doesn't have to be — I don't know what the count is now, forty-nine countries and so on. It could be a core group of countries that really matter from the perspective of mining and refining. So of course Japan, Korea, Taiwan are important pieces here. Europeans as well. As we know, Europeans have some solutions, France specifically on the rare earth front. So it's important to harness that. And even if governments don't do it, we know that people from Utah, Brazil, Australia and elsewhere go there.
It takes a little bit more cooperation. I don't think that rules out what you mentioned before, that competition for the pole position in this race. The market will create this framework already and incentivize it, but we have to protect ourselves against a strategic reaction of the adversary, who has shown in the past they were very capable of either cutting off access, or cutting off access to equipment, or cutting off access to reagents.
I mean, this is all in the restrictions — the whole panoply of restrictions that we could read through since at least twenty twenty-three until last year and again this year, at least in relations with Japan.
So that would be a mix of different policies, but including the tax policy as well. And there are certain formulas, specifically in Canada, for investors that show that you can actually incentivize especially early-stage development — not for the next five years' solution, but to maintain this momentum going forward in the longer term and generate feedstock that those future plants will require.
Daniel O'Connor (33:54)
So Tomasz, you're making a lot of sense. Now under Trump, and now what we call Great Powers 2.0, it's a more dynamic situation. I still think it's workable, but I do think that we may have to make some adjustments in our policies.
Then I want to get into China a little bit. How far do you think we are from being able to organize ourselves, and with partners, to get to the next level of appropriate policy per what you're talking about? On the one hand I hear some pessimism, on the other hand what you're talking about all seems very pragmatic and not that hard to do. But correct me if I'm wrong on that.
Tomasz Nadrowski (34:45)
So between the two powers, China and America, we have those different forces that in a way squeeze the rest of the world. It's surprising, because a lot of people thought that with Trump v2 the Chinese would be very nice to Europeans. They're actually not.
The important thing — and probably a mistake by China last year — was to apply these restrictions worldwide. The restrictions, first in April and then again in October, were not specifically US. There was only one embargo in December of twenty twenty-four, just to welcome the second Trump administration, which was specifically an embargo on exports of certain products to the US.
Otherwise, all of these measures, up until the Japanese embargoes this year, were universal. So they squeezed in the same way not just the United States, but also Europeans, Canadians, Northeast Asians and so on. And so that has galvanized the whole world to actually act. So that's part one.
Part two you mentioned already. Part two is this unhelpful wrangling over issues with Canada in the public space. A par excellence natural ally of the United States, with a more embedded and developed mining and smelting and refining industry as well.
I don't underestimate for a moment the problems of the Northwest Passage and what Greenland means strategically for the United States — and by the way for Canada too, more so than for Denmark. So there are issues here that should be solved. Probably we just didn't approach them in the best ways to build alliances, because it's true that some of our allies have probably less trust in our intentions, and if that spills over to critical minerals, it probably slows us down.
Daniel O'Connor (36:28)
Well, Denmark, I will have to say — I've spent a lot of time over there. They've always been a very, very strong American ally, both during World War Two, the government that was kicked out by the Germans did deals with us, and during the Cold War they gave us all the access we needed to base our bases up there. So I think that Denmark will work with us. I think it's how you approach it.
Tomasz Nadrowski (36:58)
I agree with the second part. I'm not sure I agree with the first one. This was a country that folded in three days to the Nazi invasion, and we took over Greenland during the Second World War. So without the United States, who knows what would have happened to the GIUK gap — important, because the Battle of the Atlantic was the longest battle of the Second World War.
Today, with three hundred fifty Danish servicemen, per size of Greenland, that gives each of them roughly the size of New Jersey to oversee. It's probably difficult even if you have a lot of drones. So I think we have an issue here.
I live in a part of the country which is straight under the ballistic arc coming over Greenland. So I would rather have that particular base which we have in the north be well protected. I don't think three hundred fifty servicemen from Denmark are capable of doing this great job, even if they try hard, which I'm sure they do.
Daniel O'Connor (37:28)
And all I'm saying is that I think Denmark is aligned with us most of the time on most things. So I'm just saying that I don't think we have to talk about taking Greenland from the Kingdom of Denmark. But maybe I'm wrong. I don't know.
Let's talk about China. One of the things — we track China a lot. I don't know if you've been keeping up with our Rare Earth Exchanges, but we do so for a reason. A lot of people give us a hard time because they're like, why are you always writing about China? And we say, well, they process ninety percent of this stuff. They are the market.
So we see crises building there. We see overcapacity, we see production surpluses, we see lousy signaling — they don't know how to signal when to adjust. They've got a lot of problems over there. They have demographic problems.
