I hope the U.S.-China trade talks go well. But I worry we don't have the cards

CNBC

4 hours ago

What exactly were we thinking starting a trade war without having this rare earth elements issue all buttoned up and ready to go? How did we get so far along in this contest of wills when we hadn't invested the money to explore rare earth material refining and production in this country? The group of 17 minerals known as rare earths are used to make smartphones, tablets, speakers, touch screens, wind turbines, solar panels, robotics, advanced manufacturing, semiconductors, lasers, electric vehicles, and, yes, the F-35 fighter jet, which uses a huge amount of rare earth minerals. Given all that, shouldn't someone have checked to see if we had refining capacity and were hoarding these the way we do oil in the strategic petroleum reserve? Why do we have a bitcoin reserve and no rare earth reserve? Does anyone know how we could let things go this far without thinking that China — which controls the majority of rare earth global production and almost all if its refining — wouldn't just shut us down? In April, China implemented export controls on a subsegment of rare earths and magnets, and automotive supply chains have started to feel the bite . A report Friday said suppliers to the Big Three automakers gained the necessary export approvals from China . President Donald Trump also claimed Friday that, in his phone conversation with Chinese President Xi Jinping, Xi agreed to let rare earths go to the U.S. In any case, there's little denying China's leverage here ahead of trade talks in London. Trump spends a huge amount of time excoriating any CEO who refuses to relocate their manufacturing to the U.S. But do we really care about bringing back manufacturing for softballs or hosiery when we don't have enough workers anyway? Shouldn't our top priority be the production of things like rare earths, which are essential inputs into the products we're pushing companies to make here, like smartphones? On that note, how is it possible that the U.S. government let the Mountain Pass rare earth mine in California amass such a troubled history, beginning with the production suspension in 2002? MP Materials now owns it and is reviving it, part of its plan to be a fully integrated producer of rare earth permanent magnets in the U.S. However, the previous company that owned the mine with the goal of resurrecting it, Molycorp, ended up filing for bankruptcy . MP Materials went public in November 2020 through a reverse merger with a special purpose acquisition company, or SPAC. That was all the rage back then, and so many of those SPAC deals were busts. Now here we are at a fraught geopolitical moment, and a former SPAC — admittedly a good one, at least — has control of Mountain Pass. The Department of Defense has granted some awards to MP Materials in recent years, but it's fair to ask if the support to date has been adequate, considering how vital its long-term success is for the nation. Getting all the production and refining up to speed is a costly endeavor. Oh, and who the heck thought this was a great idea to rely on China for the F-35 rare earth minerals? Sure, MP Materials is doing yeomen's work and is no longer sending rare earth concentrate to China for refining — something it stopped doing in mid-April as U.S.-China trade tensions heated up and tariff rates had reached triple-digit percentages. But the fact is that MP Materials produces around 15% of rare earth content consumed globally. So, the Chinese, for all intents and purposes, really own these materials lock, stock and barrel. And that puts us over a barrel. Now, I am sure someone in this administration knows something about this stranglehold China has over us and maybe realized that it was foolhardy to be relying on a former SPAC to spend all the money needed to become vertically integrated in time to reduce our dependency. But here we are on the eve of the second round of talks with the Chinese , and we have become mendicants because of something that is so obvious to anyone whoever listened to a couple of MP Materials conference calls: We don't have the cards. Perhaps someone actually took the Ukraine rare earth materials claims seriously? Maybe we have a second source buried deep somewhere in the Rockies ? Or did we really not know that China owned us on this issue and wouldn't have any compunctions about shutting down access to their minerals — or their refining capacity — when we are waging a cold war against them? Can you imagine if we were reliant on Russian oil if we were still in a Cold War with the Soviet Union? You think Richard Nixon wouldn't have known the score ahead of time? I find the whole thing embarrassing. It's bad enough that we are challenging a command economy to endure without our toy orders and tool orders. We are actually going to have to beg for unfettered access to a country whose word has meant nothing multiple times since Xi took over as China's president in 2013? If you were a neutral arbiter and came across these two countries, which one would you pick to win the war? Who would you play for if you were a free agent and didn't care about human rights? More important, why aren't we spending $100 billion to build out an exploration and refining platform where we used to produce these? We were huge at one time and relied on domestic production into the late 1990s . Why did we not figure that the Chinese would have to be laughing at us because a little-known company is in charge of our meager mineral repository while their whole government is in charge of theirs? I don't think slow-walking liquified natural gas exports to China, as vital as they can be, is enough to offset China's leverage on rare earths. The recent decision to restrain U.S. companies from shipping ethane to China is not going to counterbalance the rare earth dominance. Could we really be that bush league? Now it all comes down to something we have — less-powerful version of Club name Nvidia's artificial intelligence processors — to trade for access to rare earth minerals, a deal that can only work if we start a rare earth Manhattan Project to extricate from our ridiculous dependence. A dual-track Nvidia deal and a Molybdenum Manhattan Project might work. My hope, of course, is that everything I have written above has been thought about, and that there have been many secretive meetings — perhaps even with Elon Musk, whose Tesla relies on magnets that contain rare earths, and Mexican President Claudia Sheinbaum — to discuss the development of a North American Rare Earth Pact because Mexico has them galore. I hope we're just playing for a time until we don't need China. But, somehow, I do not think our team has really thought about this. So, I am going into these talks with low expectations because I have to believe that, without the rare earth materials we need from China, we can't really get a deal because we won't negotiate the rights to Nvidia's chips. Perhaps we would rather go without parts for the F-35 then give China access to the AI computing they want. Let's see how that goes. The president has been adamant that every company should build everything here even as we don't have nearly as many workers as we need to do so. He wants to punish China for everything it has done and punish every American company for doing what it was supposed to do for the last 30 years, which is to open plants in China, and for the last five years, which is to move those plants to Vietnam. But these are small-time measures compared with getting us off the rare earth addiction, something so strategically important. As investors, we want these talks to go well. As it is, everything seems like a sideshow to our China showdown. And without a Supreme Court ruling saying Trump really does have a right to implement these broad-based tariffs, if I were the leader of any country, I might just want to play a wait-and-see game betting that Trump would obey the Supreme Court. So, let's hope something's accomplished in London between the two sides. But until I hear that Nvidia chief Jensen Huang has been told to divert from the company's Paris GTC being held this week, I sense that there's a nothing-done situation brewing. That could be disappointing for those who are still playing the "no more tariffs, let's buy stocks" game. (Jim Cramer's Charitable Trust is long NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.