Xi’s rare earth ‘Bazooka’ sparks global alarm and race for supplies

Taiwan’s Economy Minister Kung Ming-hsin said Tuesday the government will start encouraging local companies to recycle and refine rare earths to ensure stable supplies for its domestic industries. He said China’s latest measures will impact engine, car and drone makers, while the microchip sector will be largely spared.

At the same time, protectionist measures continue at a sustained pace, beyond the increases in customs duties already imposed. China unveiled sanctions on Tuesday against the American units of a South Korean shipping giant, as part of a broader set of measures in the maritime space between Beijing and Washington. And the EU is considering forcing Chinese companies to hand over their technology to European companies if they want to operate locally.

Risk of flashback

The series of measures marks China’s first major effort to control the global flow of critical minerals that it dominates, using the same model that allows the United States to wield power far beyond its shores.

“After decades of effort, China finally has some real technological advantages over America,” Arthur Kroeber and Laila Khawaja of Gavekal Research wrote in a Monday note.

China’s too-aggressive implementation of rare earths could boost efforts to build alternative supply chains, undermining China’s long-term dominance – in the same way that Washington’s export controls on advanced semiconductors risk backfiring and spurring Chinese innovation.

Australian mining companies with critical mining projects made dizzying stock market gains on Tuesday, with shares in Resolution Minerals Ltd. closing up 56% and those of Nova Minerals Ltd. by 16%.

China’s measures represent President Xi’s adaptation of tactics pioneered by the United States – using its dominance in critical sectors as a cudgel against foreign rivals. Where Washington has the ability to use the dollar to exercise long-arm jurisdiction, China is now deploying its stranglehold on rare earth processing and permanent magnet production.

“The United States has unparalleled leverage in financial markets because of the reach of the dollar and the centrality of the U.S. financial system,” said Chris Kennedy, senior geoeconomic analyst at Bloomberg Economics, who previously served on the National Security Council under the Biden and Trump administrations. “China has global leverage through its dominance over key industries that are essential to global manufacturing. »

China’s domination

The addition of five rare earths to China’s restricted list – holmium, europium, ytterbium, thulium and erbium – will make it harder for companies to find replacements for magnets made with the seven minerals initially affected by the restrictions unveiled by Beijing in April.

In the short term, alternatives remain limited. China is responsible for 70% of the rare earths mined worldwide and more than 90% of the permanent magnets made from these minerals. While EU and US companies have already reported supply shortages and production shutdowns during previous Chinese restrictions, it takes years to build replacement capacity.

If rigorously enforced, this policy constitutes a choke point in Chinese technology that affects virtually all modern industries that rely on high-performance permanent magnets. The measures apply not only to raw materials, but also to products made overseas from Chinese rare earths, even when these materials represent only 0.1% of a product’s value.

China’s Ministry of Commerce has justified these restrictions on national security grounds, emphasizing that medium and heavy rare earths have important military applications. Officials stressed that the measures would not entirely ban exports and promised to approve applications meeting regulatory requirements.

Whatever the intention, the ambition to control the global flow of minerals was expressed in a comment Monday by a researcher at the Chinese Academy of Social Sciences, a leading government-linked think tank.

Wang Ziyang, a deputy researcher at the institution, said China was moving from being a supplier to being a “governor of the order of rare earths”, arguing that the measures prevent the military use of these elements and are in the common interests of the global community.

The latest move ends years of expansion of Beijing’s export control regime. Since 2020, China has systematically built an architecture reflecting US controls, from blacklisting entities to establishing extraterritorial jurisdiction over Chinese-origin technologies.

The timing appears linked to Washington’s expansion of an entity list targeting Chinese semiconductor companies – a move Beijing sees as a violation of bilateral agreements reached in Madrid last month that neither side would impose new controls during trade negotiations.

These checks could serve as negotiating leverage ahead of expected talks between Xi and President Donald Trump later this month. Kroeber and Khawaja said the announcement paves the way for negotiations allowing China to relax its export controls on rare earths in exchange for equivalent concessions to the United States on semiconductor export controls.

Whatever the outcome of these negotiations, a complete reversal seems unlikely, according to Oliver Melton, until recently attached to the US Treasury in Beijing and now director of the Rhodium Group’s China practice.

“Until the end”

“This is a strategic move to ensure they have lasting and persistent leverage over the United States and other countries to deter future export controls against China,” he said. “Chinese policymakers are keenly aware that they have the ability to disrupt the production of major U.S. companies in ways that maximize the impact on U.S. markets – for example by targeting companies like Apple and Tesla. »

China’s Commerce Ministry has signaled openness to dialogue while defending its actions, saying in a statement released Tuesday that Beijing “will fight to the end if necessary” while the door remains open to negotiations.

Beyond retaliation and negotiation tactics, these measures advance Beijing’s broader industrial strategy. By controlling access to processing technologies and manufacturing equipment, China aims to keep competitors out while encouraging partnerships with Chinese companies.

Rules imposed on foreign manufacturers using Chinese rare earths or related equipment come into effect on December 1. The 0.1% threshold could affect large swaths of intermediate goods and would likely result in significant administrative delays.

–With help from Josh Xiao, Yian Lee, Martin Ritchie, Jing Li, Fran Wang and Lucille Liu.

(Updated with Trump’s comments on cooking oil and Taiwan’s response to Beijing’s decision.)

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