I don't think it's as dire as the China hawks over here who say they're going to collapse tomorrow. I don't think so. But they do have crises, they have contradictions. Tell me about that. How does this Frankenstein of a system, part communist, part capitalist — what's its course? How long can it keep doing this?
Tomasz Nadrowski (39:13)
It's a large economy, so for a long time.
The smaller the system, the less resilient it will be to extremes. I'll give you two examples from islands I know firsthand. A very tiny one: Rapa Nui in the middle of the Pacific, where people just basically destroyed the environment. They chopped off all the trees and used them for other reasons. There was no timber anymore to build boats to go anywhere else. It's a fairly isolated place. And they ended up basically cannibalizing each other out of existence.
And a much larger island, one of the largest in the world, has gone through a similar process of environmental destruction, and it's still in the process of doing this hundreds of years later — and that's Madagascar.
And so it's easy to compare the sizes. The Chinese economy probably can live with this 360% debt to GDP for a while. Actually, they keep adding by about 11% per year. It is still finite.
And it's not clear whether, if this regime doesn't survive, maybe there will be solutions. There are a couple of solutions possible. Fiscal reform unwound from nineteen ninety-four — so giving resources to local governments away from the central government. But then the central government won't be able to send someone to Mars, or run the world's largest diplomatic service, or influence operations, or the largest navy and so on. So that's a strategic choice too.
The question is, to what extent is the government ready to rebalance? And for now the solution seems to be: we're going to flood the rest of the world with our product. This is our solution. And that generates of course all the trade frictions.
I'm originally from Switzerland, a tiny country. It's understandable that a small country like this with significant production capacity generates half of its revenues from overseas, so from foreign trade. But in a country like China, with seventeen percent of global GDP already controlling thirty-two percent of global manufacturing, going towards forty, it's just not sustainable.
Because what it actually means — and John Maynard Keynes said it very easily — those current account surpluses, with a lot of import substitution on the other end of that trade exchange, are a way to export unemployment. And exporting unemployment and this destruction of manufacturing anywhere else will dent the middle class. And by denting the middle class, will make our systems much more fragile.
And so the question is, is this just an offshoot of an attempt to deleverage that economy through exports, or is it actually intentional? This I don't know.
Daniel O'Connor (41:47)
Yeah, interesting. Very fascinating, Tomasz. Talk about your book. I want everybody to know about the book. Do you have a copy you can share with everybody?
Tomasz Nadrowski (41:59)
Yes. It's a rundown copy, but that's about all.
Daniel O'Connor (42:02)
Everybody should pick this up. You know, other than obviously helping people make money — which is great, that's important — has anybody in government called you up and said, hey, we'd like to get your perspective on what your thoughts are on this mess we're in?
Tomasz Nadrowski (42:26)
Yeah, so the answer is yes, but it's early stages, so maybe I should not be talking too much about it.
Daniel O'Connor (42:31)
All right. So I think that's important, that the government gets some different perspectives right now. Because right now, I think the intentions are good, but it's not going to be sufficient, I don't think.
Tomasz Nadrowski (42:48)
I think the momentum is important. When I go around the world, I hear some envy that the US actually puts real money behind that, or more so than say Europe. But I wish we had a system which could treat it as a real economic security alert, and a system that would properly embed cooperation between elements of government and the private sector. Japan does it pretty well, through JOGMEC and various initiatives. So I think there's a lot to learn from each other here.
Daniel O'Connor (43:22)
I agree, I agree. Well, it's fascinating, Tomasz. I think you're a wealth of knowledge, and it goes deep — your understanding I think is right on. We'd like to keep in touch with you and keep learning.
Dustin, any final thoughts?
Dustin Olsen (43:40)
This has been a fascinating conversation, and I love the geopolitical angle of everything. I think it's definitely something that our audience has been craving. So Tomasz, thank you for being candid and sharing your thoughts on how things are shaping up here. We appreciate you being here.
Tomasz Nadrowski (44:01)
Thank you for the invitation and for the great work you're doing. It's important that we pass on the message to a broader audience. So I'm glad that you're out there increasing the level of knowledge, not just for us, the insiders, but increasingly for journalists, investors and the other public. It's very, very important. So I'm very happy to see this.
Dustin Olsen (44:26)
Absolutely. And hopefully we'll have you on the show again to share your thoughts as things continue to develop around the world.
Tomasz Nadrowski (44:34)
Super. Thank you guys.
Dustin Olsen (44:35)
Awesome.
Daniel O'Connor (44:36)
Thank you.
Dustin Olsen (44:36)
Thank you.
