Rare earth elements are an increasingly important commodity in modern manufacturing. The minerals are a key component in the manufacture of cell phones, computers, electric vehicles, wind turbines, warplanes, missile systems, and more. While rare earths are not quite as rare as the name would imply, the number of countries that produce them is quite small. For decades, China has dominated the market for rare earths and currently mines more than half of the world’s rare earths and processes nearly 90 percent of the world supply. Nearly all the rare earths used in the United States and the European Union come from China.

In the midst of the US-China trade war, China announced that it would impose sweeping restrictions on are earth exports. In response, Treasury Secretary Scott Bessent announced that the US would help prop up American rare earths production by investing in US mining companies (which cannot compete with China’s economies of scale) and implement a price floor on rare earths. The US would also create a strategic reserve of rare earths similar to the strategic oil reserve. Now, it is unclear how long the price floors will remain in effect or whether similar price floors will be implemented in other industries. What is clear, however, is that we can expect major disruptions in manufacturing supply chains in the near future, and some of the consumer electronics we use regularly might become rarer than we would like.

Discussion Questions:

  1. How would a price floor on rare earth affect consumers, producers, and the economy as a whole? Frame your answer in terms of consumer and producer surplus.
  2. Basic supply and demand analysis indicate a price floor would create an excess supply of rare earths. What are some ways to deal with that surplus in order to maintain the price floor?