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The recent Department of Defense deal with the private mining firm, MP Materials, is one of the most aggressive government interventions to diversify rare earth elements supply chains – a tactic similar to China-style industrial policy, in a free market economy. While the agreement shields the company from price volatility and market uncertainty, it risks suppressing competition and creating inefficiencies. At the same time, these supply-side efforts are being undermined by the rollback of demand-side incentives and the imposition of new tariffs. Can the contradictory steps make a dent in China’s dominance of critical minerals supply chains?
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On July 10, MP Materials, the only major rare earths producer in the U.S., inked a landmark agreement with the Department of Defense (DoD). The Pentagon will now become the biggest shareholder in the mining company with a direct investment of $400 million while providing long term commitments of guaranteed mineral purchases and sustained price support. Five days later, tech giant Apple also signed a $500 million deal with the Las Vegas-based firm to buy US-made rare earth magnets for its products.
While the U.S.-led derisking efforts have been ongoing for the past few years through both domestic and international steps, the latest measures are the most aggressive state-led intervention in shaping the US rare earth industry – a tactic akin to China-style industrial policy. While the policy may bear short-term dividends for individual firms, direct state involvement in a market-driven economy risks suppressing competition and creating inefficiencies in the long term, making the goal of diversification even more difficult to achieve.
At the same time, these efforts are being undermined by the rollback or phase-out of demand-side incentives and the imposition of tariffs. Without sustained reforms to boost demand, the vision of secure and resilient supply chains would largely remain a pipe dream.
The DoD-MP Material deal boasts of many firsts. The Pentagon would pick up 15% stake in the company, invest billions of dollars in building a magnet manufacturing facility and purchase 100% of magnets for the next 10 years. In addition, it has guaranteed a minimum price of $110 per kg for 10 years for neodymium-praseodymium (NdPr) oxide, which is almost double the current market price of $60 per kg. According to the agreement, if the price falls below $110, the DoD will pay MP Materials the difference in quarterly cash payments.
The deal is intended to intensify diversification of rare earth supply chains, which is currently dominated by China with over 90% of the global production share. Rare Earth Elements (REE), a group of 17 critical metals, are indispensable components in military systems, robotics, consumer electronics and renewable energy technologies.
They are part of a raft of recent policy decisions from the Trump administration to bolster domestic critical minerals production and reduce reliance on China with actions such as streamlining the approval process for mineral projects, accelerating stockpiling efforts, tapping into defense-related funds, supporting seabed mining, imposing tariffs on China-sourced materials, and signing bilateral mineral agreements with the Democratic Republic of Congo and Ukraine.
The strategy has gained urgency since April when Beijing slapped export restrictions on key rare earths and magnets in retaliation for U.S. tariffs on Chinese products. As supplies from Beijing dried up, it resulted in a scramble for rare earth magnets among companies and countries and even led to temporary shuttering of auto factories from Europe to the United States. After two rounds of negotiation between the U.S. and China in May and June, a temporary truce was reached when China promised to ease the rare earths chokehold in return for lower tariffs and removal of controls on a few AI equipment. In response to U.S. export controls on advanced semiconductors and related technologies, China has increasingly leveraged its dominance through its own version of export controls and bans not only in rare earths but also in other critical minerals such as gallium, germanium, graphite and antimony.
The U.S. push to secure critical minerals through China-style state intervention could compound the very vulnerabilities it seeks to eliminate. By concentrating support in a few companies, the strategy may reduce resilience, and simply replace foreign dependence with domestic overreliance.
The narrative around critical minerals has shifted significantly in Washington, moving from the Biden administration’s focus on clean energy to Trump-era concerns over national security. The urgency of the security argument is driving the U.S. administration to directly intervene in the critical mineral sector to support its domestic players through cash infusion, favorable loans and price guarantees above market prices – the hallmarks of classic industrial policy.
