China's rare earths are its best weapon

When trade talks reconvened in London on 9–10 June, Beijing played its strongest card. It imposed export controls and licensing quotas on heavy rare earth elements, gallium, germanium and permanent magnet assemblies. Western negotiators got the message. Tariffs change what goods cost, while export controls decide whether factories can run at all.

The American delegation reflected the shift. Alongside the Treasury secretary, Scott Bessent, and the trade representative, Jamieson Greer, sat the commerce secretary, Howard Lutnick, whose department runs America's own export controls on chips and chip-design software. Opposite them was He Lifeng, China's vice-premier. The make-up of the teams said plainly that access to technology and materials, more than tariff rates, was now the subject of the negotiation.

How the squeeze built

The pressure had been building for months. China restricted exports of gallium and germanium in 2023 and banned their sale to America last December. In April, in answer to American tariffs, it began requiring licences for several heavy rare earths and the magnets made from them, and approvals have come slowly. By the end of May the president was accusing Beijing of breaking the truce agreed in Geneva, and the slow flow of magnets was at the centre of the complaint. Ford idled a car plant in Chicago for a week for lack of rare earth parts.

The April list covered seven elements, among them dysprosium, terbium and samarium, and it applied to every destination, not only America. European parts makers warned in early June that some of their production lines had already stopped, and Indian and Japanese manufacturers reported similar delays. By making the controls global, Beijing avoided the charge of targeting one country while ensuring that Washington's allies felt the pain and pressed for a settlement.

How a licence becomes a lever

The mechanism is administrative. Each shipment of a controlled material needs a licence from China's commerce ministry, and applicants must describe the buyer, the end use and often the product the material will go into. Review can take weeks. The ministry does not need to refuse anything to exert pressure. It can simply process some applications slowly, approve others promptly and let buyers draw their own conclusions about which customers are in favour.

The information gathered is a weapon too. A licensing system gives Beijing a detailed map of which Western factories depend on which Chinese inputs, and in what quantities. That map will be useful in every future negotiation, whatever happens in London.

China holds the refineries

The United States can put tariffs on consumer goods whenever it likes. China has an effective monopoly on refining and processing the critical minerals that go into defence guidance systems, wind turbines and the traction motors of electric vehicles. By withholding export licences, Beijing did not bother with prices. It cut the physical supply of components to Western defence contractors and carmakers.

The dependence is greatest at the stage where ore becomes usable metal and magnet. America has a rare earth mine at Mountain Pass in California, but for years it shipped its concentrate to China for processing. Mining is the easy part. Separating heavy rare earths such as dysprosium and terbium, which let magnets keep working at high temperatures, is chemically difficult and dirty, and China built that industry while others were happy to let it.

MP Materials, which owns Mountain Pass, stopped sending concentrate to China in April after the tariff war made the trade uneconomic, and it is building a magnet factory in Texas, while the Pentagon has helped fund its separation work in California. That is progress, but it covers mostly the lighter rare earths. The heavy elements at the centre of this dispute remain the hardest to source anywhere else.

What Japan learned in 2010

There is a precedent. In 2010, during a dispute over a fishing trawler near islands claimed by both countries, Chinese rare earth shipments to Japan stopped. Japan responded by financing Lynas, an Australian producer that built a processing plant in Malaysia, by stockpiling and by cutting the amount of rare earths its manufacturers used. America, the European Union and Japan later won a case at the World Trade Organisation against China's export quotas, which Beijing removed in 2015. Japan is less exposed today as a result, but the effort took the best part of a decade.

Who gains from scarcity

Producers outside China are the obvious winners. Lynas, MP Materials and a handful of smaller projects in Australia, Canada and Europe can now argue for long-term contracts and government support at prices that would have been laughed at two years ago. Carmakers and defence contractors holding stockpiles have an edge over those that ran lean inventories. Chinese magnet makers lose export sales, and Western carmakers without alternatives lose output, which is a trade Beijing appears willing to make.

A decade to catch up

Building rare earth processing at home means hazardous environmental permits, specialized chemical refining and about a decade of capital spending. Western supply chains will not match China’s heavy rare earth separation capacity in ninety days.

The strongest argument against Beijing's position is that the weapon wears out with use. Each squeeze pushes Western buyers to finance rival suppliers, and some carmakers already build electric motors that need no rare earth magnets at all, BMW among them. Chinese magnet makers also lose sales when licences are withheld. Those forces are real, but they work over years, while a car plant without magnets stops within weeks. The signals to watch are the pace of licence approvals after London, stoppages at Western car and defence plants, and government money for processing outside China. The London talks showed where the leverage sits. Washington can tax imports as it pleases, but for years to come Beijing will decide whether Western defence and car plants get the magnets and minerals they cannot buy anywhere else. Any deal struck this week is likely to speed licences for a while, and Beijing will keep the tap within reach for the next dispute.