The U.S.-China Supply Competition for Rare Earth Elements: a Dynamic Game View
2022
Zou, Benteng | Poncin, Stéphane | Bertinelli, Luisito
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 United States (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.
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