Overcoming China’s dominance over rare earths is just a question of political will – and Beijing’s moves might provide just that.
On October 9, Beijing expanded its rare earth export controls. China’s government now requires foreign firms to obtain approval to ship magnets containing as little as 0.1 percent Chinese‑sourced material or produced with Chinese extraction, refining, or specialized technology. The move, ironically, mirrors the U.S. Foreign Direct Product Rule, which restricted third‑party semiconductor exports to China.
China’s new controls are a continuation of a policy that Beijing implemented last April after U.S. President Donald Trump decided to raise tariffs to 54 percent on many Chinese goods. At that time, China decided to implement a new licensing system requiring companies to acquire government-issued permits to export seven medium and heavy rare earth elements – samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium – and their derivative forms. Beijing expanded that list earlier this month.
The conventional wisdom on the topic believes that China’s near monopoly in rare earths constitutes a critical chokepoint in the global economy, which Beijing is trying to exploit to gain some leverage in the upcoming China-U.S. negotiations. The reasoning is very straightforward: China has almost half of the global reserves and accounts for approximately 71 percent of mining, 87 percent of processing, and 91 percent of refining. In addition, China produces around 90 percent of the world’s rare earth permanent magnets, which are key to the defense, semiconductor, automotive, and green energy industries. Because of this dominance, China can weaponize rare earth exports to disrupt global supply chains. Hence, the chokepoint.
Not all chokepoints are the same, however, and not all bear the same risks. In geography, a choke point is a strategic location that is essential for passage. Applied to economics, a chokepoint represents a vulnerable point in a supply chain that can be disrupted, leading to significant economic consequences.
The Strait of Malacca constitutes a paradigmatic example in the most literal sense. This is particularly true for China: because most of the country’s sea lines of communication (SLOCs) pass through the strait, a blockade or disruption could freeze trade and energy supply, severely affecting its supply chains. Consequently, the “Malacca dilemma,” as phrased by China’s previous president, Hu Jintao, can partially explain both China’s unprecedented attempts to increase its blue waters military capabilities and the Belt and Road Initiative (BRI), which intends to make China’s links to the world economy through both land and sea infrastructure more resilient.
ASML’s extreme ultraviolet (EUV) lithography machines are another chokepoint, this one more metaphorical. These are the only machines that can produce the most advanced semiconductor chips in the world, and are currently impossible to replicate by anyone but the Dutch company. This is due to the high complexity of the machines not only in terms of what they do, but how they are made, as they have over 100,000 components from more than 5,000 suppliers. Because of U.S. restrictions and pressures on the Dutch government, ASML cannot sell its EUV machines to China, which holds back the latter from producing cutting-edge semiconductor chips.
Understanding these two examples is key to grasping the impact of China’s recent rare earth restrictions.
To return to the Malacca Strait example, Beijing’s expansion of maritime capabilities reflects an ambitious effort to secure its SLOCs. At the same time, the BRI aims to diversify and reinforce alternative supply routes. Together, these measures illustrate China’s strategy for mitigating chokepoint risks: reducing supply chain vulnerability not only through military strength, but also through long‑term – and not always immediately profitable – investments in supply line diversification. In the context of the rare earth market, the West should do the same: commit to creating a reliable alternative to the Chinese industry.
By contrast, in the case of EUV lithography machines, despite Beijing’s efforts no significant progress has been made when dealing with U.S. restrictions on ASML’s exports. The reason is of paramount importance: due to the singular features and high complexity of the technology, no Chinese company is capable of replicating it today or in the near future – and because China cannot buy it from its sole manufacturer, diversification is impossible. This is the worst possible scenario when it comes to dealing with a chokepoint, as there is no visible, realistic way to mitigate its impact. However, this is not the case when it comes to the rare earth conundrum.
To begin with, rare earths are not as rare as their name suggests. The United States, for example, possesses substantial light rare earth element deposits, primarily associated with carbonatite systems such as Mountain Pass. Even the scarcest elements – mainly heavy rare earths, such as dysprosium or terbium – can be found in many countries apart from China, among them Australia, Madagascar, Vietnam, and Brazil. Furthermore, China is not the only country that can produce rare earth magnets. As a matter of fact, the U.S. and Japan were the first two countries to produce them last century.
China’s monopoly is one of efficiency: they dominate the market because they can produce at scale and export at minimum costs. The profit margins are far from spectacular. Beijing’s rationale for gradually absorbing this originally American industry was more geopolitical than it was economic.
The absence of a similar mindset is exactly what left the West vulnerable to China’s rare earth controls today. As long as profits overshadow strategic needs, the West will be at China’s mercy, since building up an alternative supply chain from scratch will take time, coordination, a lot of money, and subsidies with no immediate economic return.
Nonetheless, if framed as a state necessity rather than a profit endeavor, the rare earth market becomes contestable. Therefore China’s pressure transforms into a double-edged sword: if the government weaponizes rare earth exports, Beijing will incentivize the creation of an alternative supply chain, which will reduce their dominance in the long run.
According to economic theory, the rare earths market should not be contestable. Its high financial, technological, and environmental costs are by no means a low barrier to entry. Developing refining capabilities requires significant sunk investments, and China’s ability to flood the rare earths market and depress prices is a real deterrent. Nevertheless, because of the existence of multiple potential players and the generous geographical distribution of the elements, these other factors are secondary if there is enough political will to frame supply chain diversification first as a strategic imperative based on geopolitical conviction, and only then as a long-term profitable endeavor.
Ideally, creating an alternative supply chain would be both strategic and significantly profitable for the West. However, it is unlikely that this will be the case. A difficult decision will have to be made, yet the prospect of having a decision to make in the first place is a fortunate thing, which China does not have in the EUV technology market.
Even if it is a real threat due to its short and medium-term impact on global supply chains, China’s dominance and export controls in the rare earth market should not be overstated. Quite on the contrary, Beijing might have overplayed its cards by dealing a non-crippling blow and incentivizing the rest of the world to seek more reliable partners.
