The European Union (EU) has vowed to retaliate against China after the world's second biggest economy tightened restrictions on rare earth elements (REE), a cornerstone of energy and economic security worldwide.
The 27-member bloc will develop a new strategy, RESourceEU, to secure alternative sources of the critical raw materials for its industries, such as automotive, defense, aerospace, AI chips, and data centers. The EU wants to reduce its reliance on China, European Commission (EC) President Ursula von der Leyen said.
"Over 90% of our consumption of rare earth magnets comes from imports from China," von der Leyen said on Saturday at the Berlin Global Dialogue. "You see the risks here for Europe and its most strategic industrial sectors."
Additionally, the EC president warned that Europe will "use all of the instruments in our toolbox to respond if needed," including the Anti-Coercion Instrument, to combat the Chinese restrictions. The EU and China will hold talks this week to discuss their REE trade dispute.
"China's decision to tighten export controls on rare earth elements has exposed a critical vulnerability in the EU's economic security," Francesca Ghiretti, Director of the RAND Europe China Initiative, Research Leader at RAND Europe, wrote.
EU Moves to Diversify REE Supply Chain
Despite the EU's threat to retaliate, the bloc has few options. The EU imports 100% of its REE consumption, with China accounting for 98% of the total, according to EC data.
Under the 2024 Critical Raw Materials Act, the EU has sought to diversify its supplies of critical raw materials. It also aims to strengthen circularity, including recycling, as global demand for REEs is expected to grow by 50-60% by 2040.
The new EU plan to end its dependency on Chinese REEs follows the structure of REPowerEU. The 2022 plan reduced its dependence on Russian fossil fuels through investments, diversification, and legislative measures.
Velina Tchakarova, a Geopolitical Strategist, described the new policy as "better late than never."
"The new framework rebrands the same old ambitions of securing raw materials, reshoring supply chains, and outcompeting the US and China but now wrapped in the bold new language of geoeconomics," Tchakarova said on X.
"Europe has finally realized that its green transition isn't just a climate or industrial challenge, but a strategic battlefield in a world of power politics."
Beijing's New Rules on Rare Earths
China shocked the global economy with its new restrictions. Beijing's new rules stipulate that licenses will be required for the export of technologies used in rare-earth mining and processing, as well as for the manufacturing of magnets used in military technologies.
Any foreign firm that wants to supply rare earths produced in China or processed with Chinese technologies outside China will also need to get a license, according to China's Ministry of Commerce.
"China's willingness to use its trade heft to advance geopolitical goals should make policymakers in the West wake up to the burgeoning power of China's manufacturing supply chain," James Kynge, Senior Research Fellow for China and the World, Asia-Pacific Programme, at Chatham House, wrote.
"China's latest move to use its chokehold over rare earth supply to gain international leverage should further galvanize Western countries to de-risk their supply chains," he added.
US Negotiates REE Delay with China
In response to China's REE restrictions, President Donald Trump initially threatened to impose a 100% tariff on all Chinese imports, effective November 1. He also suggested he might cancel his summit with Chinese leader Xi Jinping.
US stocks settled decidedly lower following Trump's threat, in which he accused China of "becoming very hostile" with its restrictions. Wall Street's fear gauge – the CBOE Volatility Index – rose above 22, ending about 4 months of a slow upward grind.
However, the US now looks set to secure a one-year delay or pause on China's expanded rare earth export controls. Trump will meet with Xi on Thursday to finalize the agreement.
Simultaneously, Trump has moved to limit dependency on China. He and Japanese PM Sanae Takaichi signed an official agreement on REEs on Tuesday. He also secured a pact with Malaysia, ensuring there would be no bans or quotas on the export of REEs to the US.
China Dominates Rare Earth Mining, Processing
Trump has moved more quickly than the EU to weaken China's hold on the global REE supply chain.
Beijing has significantly strengthened its position in the manufacturing of rare earth-containing permanent magnets, according to the Paris-based International Energy Agency (IEA).
Two decades ago, China accounted for around 50% of the production of permanent magnets commonly used in cars, wind turbines, industrial motors, data centers, and defense systems, according to the IEA. This share has risen significantly to 94% today, the IEA said.
"China now holds the keys to global supply and trade of 12 out of 17 rare earth elements, permanent magnets, as well as critical equipment, technology, and human know-how required throughout related value chains," Rebecca Arcesati, Lead Analyst, Science, Technology and Innovation program at Berlin-based MERICS, wrote on Friday.
"It also asserts jurisdiction over any product, made anywhere on the planet, if it contains even a minuscule trace of China-origin REEs."
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