Haass on the War in Iran, Iran Oil Fallout, IMF Meeting Anxiety, US-China Rare Earth Competition

17:16Richard Haass:When you talk about oil importing countries, perhaps the two largest are China and India. Yes. What does this mean for China? Because China has had fairly friendly relations with Iran.

17:28Chrystia Freeland:Yes. And that's the really big question, because I think close to 30 percent of China's energy, a very large share of India's energy come from the strait, from Saudi, UAE, Qatar, Kuwait, etc., and some of the natural gas. So they've definitely been hugely impacted. Also, we keep on talking about energy intensity in the U.S. has gone down, where we're still buying and using the same goods. Our energy intensity has gone down because we're more services, we're more financial services, et cetera, technology. But the goods that we're buying from China, India, and the rest of the world are still very energy intensive, and they are getting hit very badly right now.

18:11Chrystia Freeland:Now, China, as you know, has been diversifying its sources of energy very rapidly through doing more in power, doing, you know, from the car industry, which has become much more concentrated on EVs compared to the rest of the world. They are diversifying into nuclear. They can build nuclear power plants in a couple of years. It takes us 10 years to do it. It takes them maybe two, three years. So there's the longer term and the shorter term. In the short term, they're certainly currently impacted and they will continue to get impacted. The big question, David, is whether there is a scenario under which we have ships that are under Chinese protection or Indian protection or Russian protection coming in somehow into the strait and being safe compared to American or European-aligned tankers.

19:05Chrystia Freeland:So that is the big question. And that has not really sort of been a thing in the last few weeks, but it will be something to watch out for.

19:13Richard Haass:What does this mean for the rest of the world? I mean, we focus on the big players. We focus on the Middle East and the U.S. But what does this mean for Africa? What does this mean for the rest of Asia, some of the developing countries?

19:23Chrystia Freeland:So again, if you're a big Asian country right now, if you're a Japan or again, even China, the biggest countries, Korea, you can buy energy at spot prices. You can afford to still import energy as we speak. You're paying a lot for it, but you're able to afford it. If you are a poor country like the Philippines or Bangladesh, you have two problems. One is that you can't afford to buy at spot price, so you're going to suffer. And two, it's not even a question of just price. It's a question of supply to you because the U.S. and other people who are selling will prefer to sell to the bigger, richer versus the lower-income countries.

20:10Chrystia Freeland:So they will get hit again. So, together with all the other forces going on in the economy between what's happening with AI, what's happening with this war, you could be, what's happening with climate and, you know, the parts of Africa that are running out of water, you're going to have potentially very major problems, particularly for Europe when it comes to immigration.

20:36Richard Haass:As profound as the effects of the war are on the rest of the world, nowhere is it felt more, or more immediately, than in the Gulf states like Saudi Arabia, the United Arab Emirates, and Qatar. Before the ceasefire was agreed to, Stephen Cook of the Council on Foreign Relations told us that the critical importance of the Strait of Hormuz was not lost on those closest to it. Anybody who was looking at this situation and was concerned about the outbreak of hostilities between the United States and Iran, or Iran and anybody, had to be concerned about freedom of navigation through the Strait of Hormuz.

21:12Richard Haass:And of course, despite the fact that the major heavyweight Gulf states, Saudi Arabia, the United Arab Emirates, Qatar, have all placed billion-dollar, trillion-dollar bets on their countries to undertake a model of development that is beyond hydrocarbons. They still all rely on hydrocarbons, and therefore they all rely on the Strait of Hormuz. So that's one of the reasons why they sought a diplomatic solution ahead of hostilities, because I think everybody, with perhaps the exception of the president of the United States, understood that the Iranians would at least try to close the strait. Do the Gulf states at this point have President Trump's ear, or is it just Bibi Netanyahu and his alliance with Israel?

22:04Richard Haass:Well, I think there's been a lot of furious lobbying on the part of the Gulf leadership on the president. They all have direct lines to the president in one way or another. And they have made it clear now that the war is underway and now five weeks old, that even though they didn't want the conflict, they don't want the president to end it prematurely. Their feeling is that if Iran were to have some measure of control, if not outright control, of the Strait of Hormuz, if it still retained the ability to menace these countries with drones and missiles at will, it would undermine their model of development, which they have nurtured over the course of the better part of the last decade.

