Planet earth is blue: China, the EU and raw materials

Bob Hancké, PEACS

2 June 2025

Over the last few years, much has been written about the central role of China in many aspects of the digital and green economies. One of the key concerns has been the way the country has taken control of mining and exploitation of rare earth minerals that go into most modern appliances, from electric cars, their batteries, mobile phones and tablets, a host of other things that rely on electronics, and many widgets that do not exist (yet). In short, the concern in the West is that the future belongs to China because the raw materials — cobalt, lithium and a range of others — belong, effectively, to China.

I think, with many others, that what happens in China is crucial for the future of the global economy — think green transition, inflation, economic growth and, probably, innovation. The Chinese economy is unbalanced, as many commentators have already pointed out: too much investment and not enough consumption. And its financial system is, to put it mildly, unstable, something the central bank is trying to correct, but that’s turning into a bit of a tightrope, since action there may jeopardise targets elsewhere.

Yet, against that background, I fear that all the handwringing about rare earths is a bit overblown, for three reasons that any political economist would easily identify. One, the rare earths are useless without customers who use them, and those are also, perhaps primarily, in the West and its allies. Two, the EU (and the US) controls other strategic assets, which should nudge economic relations between China and the West toward peaceful, semi-cooperative trade. And three, the less easily accessible the rare earths are, the likelier that alternatives will start appearing. I sometimes wonder if western politicians have turned this into such an important problem because it is perhaps the only area where they can do, or be seen to be doing, something (hat tip Yes Minister).

Co-specific assets and co-dependent development

Imagine you control an asset that is of strategic importance for someone else — think very specific skills to staff a machine that takes years to acquire and are hard to monitor, a highly sophisticated machine tool that another company needs, or a proprietary device or software code that can be used in many situations. Think of ‘control’ broadly, from being a very large, almost monopoly supplier (like TSMC in computer chips) over highly regulated access to a market or near-exclusive skills. But there is a snag: without a counterparty, your asset is worthless. Its value depends entirely on its use by others. This is very different from two well understood corner situations, one in which what you sold was a standard widget (and where price competition between many suppliers would prevail), or one in which highly specific assets (back when they still mattered, highly skilled stevedores could command a very high fee from shipping companies). Such a situation of co-specific assets is very common in complex societies, since modern economies are highly fragmented, and your and my complementary deep specialisation are both necessary to realise their individual value; on their own, they are worth nothing. My deep specific skills as a worker, for example, are worthless without your dedicated capital as a business. We may struggle over the distribution of the result, but there is no doubt that this situation of co-specificity produces a relation of mutual dependence. Without my needs for your assets, yours are useless, and without your assets, I remain stuck in a previous technological era. Think of what a modern-day Robina Crusoe would do with her perfectly honed advanced software skills on a desert island, and you get the idea.

Well, something similar is going on between China and the EU, as James Kynge explained in The Observer recently. Given the structurally embedded co-dependence, neither of us has a serious incentive to hold the other over a barrel. In a situation where such mutual holdups are possible, basic trust and monitored cooperation are the norm for either of us to accomplish anything.

You scratch my back, I’ll scratch yours

This mutual dependence is not limited to benign complementarities between different stages in the value chain. The EU makes and exports things that China needs (as does the US). One of the most important companies in today’s world, for example, which makes machine tools for the digital age, is in the Netherlands, where ASML produces extremely sophisticated and currently unmatched devices to produce advanced semiconductors. The EU, Germany and France in particular, is also home to industrial machine tool companies that equip Chinese producers of consumption goods. And a large part of European chemicals and pharmaceuticals find their way along the silk road to Beijing. More generally, China imports more from the EU than from any other country or bloc in the world; and while not all of those exports feed the Chinese manufacturing machine, much of it does, and others are quasi-positional goods like Louis Vuitton cases, Mercedes cars or superior French and Italian wines that China does not produce.

In sum, the EU not only buys much but also makes much that it sells to China, going well beyond the earlier passive mutual dependency. The EU has developed competitive positions in industries that China needs for its own path from a poor to a middle-income country. And that multi-faceted mutual dependence is a pretty good basis for wider, cooperative trade relations.

But what if all that mutual dependence does not produce benign cooperation? Not all countries seem to understand their own interest all that well these days, as Trump’s tariffs remind us. Europe (and the US) have one additional card: innovation.

Necessity as the mother of invention

One of the first books I read as an undergraduate, and regularly come back to even today, was the sociologist Robert King Merton’s doctoral thesis, later published as Science, Technology and Society in Seventeenth-Century England. The book is not only, as you’d expect, a brilliant analysis of the social organisation of S&T back then, but it also magisterially maps the emergence of a new field of applied science, what we now think of as engineering, in response to two sets of constraints — the requirements of war and British imperialism, and of economic progress and industrial prowess. The abstract science of the time was rapidly turned into a series of practical innovations that allowed mining to flourish, industry to organise, ships to sail and, sadly also, wars to be fought more effectively.

We may today well be living in a period with similar hard and urgent constraints: the green transition forces us to think of new solutions that were due yesterday (or, increasingly, it seems, the day before), the digital revolution is upsetting long-known organisational and societal patterns, and global competition produces innovations that were unthinkable even a decade ago. In such a pressure cooker, things can either go terribly wrong — and then we are all, erm, in trouble — or the situation invites serious brains to come up with new solutions. This is not a veiled version of the naive functionalist ‘techno-solutionism’ that has dominated the narrative recently. Innovations rely on a social infrastructure, such as universities, companies, government subsidies and regulation, and the way they are integrated in society, including their distributive consequences, should be, and usually is, a matter of contestation, negotiation and politics. But the core dynamic — complex constraints spur sophisticated responses — has been with us for a while, as Merton’s book suggests.

The upshot is that, if necessity is indeed the mother of invention, the more rare earths become a part of geopolitical and geoeconomic tensions, the likelier it is that alternatives will come online. At the moment, for example, we must have millions of tons of these rare earth minerals locked in discarded iPads, mobile phones, and computers, ten-year-old cars, TVs and radios. They can currently not be profitably recycled below a certain (probably very large) scale, but I bet that won’t be the case in a few years. Similarly, if the supply of lithium, cobalt and other minerals is not secure, there are huge incentives to explore, synthesise and produce alternatives. This is an area, remember, where industrial policy, including science and technology policy, can make a big difference and where not many countries currently have any comparative or competitive advantages (unlike, say, semiconductors). Given its recent more activist orientation, and its strong science base the EU and its member states are particularly well positioned to enter that field now, for rewards in a decade or so.

Lazy zero-sum thinking and worse

Rare earths are important, and China controls many of them, directly or indirectly through partnerships with countries where they are mined. But that should not lead us into lazy zero-sum thinking or Tony Soprano-style racketeering. We may need what China has, but China also needs the EU (and the US) as the world’s biggest market(s). We may face constraints now, but will almost certainly develop technological alternatives, which themselves will strengthen our hand – voice is stronger when accompanied by exit. And we will trade strategic assets that are hard to find or make at home. The rise of China may raise many problems for the world, but its control over rare earth minerals is not the most important.