Ironically, U.S. policymakers and analysts have long criticized China for adopting similar tactics to dominate strategic sectors that include critical minerals. The current administration is competing with China using a playbook perfected by Beijing itself. But unlike China’s state-directed capitalism model, the U.S. operates as a market-driven economy, where the government has traditionally focused on setting policy frameworks and offering indirect support while leaving leadership to the private sector.
The grumblings about the MP Materials-DoD deal have already begun. The FT has reported that rival companies and former officials believe that the deal went “too far” and is “replicating the Chinese model” of heavy state interference. Their concerns highlight a broader tension within the U.S. industrial policy – the challenge of balancing strategic goals with market principles. In an economy, where investor expectations and quarterly earnings often take precedence over long-term strategic patience, sustained government support can be a stabilizing factor. It could enable domestic firms to scale up and compete globally.
However, if such support is heavily concentrated among a select few, it risks distorting the market as it would crowd out other competitors and stifle competition. Moreover, when companies become overly reliant on government contracts or subsidies for revenue and profit, they may lose the incentive to pursue efficiency, invest in R&D, or respond to market signals. This creates a negative feedback loop – fewer competitive firms, less efficiency and weaker incentives for diversification. The goal of building resilient, China-free supply chains could become even more difficult to achieve.
For the government as well, dependence on a few domestic companies for strategic minerals in a less competitive market creates several risks. Overconcentration in supply makes the system more fragile. If the state-picked “winner” faces technical and technological challenges or labor disputes, the ripple effects could disrupt entire industries dependent on the company. In addition, a narrow supplier base leaves policymakers with fewer options when it comes to ensuring environmental standards or enforcing accountability.
Instead of enhancing resilience, such a model could inadvertently replicate the vulnerabilities it aims to fix by merely shifting the source of dependence from foreign entities to a handful of domestic players.
The Trump administration has largely focused on aggressively resolving the supply-side bottlenecks in the critical minerals market. However, a secured supply will not be a reality without sustained demand. On that front, the administration seems to be moving in the opposite direction.
It has recently rolled back and weakened demand-side incentives such as energy tax credit provisions in the recently passed The Bill Beautiful Bill. The provisions, first introduced under the previous Biden administration, played an instrumental role in attracting major investments in mining, battery and other clean energy sectors. Critical minerals like lithium, cobalt, nickel, and rare earths are essential for electric vehicles, wind turbines, and battery storage. Weakening federal support for these technologies could hurt their domestic market growth and reduce overall demand.
Mining and metal refining companies looking to operate in the U.S. upstream or midstream segments cannot rely solely on government purchases through the Department of Defense or other stockpiling programs. To be viable, they need a sustainable business model built on consistent commercial demand from downstream industries such as electric vehicle manufacturers, battery producers, and energy storage companies. Without a strong market pull from these sectors, the broader strategy to diversify supply chains risks falling flat.
On top of that, existing and proposed tariffs on minerals could make the situation worse. While targeted tariffs, if implemented strategically, could spur domestic production while discouraging imports. But slapping of punitive levies without a clear strategy could create more complications.
For example, the Commerce Department recently imposed an additional tariff of 93% on Chinese graphite, a key element for batteries. The move is likely to further increase the costs for EVs as China supplies the majority of US graphite demand. Along with the phasing out of tax credits, the tariffs are yet another blow to the fledgling domestic battery industry. Similarly, U.S. president Donald Trump’s latest threat to slap a 50% tariff on copper would dramatically increase the costs for a vast range of industries from defense to automotives to data centers.
In its push to reduce dependence on China and secure mineral supply chains, the Trump administration has adopted an assertive, state-led industrial policy that marks a significant departure from traditional U.S. market principles. While this approach may spur domestic production for a select few in the near term, its long-term success depends on balancing supply-side intervention with robust demand-side support.
Without clear, consistent incentives for downstream industries, along with mineral trade arrangements with allies and partners, the strategy risks undermining itself. Securing supply is only half the battle. Without securing demand, the vision of a resilient, diversified, and competitive critical minerals ecosystem may prove unattainable.
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