22:52Richard Haass:And that model includes being open to the world, welcoming investment from around the world in high tech, logistics, entertainment, tourism. Those kinds of things that have been sources of success and development beyond hydrocarbons would be a question if these countries are threatened by an even weakened Iran. Did the Gulf states anticipate the level of effectiveness of the Iran attacks? Because they've been hit pretty badly. UAE has been. Saudi Arabia has been ahead. Did they anticipate them being this effective? I think that no one anticipated how effective the Iranian response would be. We know they're getting help from the Russians in terms of targeting.

23:37Richard Haass:And I think that there was an expectation that the Iranians might respond, but that there would be a limit to their response. And after the first week or two, there was a sense that the rate of fire from the Iranians would decrease significantly and they'd be able to get back to some sense of normalcy. That just has not happened. And I think that this is a very significant miscalculation on the part of the United States, on the part of Israel. And I think that the Gulf states, although very concerned about what would happen to their cities, cities like Dubai, Abu Dhabi, Manama, Riyadh even, and critical infrastructure in and around those countries, I think that they were worried about it but didn't expect this relentless fire for five weeks and counting.

24:25Richard Haass:At some point, this will settle down or be resolved, however it's resolved. How much damage has already been done to the Gulf states? You mentioned before the billions, even trillions of dollars that they've been investing and making that a real center for investment, for tourism, for everything else. Has that been permanently damaged, do you think? Well, the Gulf states have certainly taken a beating. Their air defense systems have worked better than some had expected, but still, the damage is undeniable. Gulf airspace has been open only at limited times and for limited purposes over the course of the last five weeks.

25:05Richard Haass:And this entire model of development is based on attracting the best and brightest from around the world, attracting tech companies, providing entertainment venues for tourists and the like. And I think at the moment, at least, that model has been significantly damaged. My sense is that when the crisis is over, there will be a deviation from this model so that the Gulf countries can harden their cities and invest in their defense and tighten, in some cases, their relationship with the United States in support of that. But then we'll return to this model of openness to the world so that people will come and invest and that they can proceed along some semblance of the path that they were on prior to the outbreak of hostilities on February 28.

26:01Richard Haass:One of the foreign policy issues that President Trump has been proudest of are the Abraham Accords. He thought he should have gotten the Nobel Peace Prize the first time around for what was done there. In light of what's happened, what's left of that initiative? Can it be revived? Well, what's been surprising about the Abraham Accords is how actually durable they've been. Setting aside for just a moment the current conflict through two years of very intense combat in the Gaza Strip in which tens of thousands of Palestinians were killed, the Abraham Accords survived. The core countries of the Abraham Accords have never broken diplomatic relations with Israel.

26:42Richard Haass:And throughout this conflict, there has been some measure of coordination between Israel and countries in the Gulf, just by dint of the fact that they are all members of Central Command, the combatant command from which the United States secures the Middle East. So it is certainly a surprise that they've been durable through these last now almost three years of conflict throughout the Middle East. The big question prior to Hamas' October 7th attacks on Israel was when Saudi Arabia and Israel would normalize. Now the question is if Saudi Arabia and Israel will normalize. And I think that as a result of both the conflict in the Gaza Strip and the sense among Saudi leaders that Israel has been an agent of chaos here, that the price of normalization between those two countries has gone up and is much further away than some would like to admit.

27:44Richard Haass:Coming up, we get ready for next week's World Bank IMF meetings in Washington with a guided tour from our contributor, Christia Freeland, who attended as a principal when she served as Canada's finance minister.

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30:37Richard Haass:When the World Bank and IMF hold their annual meetings in Washington next week, they'll have the usual issues to discuss. Global growth, climate change, energy needs. But this time, they'll have a war in the Middle East to deal with as well. To take us behind the scenes, we welcome our special contributor, Chrystia Freeland, who knows these meetings well from her time as Deputy Prime Minister and Finance Minister of Canada. We have the IMF World Bank meetings in Washington next week. A year ago, if you remember, it was just after Liberation Day. Now, this time, we have a shooting war instead of a trade war.

31:13Richard Haass:How will that affect these meetings?

