Recently, the Chinese Communist government has tightened export controls on some key rare earth elements, leading to a further escalation of trade tensions with the United States. With China monopolizing over 90% of global rare earth processing, it has long viewed 17 specific rare earth elements as critical strategic resources.
Analysts suggest that China’s new export permit rules, while seemingly applying to all countries, are actually targeting the United States. This could be a strategy to pressure Washington, attempting to compel concessions in trade negotiations.
“This is a typical case of weaponized negotiation,” said American economist Davy J. Wong to Epoch Times. He believes that China’s aim is to prompt lobbying efforts from Congress and industry to reduce U.S. restrictions on tariffs, export controls, and foreign investments towards China.
Wong also pointed out the risks of China’s strategy, indicating that continued export restrictions could potentially lead Western countries to disengage from China, resulting in oversupply domestically and weakening China’s near-monopoly position in rare earth processing established over decades.
On April 4th of this year, China announced regulations including export controls on magnets and seven rare earth elements widely used in critical sectors like defense and energy, such as samarium, gadolinium, terbium, dysprosium, lutetium, holmium, and yttrium.
Due to the requirement for exporters to apply for special licenses, with permit approvals possibly taking weeks or months, shipments may be delayed, posing risks of disruptions in the global supply chain.
Gracelin Baskaran, director of the Critical Minerals Security Program at the Center for Strategic and International Studies (CSIS) in Washington D.C., shared in a podcast on April 14th that China’s export restrictions may take the form of “non-automatic permits.”
According to Baskaran, China may issue only minimal licenses to American buyers, and countries willing to continue strengthening cooperation with China wouldn’t be affected by these limitations.
She revealed that 15 U.S. defense and aerospace companies have been listed in China’s ban. Even with rare earth export permits, these firms would still be unable to conduct business with Chinese companies producing key technologies.
Wong emphasized that China’s primary target with these measures is the U.S. defense supply chain, particularly for high-tech weapons reliant on rare earth magnets, such as the F-47 sixth-generation fighter and others.
Baskaran disclosed that an F-35 fighter requires around 900 pounds of rare earth metals, an Arleigh Burke-class destroyer about 5,200 pounds, and a Virginia-class submarine roughly 9,200 pounds.
Looking ahead, Wong warned that for the Chinese government, these tactics may bring “short-term gains but long-term hemorrhage,” predicting that Chinese rare earth producers could soon encounter pricing fluctuations, unsellable inventory, and escalating financial challenges.
For the past thirty years, China has artificially depressed prices through excessive production, high subsidies, and market intervention, leading to the closure of many international competitors.
By heightening uncertainty rather than imposing outright bans, the Chinese government is now hoping for American manufacturers to plead for a trade agreement, Wong explained.
He described China’s move as a gamble to create panic in order to achieve its objectives, acknowledging substantial risks in this strategy that could potentially lead the global community to seek alternative supply chains in the end.
Baskaran stressed in the podcast that although rare earth ores are “not actually rare,” they are often found in small quantities.
Rare earth production typically involves three main stages: ore mining, chemical processing, and manufacturing final products like magnets and alloys.
She noted that China currently accounts for 60% of global rare earth production and around 90% of processing, making rare earth production and processing a “critical weak link” for the U.S.
The most stringent control by China is no longer in rare earth ore mining but in the processing and manufacturing stages post-mining. Processing involves steps like smelting to separate metals from ores, while manufacturing includes processes like alloying, shaping, and heat treatment.
End products from these stages include high-purity metals, advanced alloys, and various permanent magnets that power electric vehicles (EVs), wind turbines, smartphones, and guided missiles.
Without Chinese processing plants, even with alternative ore sources, the global supply chain would face shortages of refining and sintering facilities.
Wong highlighted that the U.S., Australia, Canada, and the EU have started funding initiatives to fill the “missing middle” gap, addressing shortages in rare earth processing and manufacturing, aiming to establish a basic rare earth supply network within five to ten years.
Other countries like Brazil and Vietnam also hold significant rare earth reserves and are exploring methods to increase production.
However, environmental concerns remain a challenge. Rare earth ores contain varying amounts of thorium and uranium, producing toxic tailings and wastewater during separation. Strict environmental regulations in the U.S. and Europe would increase production costs unless more efficient filtration and on-site heavy metal recovery technologies are adopted.
Nevertheless, Wong suggested that the costs in ensuring strategic independence could be offset through increased prices and government subsidies.
As far back as 2010, China had employed similar tactics when it stopped rare earth exports to Japan during a territorial dispute for seven weeks.
Tokyo responded swiftly, reaching a significant supply agreement with Australian mining giant Lynas, investing in developing non-Chinese deposits in India and Vietnam, and swiftly initiating rare earth recycling projects. The U.S. quickly followed suit, reopening the Mountain Pass rare earth mine in California, stockpiling critical rare earths, and funding research on rare earth alternatives.
Wong stated that this incident highlighted how rare earths have become a geopolitical weapon and any threat of supply interruption could lead to broader diplomatic impacts.
A report from the Center for Strategic and International Studies cited U.S. Geological Survey data showing that despite rising demand, China’s share of global rare earth production had decreased from 97.7% in 2010 to around 63% in 2019.
Wong proposed that countries like South Korea, the EU, and ASEAN members have already devised risk mitigation plans to reduce reliance on Chinese rare earths.
With each leverage pull by China, its credibility as a reliable global supplier diminishes, Wong noted.
Investors from the public and private sectors are backing projects previously considered marginal, supporting Lynas in Australia, MP Materials in the U.S., and various projects in Canada and Scandinavia.
Companies within China unable to guarantee stable rare earth exports are either relocating to other countries or diversifying their operations.
On the other hand, developing rare earth substitutes and recycling initiatives present alternative solutions.
Major U.S. automakers like General Motors and Stellantis are investing in developing rare earth substitutes, such as using neodymium iron-based magnets without rare earths in electric vehicles. Simultaneously, the U.S. Department of Energy is pushing and funding large-scale recycling projects for decommissioned wind turbine components and electric vehicle batteries.
For instance, Tesla has reduced rare earth usage in its Model 3 powertrain by 25% since 2017.
While these alternative solutions are still evolving, Wong noted, “the trend is clear, and investments are surging.”
He suggested that the Chinese government must address this significant impact domestically, anticipating potential moves like stock acquisitions, subsidies to sustain mining operations, or promoting new rounds of consolidation allowing small enterprises to integrate with large state-owned enterprise groups. However, attracting foreign demand is currently challenging for them.
In the short term, with rare earth prices on the rise, Chinese exporters may enjoy larger profit margins. Looking ahead, developments like diversified mine operations, new smelting facilities coming online, and advancements in rare earth recycling utilization could weaken China’s dominant position in the rare earth sector.
Even though some foreign magnet manufacturers might establish plants in China to secure raw material supplies, geopolitical risks and U.S. rules on foreign investment may restrict this trend, Wong predicted.
According to Wong’s forecast, the most likely outcome would be a market reshuffle where China remains a key player but no longer the sole dominant force.
He believed that in such a scenario, while the Chinese government gains temporary negotiation leverage, the cost would be permanently weakening its dominant position in the industry. China’s actions will only backfire, accelerating global efforts to reduce reliance on Chinese rare earth exports.