The Cold War had Americans worried about a “missile gap.” Should the rise of China have us nervous about a neodymium gap?

It’s a question President Barack Obama is taking seriously, as he showed Tuesday in asking the World Trade Organization to look into China’s manipulation of the global market in so-called rare-earth elements. We wish the U.S. Defense Department would show an equal amount of concern.

Neodymium is one of 17 rare-earth metals that have become vital to industrial production and national security in our high-tech age. Its unique magnetic properties are integral to computer hard drives, hybrid-car motors, aircraft turbines and those Beats by Dr. Dre headphones your teenager apparently can’t live without.

One thing neodymium isn’t is rare -- it is as commonplace in the earth’s crust as prosaic metals like copper, and scattered around the globe. Much the same can be said of praseodymium (used in Hollywood’s arc lights), samarium (guided missiles) and lanthanum (night-vision goggles). Yet, despite this abundance, China produces more than 90 percent of the global supply of rare earths.

Mining Isn’t Easy

There are many reasons for this: The ore is usually found in small quantities that aren’t cost-effective to mine and refine. Because it is often in seams of thorium and other radioactive or harmful substances, extraction can create an environmental disaster. Opening a new mine in the U.S. can cost upward of $1 billion, and can take as long as 15 years before it becomes operational. These difficulties give an advantage to China, with its vast rare-earth deposits in Inner Mongolia and elsewhere, state-financed mining operations, and lax environmental and worker protections.

It’s never good to have a single supplier develop a market stranglehold, and the problem is compounded in this case because China is a commercial and military rival with no qualms about pressing every advantage. It places quotas on exports and sets prices for rare earths far lower for the domestic market -- a ploy to get Western manufacturers to move factories inside China. According to a study by Bloomberg Government, the average Chinese export price of neodymium oxide was $321 per kilogram in the summer of 2011, 66 percent higher than the domestic price and a 563 percent increase compared with the same period in 2010.

The stakes go beyond commerce: In 2010, after Japan detained a Chinese fishing captain near some disputed offshore islands, Beijing played some power diplomacy by placing an embargo on rare-earth exports to its island neighbor.

In response, Japan has been shaping a national strategy on rare earths, centered on increasing stockpiles, recycling from discarded electronics and finding new sources (its scientists believe they may have found large deposits under the ocean). Yet the jury is out on Japan’s approach, and such steps may not lend themselves to the U.S.’s military-industrial structure. Congress is rightly leery of intervening in the market through creation of a large-scale defense stockpile, and most electronic devices contain too little rare-earth metal to make recycling financially worthwhile.

On new sources, however, things are looking up. Molycorp of Greenwood Village, Colorado, has recently reopened its Mountain Pass mine in California’s Mojave Desert, which is particularly rich in so-called light rare earths such as lanthanum, cerium, praseodymium and neodymium. Mountain Pass was shut down more than a decade ago because of radioactive discharge. This time around, however, Molycorp seems to be saying and doing all the right things environmentally, and plans to be at full production later this year.

A Market Success

Congress had considered providing loan guarantees for Molycorp’s efforts to reopen Mountain Pass. In the end, the market worked just fine. The company raised nearly $400 million in an initial public offering last July and this month reached a $1.3 billion deal to purchase Canada’s Neo Material Technologies Inc., a major refiner of rare earths. (Although this is mostly good news, Neo Material has two plants in China, raising the troubling possibility that ore from Mountain Pass could be exported there.) Meanwhile, the other major Western company in the field, Lynas Corp. of Australia, is running into local opposition in efforts to build a refinery in Malaysia.

Still, given the importance of rare earths to the U.S. economy and national defense, the government has a role to play in the success of Molycorp and its smaller domestic rivals.

The complaint to the WTO is justified, but is hardly certain to succeed. This is a tougher issue than a 2009 case on broader raw materials that China lost, as Beijing will probably cite concerns over the environmental impact of rare-earth mining as reason for restricting exports.

Better to concentrate on increasing non-Chinese supplies. Representative Mike Coffman, a Republican who represents the Colorado district where Molycorp is based, has been pressing the Pentagon for years for a report on its rare-earths strategy. Defense officials, who have blithely dismissed the idea of a rare-earth security threat in the past, are expected to give Congress a classified briefing on the issue this month.

At the very minimum, the Pentagon needs to have its Defense Logistics Agency conduct an inventory of rare earths on hand and its potential needs over the next five years, and develop a plan should Beijing officials jack up prices or turn off the supply. It could also look at long-term purchasing contracts with Molycorp, smaller U.S. companies and even foreign, non-Chinese firms like Lynas to assure diversity of supply. These minerals could eventually be sold off to military contractors and other manufacturers.

Thirty years ago, Deng Xiaoping presciently said: “There is oil in the Middle East, there is rare earth in China.” The U.S. has seen the ill-effects of dependence on Middle Eastern petroleum. We have a chance to avoid a similar fate with neodymium.

Read more opinion online from Bloomberg View.

To contact the Bloomberg View editorial board: view@bloomberg.net.