31:15Chrystia Freeland:I think that at the beginning of the year, as people were getting ready for these meetings, what officials, finance ministers, central bankers were getting ready to talk about is global trade, how resilient is it? AI, what is the impact going to be on the world economy? I think those were probably the big issues. But with the war in Iran, that has now pushed everything off the agenda. And I think the central focus is going to be what is happening to the global economy. I think you're going to see, you know, nervous is maybe the wrong word, but some very concerned finance ministers and central bankers.

32:02Chrystia Freeland:I spoke to one person who is a principal participant in these meetings. And I asked this person, I said, you know, I want to talk about these meetings, what you're thinking, what you're getting ready for. And this person said to me, the first thing the person said is, I'm expletive deleted. So I think that gives you a sense of, you know, the degree, I would say, of potential crisis that leaders are preparing to deal with.

32:32Richard Haass:Talk about the state of the global economy as far as we can see it right now. We see, for example, OECD estimates out where we're taking growth down, inflation up, and people at least are talking about stagflation, that dreaded term.

32:44Chrystia Freeland:The concern that I would have if I were headed there as finance minister would be that there is a triple whammy that the world is facing right now. One, stagflation. That is hard enough to deal with. Two, it is coming at a time when the fiscal capacity of countries is really strained. Remember, COVID was not that long ago. And in addition to treasuries having been depleted by COVID, governments are spending a lot on defense. So the money available to deal with a crisis is really, really not there in the way it was before. And then the third thing is, you know, it's not just that there is a vacuum in leadership.

33:35Chrystia Freeland:There are a lot of fights going on. In 2008, the big global financial crisis, the G20 really rallied to pull the world through. During COVID, when I was finance minister, it was much more the G7. You'll remember that Russia invaded Ukraine early on in COVID, and that made the G20 much less effective. But the G7 really acted. Today, it's really hard to see where the leadership comes from. The G7 itself is deeply divided, and there are obviously deep divisions in the G20 between Russia and the NATO countries, between China and the United States.

34:22Richard Haass:It strikes me the IMF and World Bank and other institutions like that were the essence of multilateralism coming out of World War II. And now, as you say, it's not so clear where the leadership comes from. I wonder whether they could even get together in the same room. I mean, you have the United States and Israel in one place, and you've got the rest of the West in another place. Before you get to China and Russia, I mean, what is the future of multilateral organizations in that sort of world?

34:46Chrystia Freeland:Really, really rough. And, you know, the IMF and the World Bank are not just multilateral institutions. At the end of the day, these are the Bretton Woods institutions that were created by U.S. leadership in the world. These were the institutions created as the Allies looked at the carnage, the destruction of World War II, and said, we have to build a world that works better. There's a great line from Dean Acheson that I love where he said, we have to at least build a world that works for our half of the world, for the free world. And I know it's quite in vogue to criticize that U.S.-led international order, but actually it worked pretty well.

35:37Chrystia Freeland:You know, the time from World War II to today, certainly for North America, for Western Europe, has been a time of unprecedented peace and prosperity. And that is in part because of the Bretton Woods institutions. Now, what is unprecedented is that this order that America built, these institutions that America was the leader in creating, is being really wrecked by the country that created them, by the United States.

36:11Richard Haass:In another time, in another place, we would be talking about development. Some of the less fortunate countries around the world and what they needed. When the big powers conflict, often it's the little guys who really take it in the neck, as it were. What's going on in Asia? What's going on in Africa as we see this war in Iran unfold?

36:31Chrystia Freeland:That is a hugely important question. I hope that it is a question that we hear a lot of people talking about next week. The reality is that challenging as this moment in the global economy looks in Washington, in New York, in San Francisco, it is much, much worse in Asia, in Africa. These are the countries that depend on fuel coming through the Strait of Hormuz. They depend on fertilizer that comes through the Strait of Hormuz. And that is where you are really seeing the stagflation. Because in those countries, in addition to seeing higher prices, because energy has become much more expensive, you're also seeing governments acting to slow down the economy.

37:22Chrystia Freeland:You're seeing governments saying that people need to be working from home. You're seeing governments saying that people can't be driving their cars.

