Geoeconomics of Rare Earths: China's Role and Europe's Response

Beijing's strategic leverage

The increase in U.S. tariffs on Chinese exports has inevitably exacerbated geopolitical tensions with Beijing. China has capitalised its competitive advantage – its 95% dominance of the global rare earth market – in retaliation, as these strategic materials are essential for key sectors such as automotive, renewable energy, electronics, aerospace and, above all, European defence. On 4 April 2025, China imposed restrictions on the export of rare earths, compounds and related products, such as permanent magnets. By May, Chinese shipments of rare earth magnets to Europe had fallen by around 75% compared to the previous year, dealing a severe blow to the European Union (EU), which imports 100% of its heavy rare earth elements from China.

The complexity of supply chains

Even when the eurozone (EZ) sources secondary products containing rare earths from countries other than China, its dependence on Chinese supplies remains significant. A network analysis based on Bloomberg data shows that more than 80% of large European companies are no more than three intermediaries away from a Chinese rare earth producer. According to their research, about a quarter of companies, including Volkswagen, Renault, and Telefónica, depend on a single intermediary, often U.S. technology companies that transform Chinese rare earths into finished products.

The consequences are already tangible: some European car manufacturers have temporarily suspended production. Mercedes-Benz has created strategic stocks through coordinated warehousing with suppliers, while BMW has introduced magnet-free electric motors and is experimenting with wound-rotor technologies, using inductive transmission, reducing the use of rare earths without compromising performance. Despite these initiatives, external dependence remains high, and the measures taken do not completely neutralise disruptions.

New Chinese rules and export controls

New licensing requirements introduced in April 2025 have turned rare earth exports into a powerful tool. Each shipment now requires the CCP’s Ministry of Commerce (MOFCOM) approval through a compliance application, which defines who can receive the materials and in what quantities. Stockpiling is prohibited, and exporters to Europe must provide technical details on end use.

Although Chinese Foreign Minister Wang Yi described Chinese controls on rare earth exports as a matter of sovereignty in line with international norms, the reality is more complex. In fact, despite the introduction of a green channel and a European whitelist, Beijing had approved only 19 of 141 EU licence applications in September, according to the European Union Chamber of Commerce in China. Defence companies and small and medium-sized technology enterprises (SMEs) continue to experience delays and rejections, confirming a selective and politically oriented system.

The new measures on rare earth exports announced by China on 9 October 2025 extended Beijing's control to dual-use materials and technologies. According to the Chinese authorities, the unauthorised transfer of these materials and technologies could have military or sensitive uses, posing potential risks to national security and global stability. As a consequence, the Chinese government deemed it necessary to strengthen its control with new regulations. According to the announcement, regulations on Chinese citizens prohibit them from contributing to rare earth-related activities along the entire value chain abroad without prior authorisation. However, implementing such broad restrictions presents significant enforcement challenges. Beijing would have to expand a register of authorised entities, monitor end use, and protect intellectual property; yet, no concrete mechanisms have been defined at this stage.

Risks and strategic pressure

The concentration of rare earth production in China is the result of decades of strategic investment. Both extraction and processing are costly and highly polluting, and the presence of radioactive elements has discouraged many countries from investing locally. In the 1980s and 1990s, however, China developed a comprehensive infrastructure, becoming the world leader in the early 2000s. Today, this long-term strategy is causing a high degree of dependency for Europe and worldwide, making the EU vulnerable to geopolitical shocks. 

Since radar equipment, sensors, and drones rely on strategic rare earth elements such as neodymium, praseodymium, samarium, and dysprosium, European production of advanced military systems is at risk. Fearing that a Ukrainian victory could shift U.S. attention from European security to the China-Taiwan front, Wang Yi told Vice-President of the European Commission, Kaja Kallas, on 2 July 2025, that China does not want Russia to lose the war. Given the near-monopoly of Beijing over rare earth elements, any restriction or manipulation of their supply could indirectly weaken the defence capabilities of transatlantic countries and, consequently, reduce material support for Kyiv. This suggests that China, guided by geopolitical considerations rather than principles, may be indirectly promoting Russia's interests in this war.

