Deng Xiaoping understood something in the 1970s that Western strategists still struggle to grasp: “The Middle East has oil. China has rare earths.” But the insight went deeper than resource endowment. Deng recognized that controlling processing infrastructure creates leverage that operates independently of conventional market dynamics. It’s not about who has the best AI model or the most efficient data center design. It’s about who controls the physical bottlenecks in the supply chain. Five decades later, that strategic insight has become the defining constraint of the AI era.
Understanding geopolitical leverage requires mapping the critical minerals supply chain across its three distinct stages: upstream, midstream, and downstream.
Upstream encompasses mining and extraction—the raw ore deposits scattered across the globe. This stage is relatively distributed. Chile and Peru dominate copper. Australia leads in lithium and rare earths. The Democratic Republic of Congo controls cobalt. No single nation monopolizes extraction, and new deposits continue to be discovered. From a pure resource perspective, the world isn’t facing scarcity—it’s facing a processing bottleneck.
Downstream covers manufacturing—the finished products that power the modern economy. AI data centers, electric vehicles, consumer electronics, and defense systems all represent downstream applications. This stage is also distributed, with manufacturing capacity spread across Asia, Europe, and North America. Companies compete fiercely on design, efficiency, and cost. But every downstream manufacturer shares a common dependency: they all require processed materials from the midstream.
Midstream is where strategic power concentrates. Processing and refining transform raw ore into usable materials—the copper wire, battery-grade lithium, and separated rare earth elements that downstream manufacturers require. This stage demands specialized infrastructure, technical expertise, and massive capital investment. And this is precisely where China dominates.
The Leverage Point
China’s midstream dominance didn’t happen by accident. It resulted from a deliberate multi-decade strategy executed while Western nations focused elsewhere.
The strategy had three components. First, invest heavily in processing infrastructure. While Western capital chased software returns, China built refineries, smelters, and separation facilities. The investments seemed unglamorous—dirty industrial capacity rather than sleek technology—but they created irreplaceable physical assets.
Second, build technical expertise while the West exits. Processing rare earth elements requires specialized knowledge that takes decades to develop. As American and European universities defunded mining and metallurgy programs, China expanded them. The institutional knowledge that once resided in Western research labs migrated east.
Third, control the bottleneck, not just the deposits. Raw ore has substitutes and alternatives. Processing capacity doesn’t. By dominating midstream infrastructure, China gained leverage over every nation that needs refined materials—regardless of where those nations source their raw inputs.
The result: China controls refining capacity for the materials that power AI infrastructure. Beijing sets processing standards that global manufacturers must meet. And when strategic interests demand it, China can restrict exports—as it did with gallium and germanium in 2024, causing prices to double within months.
The Western Blind Spot
How did Western nations miss this? The answer reveals a systematic failure of strategic imagination.
Western policymakers focused on “clean” technology optics. Solar panels, electric vehicles, and AI systems appeared as triumphant products of innovation. The dirty processing that made them possible remained invisible—outsourced to facilities that didn’t appear in corporate sustainability reports or political talking points.
Western corporations outsourced “dirty” processing to optimize quarterly returns. Refineries require environmental compliance, community relations, and long-term capital commitment. Outsourcing eliminated these complications from balance sheets while creating strategic dependencies that wouldn’t manifest for years.
Western institutions lost institutional knowledge through decades of neglect. Mining engineering programs closed. Metallurgy departments merged into broader materials science. The specialized expertise required to build and operate processing infrastructure simply disappeared from the Western talent pool.
The cumulative result: Western nations cannot build AI infrastructure without materials processed by a strategic competitor. Every data center, every GPU cluster, every battery storage system depends on midstream capacity that China controls. The downstream applications that seem like technological triumphs are actually expressions of strategic vulnerability.
The Nature of Structural Power
Structural power differs fundamentally from market power. Market power operates through prices—suppliers with market power charge more, and buyers respond by seeking alternatives or reducing consumption. Market dynamics eventually equilibrate supply and demand.
Structural power operates through dependency—actors who control critical infrastructure can impose conditions that transcend price. When China restricts rare earth exports, the issue isn’t cost; it’s availability. No price premium can purchase materials that aren’t for sale. No market mechanism can substitute for processing capacity that doesn’t exist outside Chinese control.
This distinction matters enormously for AI strategy. Technology companies accustomed to market competition assume that supply challenges resolve through procurement creativity or premium pricing. Structural dependency doesn’t work that way. When the bottleneck is physical infrastructure controlled by a geopolitical competitor, software-era playbooks fail.
Strategic Implications
For technology executives, the leverage point framework demands supply chain mapping that extends beyond tier-one suppliers. Understanding midstream exposure—where materials actually get processed, regardless of where they’re nominally sourced—reveals vulnerabilities that procurement dashboards obscure.
For investors, midstream infrastructure represents both risk and opportunity. Companies dependent on Chinese processing face structural exposure that no financial hedge can eliminate. Conversely, investments in alternative processing capacity may benefit from strategic premiums as Western nations recognize their vulnerability.
For policymakers, the leverage point reveals the inadequacy of downstream-focused industrial policy. Subsidizing chip fabrication or EV manufacturing addresses symptoms while ignoring the processing bottleneck that constrains both. Strategic autonomy requires midstream investment—the dirty, capital-intensive infrastructure that Western nations abandoned decades ago.
The geopolitical leverage point isn’t about rare earths specifically. It’s about the nature of structural power in supply chains with concentrated processing capacity. Whoever controls the bottleneck controls the system. China understood this fifty years ago. The West is only beginning to learn.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