37:28Richard Haass:And that, of course, has major repercussions for countries that need to import oil and natural gas. But also, we've talked about fertilizer before. As you say, you're a farmer's daughter. You know this world of fertilizer. And it's one thing for April, which is critical in North America for planning. What about for the rest of the world, where the planning may come a little later? Could we be facing more than just higher prices? Could we be facing real food shortages?

37:52Chrystia Freeland:100%. You know, the combination of fertilizer, having a hard time getting through the Strait of Hormuz, and also fuel prices translate very directly into higher food prices. It takes fuel, usually diesel fuel, to farm. So you're already seeing that. That is already a challenge right now for countries in Africa, for countries in Asia. I don't want to just talk about bad news. Something that is promising that is happening right now is the UN is involved in some negotiations trying to get a deal with Iran to allow fertilizer to pass through the Strait of Hormuz. There's some precedent there because a deal was done to allow commodities to pass through the Black Sea after Russia launched its full-scale invasion of Ukraine.

38:51Chrystia Freeland:So that would be a piece of good news, first and foremost, for the countries of the global south, but for the whole world. So let's hope that the UN can do it. And, you know, it would be a sign that multilateral institutions can work.

39:08Richard Haass:Christian, let me impose on you for a moment. Put your old hat on as finance minister from Canada. If you were going to these meetings, what would be your goal? What do you think you might be able to accomplish in these meetings?

39:21Chrystia Freeland:My goal this year would be to spend a lot of time, first and foremost, talking to the, having meetings within the G6. I'd be spending a lot of time talking to France. I think Macron's leadership right now is extraordinary. I think, by the way, my own Prime Minister, Mark Carney, is showing extraordinary leadership. I think we're seeing the UK stepping up, working hard on the Strait of Hormuz. I think the EU, Germany, Italy, all of those countries are playing an important role. I would say Spain is another country to watch. It has been a leader in saying it's time to say to the White House, enough is enough.

40:12Chrystia Freeland:And I think we're seeing a lot of European countries follow that advice. So if I were headed to the meetings, the personal thing that I would be planning and how I would start my remarks at the G7 finance minister and central bankers meeting would be by saying thank you to Jay Powell, thanking him for his leadership, thanking him for his integrity, thanking him for his courage. And I bet I'm not the only person thinking that. So I am pretty sure that behind closed doors, a lot of people are going to be congratulating him, wishing him well. And I wouldn't be surprised if you hear people saying that in public too.

40:58Chrystia Freeland:And I'd like to take this opportunity to say, thank you very much, Jay Powell. You're an example of American integrity. The world needs you more than ever.

41:08Richard Haass:Up next, the 10-year head start that the U.S. has given China on critical minerals and whether there's any way America can catch up.

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44:14Richard Haass:This is a story about having the right playbook. Not the kind drawn up to make sure your local team can win on Friday night, but one that works when you're competing on the field of the world economy. While the U.S. playbook focused on all the things smartphones could be used for, China's concentrating on what was needed to go into those smartphones and automobiles and defense systems. Rare earths and critical minerals have been at the center of China's playbook for over a decade. And now the U.S. is playing from behind, looking for new ways to compete and doing it with new players. In Exeter, New Hampshire, inside this unassuming building, an international race is taking shape.

44:54Richard Haass:Here at Phoenix Tailings, they're processing critical minerals, a key part of the global supply chain. So Phoenix Tailings produces the final rare earth metal and metal alloys that are needed for magnets, for aerospace applications, and for many different other types of applications. But companies like Phoenix Tailings, led by co-founder and CEO Nick Myers, are up against a giant. There's been a lot of talk about critical minerals, rare earths and otherwise, and the disparity between China and the United States, how far behind is the United States right now? That midstream processing stage, they pretty much dominate entirely, so much so that it's extremely tough for the U.S.

45:32Richard Haass:to compete in any way, shape, or form. The U.S. needs critical minerals for a range of military applications, but even more for many consumer products. Defense is, functionally speaking, a pretty small market. It's roughly about 500 tons per year is the need for metal for the Defense Department. And that's not that much, whereas the U.S. commercial needs are about 12 ,000 tons per year. So pretty much all of our demand comes from automotive. Many people think that it's actually for electric vehicles. To be honest with you, not really. Like, yes, electric vehicles use much more rare earths than other vehicles.

