The U.S.–China Supply Competition for Rare Earth Elements: A Dynamic Game View

Rare earth elements govern today’s high-tech world and are deemed to be essential
for the attainment of sustainable development goals. Since the 1990s, these elements
have been predominantly supplied by one single actor, China. However, due to
the increasing relevance of their availability, the United States, who imports 80%
of its rare earths from China, recently announced its plan to (re-)enter the rare
earths supply market. This paper analyzes the strategic interactions among these
two countries in open-loop and Markovian strategy spaces. Particular interest
is devoted to the impact of heterogeneous supply concepts on (1) the theoretical
optimal timing for the U.S. to enter the non-renewable resource market, (2) China’s
optimal supply reaction to the U.S.’ entry announcement, (3) the central planner
outcome, and (4) the profitability of the suppliers’ extraction behavior. By setting up
a continuous-time differential game model, we show that in the absence of arbitrage
opportunity, (1) the U.S. should always postpone the production launch until its
rare earths reserves coincide with those of China, (2) China’s monopolistic supply is
not shaped by the selected strategy, (3) while the duopolistic Markovian behavior is
initially more lucrative than open-loop commitment, the opposite situation emerges
as the competition proceeds, and (4) on balance, both countries are financially better
off when committing to an open-loop supply path.