On the other hand, China’s management of rare earth elements and magnet exports shapes both the supply and influence in global markets. As part of this strategy, European companies are now obliged to provide detailed data on technologies, supply chains and markets, information that reveals the industrial and military vulnerabilities of the EU.

In fact, this data collection creates a form of indirect influence over critical sectors, exposing weaknesses along the entire technological and defence value chain. To redress the balance, European governments could develop regulatory frameworks and institutional tools capable of collecting and analysing the same information directly at the state level, while ensuring the protection of security, intellectual property and industrial competitiveness.

In parallel, Beijing has attempted to use supply control as direct trade leverage, urging the EU to waive countervailing duties on subsidised Chinese electric vehicles. Although the initiative has not yet produced tangible results, it illustrates how economic measures and geopolitical considerations increasingly interact within China’s broader global strategy.

European reactions and resilience strategies

Although China's restrictions on rare earth elements now pose a significant challenge, they offer the EU an opportunity to consolidate its strategic autonomy and industrial resilience. With the Critical Raw Materials Act (CRMA) coming into force on 23 May 2024, the EU will limit the share of supply from a single third country to a maximum of 65%, promoting internal extraction, refining, recycling and innovation capacities, to ensure significant production of critical materials by 2030.

To diversify sources, the EU has launched 13 strategic extra-block projects and signed 14 partnerships with countries such as Canada, Kazakhstan, Rwanda and Argentina, ensuring stable supplies for defence, energy transition and the technology industry. Initiatives such as the Caremag project in France, set to become Europe's first large-scale rare earth elements recycling plant, show progress, but the long duration of projects and the absence of public price guarantees make additional financial support crucial. The EU has allocated 381 billion EUR in defence spending for 2025, and the 800 billion EUR ReArm Europe programme offers a concrete opportunity to close these gaps.

Globally, the EU is coordinating its actions with the United States and G7 partners to strengthen the resilience of critical material supply chains. During the G7 Energy and Environment Ministers’ Meeting in Toronto, the G7 moved from general coordination to the adoption of concrete measures aimed at strengthening the resilience of critical material supply chains. Ministers endorsed a Roadmap to Promote Standards-Based Markets for Critical Minerals, establishing minimum criteria for responsible production, enhanced traceability and interoperable digital credentials across supply chains. They also announced 26 new cross-border investments and partnerships, amounting to approximately USD 6.4 billion, together with a set of offtake agreements intended to secure a long-term supply of strategic minerals such as graphite, scandium, and rare earth elements. In parallel, the UK has restarted trade talks with Greenland and India, agreeing on joint research and processing projects to diversify and strengthen supply chains for critical raw materials.

The escalation over rare earth exports requires a response that goes beyond trade. Two members of the European Council on Foreign Relations (ECFR), Tobias Gehrke and Janka Oertel, propose activating the Anti-Coercion Instrument as leverage to push Beijing to negotiate a ‘landing zone’ that preserves essential industrial flows while protecting strategic industries; integrating it into the CRMA could transform the current vulnerability into a concrete opportunity for negotiation.

Ultimately, addressing the rare earth challenge requires more than just diversification or industrial resilience. It is of pivotal importance for Europe to work on several fronts: developing alternative supply chains and strengthening domestic capabilities, while maintaining a steady dialogue with China to mitigate geopolitical risks. Only by combining economic, technological and diplomatic tools can the EU turn its current vulnerabilities into strategic opportunities in an increasingly complex and competitive international landscape.

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ABOUT THE AUTHOR

Rossella Pediglieri is a young professional currently pursuing a Master’s in International Relations – China and Global Studies at the University of Turin. After living in Shanghai and Guangzhou, where she studied Chinese language and International Business, she now focuses on Chinese market strategies, risk assessment, and de-risking policies. She is a native Italian speaker, fluent in English and Spanish, and proficient in Chinese.

This article was edited by Robin Millet and Mengfei Xu.

Featured Image: Bayan Obo / Free for Use / Creative Commons Attribution-Share Alike 4.0 International license.