46:09Richard Haass:However, internal combustion motor vehicles quite heavily use rare earths. China's dominance spans the entire supply chain, from extracting critical minerals to processing them, and then turning them into magnets used in everything from cars to defense systems. It all raises the question, with that level of control, what can be done? And why wasn't more done sooner? David Abraham has spent years studying these issues, and they're the subject of his book, The Elements of Power. We didn't focus on the challenges of the market. We saw that these minerals were a sector of the economy that was not interesting to us.

46:50Richard Haass:We were focusing on building apps back in 2010 and 2011. It was how do we create a technological country that was built on services, was built on financial services, and mining was dirty. And so we outsourced this dirty work to faraway places. And China was realizing that these ingredients were providing them capital that they needed to grow their economy. But more importantly, they saw these as seeds to the future, seeds to their high-tech and green industries that are at the heart of their economy today. As China quietly built its dominance, the first alarm bells for the U.S. came more than a decade ago.

47:31Richard Haass:American manufacturers need to have access to rare earth materials, which China supplies. We realized that there was a structural risk back in about 2010, And that's when China and Japan had a territorial dispute. And within that, China had restricted access to rare earths to Japan. There was an initial shock, and the price of these materials, especially rare earths, jumped about 20 times. But what happened afterwards was that the prices themselves dropped. And they dropped to such low levels that people in the halls of power in Washington and in Europe, and some within Japan, became less concerned about security of supply.

48:10Richard Haass:And so between about 2014 and about 2022, there wasn't much concern looking at these critical minerals because the market was supplying them. Fast forward to today. Critical minerals are dominating the conversation from the halls of Congress.

48:27Chrystia Freeland:The necessity of these minerals literally cannot be overstated.

48:30Richard Haass:To boardrooms. Look, for rare earth, we continue to diversify our supply chain. And now to the center of President Trump's trade war with China.

48:40Chrystia Freeland:My administration has taken extraordinary steps to make sure the United States has all of the critical minerals and rare earths that we need.

48:48Richard Haass:But ensuring the U.S. has what it needs may require a different approach. In a new report, Heidi Kribo-Retiker, a senior fellow at the Council on Foreign Relations, says leapfrogging China is possible if the U.S. is strategic in its focus. If the number one priority for the country were to somehow catch up on critical minerals and rare earths, how long would it take? So for like through traditional mining, it actually takes a very long time. But the context that the report that we wrote at the Council on Foreign Relations was that, OK, so we have this traditional approach and we're going as fast as we can.

49:26Richard Haass:It's going to take years, decades. It's going to take a very long time. And we have this timing mismatch. So we can't out-extract, out-process, or out-fund China, but we can actually have a separate track that looks to innovation. Because there are a lot of great new companies and innovations rolling out that can actually leapfrog China's chokehold. And that innovation has already begun to take shape across labs, startups, and in new technologies. You have material engineering that has been able to create rare earth free magnets up in Minnesota. You have new startups that came out of lab innovations that are able to manipulate proteins so that they act like protein robots and go into waste and extract rare earths from pools of waste.

50:19Richard Haass:And waste is a very ripe area for the U.S. to be able to look to for our own capacity to generate our resilience.

50:28Chrystia Freeland:It's almost like steel is the right way to go. The way to go. It's the way to go.

50:32Richard Haass:One of those companies looking to extract critical minerals from mine waste, known as tailings, is Phoenix Tailings. Take us through the Phoenix approach and why it's so much faster. So Phoenix, we started this back in 2019. I met my co-founder at a Bible study and we started talking about the biggest problems in the world. One is exactly this issue that we talk about here with critical minerals. So we said let's find a way to solve it and we built the first prototype with $7 ,000 back then in a backyard in Cambridge, Massachusetts. Now we've raised$120 million dollars and we're backed by BMW, Sumitomo and many other players.

51:06Richard Haass:But our approach is to really use technology and develop the novel technology to be able to process and produce the final metals free of emissions, free of discharge in a safe way right here in the United States. So we solve all three parts of the value chain, which is the extraction. That's what we think about when we think about normal mining. That's digging a hole in the ground and digging up the raw material. And we harvest that material from the ground. Now, once we have that mixture of rare earth oxides or carbonates, we have to separate that out. And that's the next stage of the process called separation.

