How Long Can China Continue to Leverage Rare Earths?

Recent high-level negotiations between China and the United States in London were sparked by rare earths. Amid increasingly tense China-U.S. relations, the U.S. has imposed stricter export control policies on China. However, China holds few trump cards, with rare earths being a critical one. This resource has already become a choke point for many industries in Europe and the U.S., forcing the U.S. to re-engage in negotiations with China.

Historical Background and Policy Evolution

Rare earth elements, crucial to modern high-tech industries, have gained increasing strategic importance in the global economy. Despite their name, rare earths are not particularly scarce. The 17 elements, including lanthanum, cerium, and neodymium, are relatively abundant in the Earth’s crust, with some, like cerium, as plentiful as copper, and yttrium more abundant than lead. They are called “rare” because they are seldom found in high-concentration, easily mineable deposits, making their extraction and refining complex and costly.

China’s dominance in the rare earth industry began in the late 1980s and early 1990s, when it captured approximately 97% of the global market through large-scale mining and low-cost exports. Rare earths were once sold at “cabbage prices,” a strategy that boosted exports but caused severe environmental pollution. The extraction and processing of rare earths involve heavy chemical use, generating toxic wastewater and waste that cause long-term damage to soil and water sources. Recognizing these issues and the strategic importance of rare earths, the Chinese government began tightening controls in 1998, implementing export quotas to stabilize prices, reduce environmental damage, and protect national resources.

In the 21st century, China’s rare earth policies further evolved. In 2010, China sharply reduced export quotas due to geopolitical factors, triggering global market shocks and prompting countries like the U.S. and Australia to restart domestic rare earth mining, such as the Mountain Pass mine in the U.S. and Lynas in Australia. However, their output remains far below China’s. In 2023, China strengthened its grip by banning the export of rare earth smelting, separation, and processing technologies, including those for rare earth permanent magnets. This shift from raw resource exports to technology protection aimed to solidify China’s central role in the global rare earth supply chain. In 2024, China introduced the Rare Earth Management Principles, stipulating that all rare earth resources are state-owned, prohibiting private companies from mining or exporting them without authorization. The industry was further consolidated under two state-owned enterprises—China Rare Earth (South) and Northern Rare Earth (North)—forming a south-north industrial structure. This highly centralized model enables China to precisely control rare earth production and exports, maintaining its strategic advantage in the global market.

Current Control Mechanisms

China’s rare earth industry is strictly regulated through a quota system, with annual production quotas set based on global demand forecasts to maintain supply-demand balance and price stability. The government uses a stockpiling mechanism in certain years to purchase rare earths, preventing prices from falling too low while avoiding excessive increases that could spur overseas competitors to develop their own resources. This strategy keeps China’s rare earth prices below the production costs of foreign competitors while remaining profitable. Mining is entirely controlled by China Rare Earth and Northern Rare Earth, which oversee the full supply chain from extraction to smelting, separation, and final products like rare earth permanent magnets.

Since April 2024, China has implemented an export licensing system for seven heavy rare earth elements, which are critical for both civilian (e.g., electric vehicles, wind turbines) and military (e.g., missile guidance systems, radar) applications due to their dual-use value. The licensing process takes approximately 45 working days, causing production disruptions for some overseas manufacturers due to inventory shortages. For instance, some automakers have publicly stated that rare earth supply shortages threaten production line shutdowns. However, China maintains an open stance on rare earth exports for civilian use, typically granting licenses for non-military applications like electric vehicles or humanoid robots. At least six rare earth permanent magnet companies have resumed exports to Europe, Southeast Asia, Japan, and South Korea, including to major clients like Tesla. Nevertheless, the lengthy licensing process has created short-term supply chain pressures for some companies.

Additionally, China allows the export of finished motors containing rare earth permanent magnets, providing overseas manufacturers a way to bypass direct rare earth export restrictions. By producing motors in China and exporting them, foreign companies can indirectly access rare earth materials without navigating the licensing system. This flexible policy has alleviated some global supply chain tensions but underscores China’s control over rare earth end products.

So why does the U.S. seem unprepared despite China’s long-standing use of the rare earth card? This highlights China’s flexible control mechanisms. When relations sour, China can impose export restrictions, compelling the U.S. to negotiate. When Western companies begin developing their own rare earth industries, China increases production to lower prices, forcing those industries to operate at a loss.

