The Senkaku Islands: not much of a holiday destination (Photo: AP)

In Baotao, inner Mongolia, a huge mine operates day and night. Workers in chemical suits hose acid into tunnels. Huge posters bearing images of smiling employees proclaim "Become the leader in Rare Earth mining!" as huge refineries and factories belch smoke into the sky. Yet this huge centrally planned project is in danger because of events thousands of miles away.

You probably haven't heard of the Senkaku islands. Or, as they are known in China, the Diaoyou islands. Called the Pinnacle islands on British naval charts, they are a collection of uninhabited, barren rocks, home to a rare albatross and a exceptionally rare type of mole. Not a great holiday destination.

Last week, Japan arranged to buy the Senkaku islands from their private owners. There was uproar in China. In Beijing, cars were burned and Japanese businesses were attacked, and riots in Shenzen. The Senkaku/Diaoyou dispute has long been a flashpoint between the two nations. Every few years, ultra-nationalists from either side (or, indeed,from Taiwan, who also claim them) will sail out there, raise a flag, and cause a row.

However, it's never been this serious before. Regardless of silly orientalist ideas about "losing face", a quick glance at a map reveals why the governments care about these rocks. The islands are mid-way between Japan and Taiwan; a Chinese base there would push the range of carrier-killing ballistic missiles an extra four or five hundred miles into the Pacific.

The Chinese government has issued threatening statements, and the Japanese government has threatened right back, ominously declaring they had US support for nationalising the islands. Currently, Chinese and Japanese gunboats are steaming towards the islands and everyone in the Pacific is holding their breath. However, you may be asking why you, or the mine workers at Baotao, should care. After all, it is unlikely to come to a shooting war.

The mines at Baotao have slowed production in the light of the Diaoyou situation; they provide around 99 per cent of the world's supply of rare earths. Indeed, the Chinese government has explicitly stated it will not allow the shipping of these rare earths to Japan, which currently consumes around 60 per cent of Baotao's output.

Those rare earths, shipped from Mongolia to Japan, go into practically every gadget we buy or make. Almost every flatscreen TV, every mobile phone, everything that requires memory, requires parts made in Japan with Chinese minerals. The Japanese can't switch suppliers or buy the elements from somewhere else for more money. No rare earths, no manufacturing.

It's not just the gadget industry, either. In news that will delight my colleague James Delingpole, the renewables industry is also dependent on the mines of Baotao. You can't make a Prius battery or a wind turbine magnet without Neodymium mined there and machined in Japan.

The Japanese have been aware of this nightmare scenario for some time; indeed, they've invested in sci-fi schemes such as underwater rare earth mining to try to wean themselves off their dependence on Chinese minerals. Unfortunately, the crisis has blown up before these projects could bear fruit.

If the crisis around the Senkakus, there will be huge consequences for all of us, as supply chains all over the world break at the Japanese link. For all our sakes, let's hope this dispute is resolved quickly.