51:35Richard Haass:And you take that and you split it into the individual pieces. Now, they still remain in their oxide form, but they're split out. And that's generally what historically was the product it would send to China to be processed into the metal. And at Phoenix, what we do is we take that oxide and convert to metal. And that's one of our revolutionary key things that we do. We're one of the best in the world on how to take oxide and convert to metal. Sage is a huge supply chain gap, and that's what we do primarily right here in New Hampshire. This facility is designed as that one key part of that process.

52:03Richard Haass:The materials that you work with in your facility in New Hampshire, where are those mine tailings from? So the facility in New Hampshire is buying actually normal mined products. We will vertically integrate to go upstream, meaning going closer to the mine site in the future. But right now it's normal mine products coming from the US and Australia. Can you be competitive with the Chinese? Yeah, it's a tricky question, honestly. Because, fundamentally speaking, the Chinese control the market indices that dictate price, it's extremely challenging. Now, what I will say is that we are generally cost competitive with the Chinese operations.

52:36Richard Haass:That's a very important thing to note. However, China does subsidize a lot of these operations, and the pricing does not quite indicate how an actual process would work. So it's always tricky to answer that question. David Abraham says it's not enough just to be cost competitive with Chinese alternatives. You also need to have a complete supply chain that relies on the critical minerals you're producing. My concern, as crazy as it sounds, is not for the materials themselves. It's to create supply lines so that we can make the products of the future. No one sells dysprosium or neodymium in the market.

53:11Richard Haass:You can't just go to the store and buy it. They're critical to our phones, our robots, our vehicles. And that's where we need to be spending our time is how are we creating the products that our next generation needs? How do we create the economy that our children want? And how do we ensure that defense systems that we're setting up to protect our countries are invulnerable to supply chain challenges? So you really want to start with the end, with the demand, and then use the inputs, these materials, and then focus on how to get them. And in many ways, that is exactly what China has done, building not just the supply of these materials, but the industries that depend on them.

53:56Richard Haass:China, for many of these materials, is the market. They produce, depending on the material, 70, 80, 90 % of a particular material, but they also consume 60, 70, 80, 90 % of the material. Their supply lines are becoming increasingly tight. I was back in China in 2011, and they were quite clear the materials that they were producing in their country are set to be consumed in their country. they did not see a benefit to export. China built its playbook around critical minerals long before the U.S., and it's used its entire system of government to execute on its plan, something that former U.S. ambassador to China Nick Burns says we need to take into account.

54:41Richard Haass:How does our system compete on something like critical minerals, given where we are? Because it may take a long time for our system to come around to the right decision. In the meantime, China's off to the races. So when I was educated a long time ago, college and graduate school, I prayed at the altar of free trade. And I became a free trader in my youth. And like most people in Washington, as an official, a young official, 80s, 90s, even into this century, free trade was our gospel. I now think, to directly answer your question, it's a really important question. Both President Biden and President Trump have now engaged in a degree of industrial policy, recognizing if you're up against this authoritarian, colossal economic power, and that's what China is, we have to isolate certain industries, pick out certain industries in the United States for special support.

55:33Richard Haass:The United States government needs to pick out our national champions in rare earths, there are very few of them, and support them financially. And President Trump's gone all the way to take a financial stake for the USG in this. And frankly, I don't think we compete with China in certain industries without that degree of involvement by the U.S. executive branch that we really haven't seen in a way since FDR's time, when we had to have a war production economy in the 1940s during the Second World War. When it comes to critical minerals, the U.S. has to recognize that it's playing from behind. It has to get its playbook right, and it needs to see how much the Chinese government is doing to promote its industry.

56:15Richard Haass:But with all that, Ambassador Burns still believes the U.S. can get back in the game. I will say this. President Xi Jinping has basically become a one-man show. So there is an advantage in a way that Xi Jinping can order things to be done and have them implemented. But, you know, if you compare our system to theirs, I'll take our system every day. Our democracy is messy. There's too much partisanship in Washington. But what's not a problem is that we believe in democracy and human rights and the rule of law and the balance of power among three branches of the U.S. government. I'll take that any day over China's system.

56:57Richard Haass:That does it for us here at Wall Street Week. I'm David Weston. See you next week for more stories of capitalism.

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