How China’s restrictions on rare earths could disrupt the US defense industry

China’s drastic restrictions on rare earth exports threaten the U.S. defense industry, providing President Xi Jinping with powerful leverage over President Donald Trump in upcoming trade negotiations.

Beijing will not authorize the export of rare earths for use by foreign militaries, the Chinese Ministry of Commerce announced on October 9. These are the first restrictions imposed by China that specifically target the defense sector, according to Gracelin Baskaran, a critical minerals expert at the Center for Strategic and International Studies.

“What this essentially means is that it will deny licenses to foreign militaries and companies that produce finished products for military use,” Baskaran told CNBC. “This undermines the development of the defense industrial base at a time of increasing global tensions. It is a very powerful negotiating tactic because it compromises national security.”

Rare earth magnets are crucial components of U.S. weapons systems such as the F-35 fighter jet, Virginia and Columbia class submarines, Predator drones, Tomahawk missiles, radars and the Joint Direct Attack Munitions series of smart bombs, according to the Department of Defense.

China dominates the global rare earth supply chain. It controls 60% of mining and more than 90% of refining worldwide, according to the International Energy Agency. The United States depends on China for about 70% of its rare earth imports, according to the U.S. Geological Survey.

“It’s outrageous that we don’t have a strategic reserve of rare earths, that we let China monopolize 90% of rare earth refining,” Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania, told CNBC on Monday. “Where were we?”

Beijing has also imposed broad controls that require foreign companies to obtain an export license if rare earths processed in China represent just 0.1% of the value of their products. Companies also need licenses for products that rely on Chinese rare earth technology for mining, smelting, separation, magnet manufacturing and recycling.

“If these rules were to be enforced strictly and indefinitely, they would cause considerable disruption, not only in the United States but around the world,” Tobin Marcus, an analyst at Wolfe Research, told clients in an Oct. 10 note. Rare earths are also crucial inputs for the semiconductor and automotive industries.

The restrictions would affect all sectors of the U.S. economy, but the defense, semiconductor and electric vehicle sectors would be hardest hit, according to Alicia Garcia Herrero, an economist at French investment bank Natixis. Defense contractors Apple, Nvidia, Intel, Tesla, Ford and GM are all highly exposed, Hererro told clients in a Monday note.

The Trump administration is working to build a national supply chain. The Defense Department reached an unprecedented deal in July with the largest U.S. rare earths miner, MP Materials, that included an equity stake, floor prices and an offtake agreement.

“It will certainly also accelerate U.S. efforts to develop our own rare earth resources,” Marcus said. U.S. rare earth stocks have surged as investors speculate the Trump administration will strike deals with other mining companies.

The restrictions threaten to reignite the trade war between China and the United States after months of relative calm.

Trump responded by imposing 100% tariffs on Chinese goods starting November 1. The huge import taxes would come on top of the 44% tariff rate already in place on China, cutting off trade between the world’s two largest economies, according to Wolfe Research.

“It wouldn’t take much further escalation to bring us back to the near-embargo situation that prevailed in the spring,” Marcus told his clients.

The U.S. stock market wiped out about $2 trillion in value Friday after Trump threatened to impose massive tariffs against China, according to Bespoke Investment Group. The S&P 500 rallied Monday to regain more than half of Friday’s losses after Trump appeared to ease tensions, saying “everything will be fine” with China.

Trump and Xi are still expected to meet on the sidelines of the Asia-Pacific Economic Cooperation summit in Seoul, South Korea, later this month, Treasury Secretary Scott Bessent told Fox Business on Monday.

The most likely scenario is that “both sides abandon the most aggressive policies and that negotiations lead to a further – and perhaps indefinite – extension of the tariff escalation pause agreed in May,” Goldman Sachs told clients on Sunday.

But Beijing’s strategy is unclear and the tariff deadline is only weeks away, raising the risk that a deal won’t be reached in time, Marcus said.

“Without more conviction about Beijing’s strategy, we fear they may not be willing to back down quickly enough to prevent these 100% tariffs from taking effect, at least temporarily,” the analyst said.