Challenges in Replacing China’s Rare Earth Supply

Although rare earth elements are not scarce in the Earth’s crust, their extraction and processing face multiple obstacles, making it difficult for the world to quickly reduce dependence on China. First, rare earth mining and processing are highly polluting, involving extensive chemical reagents and waste management. Many countries avoid developing domestic resources due to environmental concerns. For example, after China’s 1998 export restrictions, the U.S. and Australia restarted the Mountain Pass and Lynas mines, but they struggle with the highly polluting smelting and separation processes. The U.S. ships much of its rare earth ore to China for processing, while Australia’s Lynas operates a processing plant in Malaysia to circumvent strict domestic environmental regulations. Myanmar, another major source of heavy rare earths, also sends all its ore to China for processing, reflecting the global supply chain’s deep reliance on China.

Developing new mines typically takes 3 to 5 years, but in geopolitically stable regions with strict environmental regulations, it can take over a decade due to the need for environmental permits, community approval, and infrastructure like power and transportation networks. In contrast, China’s rare earth industry benefits from mature infrastructure and relatively lenient environmental policies, enabling lower-cost, higher-efficiency production. Since 2023, China’s ban on exporting rare earth smelting and separation technologies has further widened the technological gap, as foreign countries struggle to access cutting-edge expertise. Even if new mines are developed overseas, smelting and separation capabilities are constrained by outdated technology and high environmental compliance costs. For example, Lynas’s Malaysian processing plant has faced operational restrictions due to local protests over pollution.

Producing rare earth permanent magnets is the biggest hurdle in replacing China’s supply chain. These magnets, critical for electric vehicles, wind turbines, and robotics due to their ability to enhance motor efficiency and reduce size, are dominated by China, which holds over 90% of the global market and leads in technological expertise, surpassing competitors like Japan. Alternative technologies, such as traditional motors without rare earths, are less efficient and heavier, making them unsuitable for applications like electric vehicles. The U.S.’s Mountain Pass mine claims it will produce rare earth permanent magnets by the end of 2025, but its capacity and quality remain uncertain, and automotive industry certification for new suppliers typically takes 2 to 3 years. Overseas projects, such as small-scale initiatives in Europe and North America, produce only 1,000 to 2,000 tons annually, compared to tens of thousands of tons from a single Chinese company, highlighting a significant scale gap.

Strategic Implications

China’s control over rare earths provides a powerful strategic lever in global geopolitics and economics. However, this leverage has a time limit. The 1998 export restrictions spurred the U.S. and Australia to restart mines, and current controls may further incentivize global efforts to develop alternative supply chains. Still, foreign countries face significant technical, environmental, and scale-related challenges in the short term. Developing mines, smelting and separation facilities, and achieving breakthroughs in permanent magnet production could take years or even over a decade. Additionally, the automotive industry’s lengthy certification process for rare earth permanent magnets further delays the transition away from China’s supply chain.

China’s allowance of rare earth and finished motor exports for civilian use has eased some supply chain pressures, but strict restrictions on military applications have pushed countries like the U.S. to accelerate self-sufficiency efforts. For instance, the U.S. government has increased funding for domestic rare earth projects, such as Mountain Pass, but progress is slow and unlikely to challenge China’s market dominance in the near term. Meanwhile, Chinese rare earth companies continue to expand capacity, further solidifying their global advantage.

In the long term, China’s rare earth strategy may drive the development of diversified global supply chains. Countries could gradually close the technological gap through technology transfers, talent acquisition, or independent R&D. Japan, for example, remains competitive in rare earth permanent magnet technology but lacks the production capacity to meet global demand. Over the next 2 to 3 years, China is likely to maintain its grip on the rare earth supply chain, but as foreign investment and technological advancements increase, its strategic leverage may weaken. Nonetheless, short-term supply chain disruptions have already significantly impacted industries like automotive and robotics, underscoring the critical role of rare earths in modern technology.

The U.S. has imposed export controls on high-end chips, such as Nvidia’s GPUs and advanced FPGAs, for a long time, yet these products are still available in China. In contrast, China’s rare earth restrictions have left the U.S. with few immediate solutions. This success is largely due to the Chinese government’s foresight to nationalize rare earths, placing them under direct state control rather than treating them as mere commodities. While the U.S. relies on commercial companies to enforce chip export bans, which are difficult to manage, China’s centralized control over rare earths ensures stricter enforcement and greater strategic impact.