‘We have great raw earth material. We are not allowed to use it because of the environment. I will let them use it’, Trump said two weeks before the election.
He mentioned bringing back manufacturing first when asked about US economic needs. Trump is not alone. Influential alumni of his first administration are laser-focused on strengthening the defence industrial base and the defence industrial subbase. They see industrial and trade policy through the prism of achieving ‘peace through strength’, in US competition with China. Elbridge Colby, a former Deputy Assistant Secretary of Defence, laments that China produces almost half of all ships globally, 200-times more than the US. He warns that, despite sanctions, Russia has a ‘revved up defence industry’ and is ‘outproducing the North-Atlantic alliance in artillery production […] by a factor of two-or-three’. NATO allies perhaps will narrow that gap: the EU may finally reach its 1 million shell supply target before the close of 2024. Russia, however, can make use of millions of shells supplied by Pyongyang, according to South Korea’s defence minister.
Deterring great powers requires the capacity to produce weapon systems and ammunition in large volumes.
What is clear is that military-technological dominance is no longer enough. Smart use of precision weapons and tech dominance may have evicted Saddam from Kuwait in 1991. But deterring great powers requires the capacity to produce weapon systems and ammunition in large volumes. This relies on access to steel, critical materials, and a large manufacturing base. Maintaining medical, telecommunications and other critical systems relies on producing many of the same components domestically or in secure, partner states.
The world we live in
Despite its wealth and technological prowess, the US share of global production has fallen dramatically. Following decades of globalisation, the combined GDP of the G7 and its partners is still almost three times bigger than that of China, Russia, Iran and North Korea. This emerging anti-Western axis, however, exerts formidable control over low-value-added, but strategically essential industries, such as metals production. These nations seek to weaken the West and are explicit about their intention to accelerate the transition to a multipolar world, divided into spheres of influence.
Wealth does not equal power
Western weight in industrial sectors has fallen dramatically
Data: World Bank, ‘World Development Indicators’, 2024; UN Trade & Development (UNCTAD), ‘Ships build by country of building, annual’, 2024; Our World in Data, ‘Steel Production 1943 to 2023’, 2024; US Geological Survey, ‘Mineral Commodities Summaries 2024 and 1996 - Rare Earths’, and 2017 Minerals Yearbook – Rare Earths [Advance Release], 2024, 2017, 1996; OECD, ‘OECD Data Explorer – Trade in Value Added (TiVA)’, 2023; US Geological Survey, ‘Rare Earths’, 1995, 2024.
To achieve this, they have settled on a division of labour that multiplies their capabilities. Russia’s war in Ukraine depends on China’s supply of micro-electronics, domestically produced or reexported from the West and its partners, on Iran’s supply of drones, and North Korea’s supply of ammunition and manpower. These countries’ sanctioned regimes have little to lose by antagonising the West openly. China leverages its deep integration in global value chains and leadership in manufacturing to backfill the dual-use goods. Russia supplies both North Korea and China with cheap energy, and the former with advanced military technology. The result: China evades being sanctioned by the G7, Russia maintains its fighting capability and avoids another round of unpopular conscription, and North Korea becomes a more potent threat.
China is less generous in supplying G7 economies with these critical resources, however. In 2024 Beijing introduced export controls on antimony, a material used in ammunition. It has halted exports of unwrought gallium and germanium to the US, Japan, and the Netherlands entirely. China has decreed that rare earths are the property of the state, introducing stringent reporting requirements for producers. Beijing is already pulling the rug from under some US strategic industries. The Chinese ban on supplying vital components, including batteries, to Skydio, the US’s largest drone manufacturer and a key supplier to Ukraine’s military, has led to production disruptions. Following Trump’s election, Beijing imposed licensing requirements on several more metals.
The drive to control manufacturing has been central to the CCP’s mercantilist and security-obsessed ideology.
China can pull more levers to help partners and undermine rivals: it produced a staggering 35% of all manufactured goods worldwide in 2020. Out of 19 of the 34 materials that the EU has designated as critical, China currently either mines or refines more than 50%. Bar decisive G7 counteraction, this problem will only get worse. The drive to control manufacturing has been central to the CCP’s mercantilist and security-obsessed ideology and its continuous expansion of industrial policies: In 2020, Xi advocated ‘tighten[ing] international production chains’ dependence on China […] against foreigners who would artificially cut off supply to China’.
EU vs US potential for reindustrialisation
EU leaders would be wise to work with Trump 2.0 on reindustrialisation, whatever differences they may have on Ukraine and bilateral trade. After all, the concentration of fighting capability, manufacturing capacity, and control over critical economic inputs in the anti-Western axis is the major threat to Europe’s security. EU leaders should also acknowledge that the US has better cards to reverse its manufacturing decline. Trump 2.0 will probably expand energy production, cut environmental regulations, and abandon climate targets. At the same time, the new administration can leverage the Pentagon’s resources to build on Biden’s initiatives to kickstart production for anything from materials to magnets. Even more so than Biden, Trump’s team will disregard what it perceives as international regulatory hurdles, such as the WTO, if they stand in the way of its goals.
EU leaders should acknowledge that the US has better cards to reverse its manufacturing decline.
The EU has less leeway. Following Putin’s gas extortion, EU electricity prices are two-to-three-times higher than in the US. Natural gas prices are an astonishing four-to-five-times higher. The continent has stringent environmental regulations, and (among) the most ambitious climate targets in the world (especially the 2030 target). Until the energy transition bears fruit, Europe remains dependent on volatile international energy markets, discouraging energy-intensive strategic industries from making investments. Lengthy permitting procedures and ‘not-in-my-backyard’ movements delay strategic projects even more. The Draghi and Niinistö reports have proposed policies for competitiveness and reindustrialisation, but these have not yet led to action.
What to do? An industrial pact
Already during the transition, EU leaders along with likeminded partners should reach out to initiate negotiations with the Trump team on an industrial pact. The goal should be to stimulate manufacturing outside of China and Russia. EU leaders should focus not on Trump, but on security-minded officials. Trump’s former and likely future trade chief acknowledged that ‘if [in the late-2010s] the European Union and Japan had imposed their own tariffs on China simultaneously [that] would have been helpful’. Instead, EU leaders responded to Trump’s steel tariffs with outrage, criticising him for ignoring the rules and overlooking the strategic importance of steel production.
The EU, US, and partners can kickstart reindustrialisation by aligning public procurement clauses to promote production of critical components and materials outside of China and Russia. Take the rare earth pipeline, which is essential for defence industries. North America has available deposits and strong mining expertise. Japan has permanent-magnet-making capabilities. The EU has refining capabilities, a strong chemical sector, and generates enormous demand through its energy transition. Beijing’s monopolistic trade practices are the main hurdle to derisking rare earth supply chains. To balance the scales, the EU and partners could follow the US in imposing financial penalties on the use of components from ‘countries of concern’, like China. Alternatively, the G7 economies and partners could agree to a combination of reciprocity, reliability and trustworthiness clauses.
Beijing’s monopolistic trade practices are the main hurdle to derisking rare earth supply chains.
If EU and other allied leaders fail to initiate a deal, Washington will again march onward unilaterally, de-prioritising the economic and security interests of allies. Critical EU dependencies, including on Trump’s coveted ‘great raw earth materials’, may remain the same, or shift from China to the US. EU leaders risk being left without the means to translate their outrage into the industrial capacity needed to deter Russia and China. In today’s far more dangerous world, this is likely to come at a great price.
