China imposes restrictions on rare earth exports: What are the potential consequences?

On April 4, China implemented export restrictions on seven types of 'rare earths' shortly after US President Donald Trump announced tariffs affecting most of the nation's trade partners earlier this month. These elements are essential for the production of high-value products, including those in the defense and clean energy sectors, as well as common items such as smartphones and electronic displays. Since the 1990s,

China has maintained a dominant position in the rare earth market, accounting for 85 to 95 percent of global demand. Recent reports from sources indicate that several shipments of rare earths have been halted. In light of the rapidly evolving global trade environment, numerous Western media outlets have cautioned that extended delays and restrictions could significantly impact various industries.

Rare Earth Elements, also known as Rare Earth Metals, comprise a group of 17 chemical elements found in the periodic table, including cerium (Ce), dysprosium (Dy), erbium (Er), europium (Eu), gadolinium (Gd), holmium (Ho), lanthanum (La), lutetium (Lu), neodymium (Nd), praseodymium (Pr), promethium (Pm), samarium (Sm), scandium (Sc), terbium (Tb), thulium (Tm), ytterbium (Yb), and yttrium (Y).

These elements share similar chemical characteristics and typically exhibit a silver hue. The United States Geological Survey (USGS) indicates that, contrary to their name, most Rare Earth Elements are not particularly rare. They were designated as “rare-earth elements” because they were first identified in the 18th and 19th centuries as “earths,” a term originally used for materials that could not be altered by heat, and were considered relatively uncommon compared to other “earths” like lime or magnesia. Although nearly all Rare Earth Elements are more prevalent in the Earth’s crust than silver, gold, or platinum, it is rare to find concentrated deposits that are economically viable for mining.

China is recognized for its superior capabilities in the refinement of these elements. Paradoxically, despite their application in the production of electric vehicles and wind turbines—key components of the clean energy initiative—the mining of Rare Earth Elements causes considerable environmental harm. For example, the ores contain arsenic and cadmium, which are released into the atmosphere during the refining process, posing risks to human health and contaminating water supplies.

Nevertheless, the distinctive magnetic and optical properties of Rare Earth Elements make them valuable for a wide range of applications, including the creation of phosphors for digital displays and screens. Their use is increasingly expanding into the manufacturing of powerful magnets, which are essential in various automotive components such as power steering, electric windows, power seats, and audio systems.

In the 1990s, the Chinese government classified rare earth elements as a "protected and strategic mineral." Since that time, it has intermittently imposed restrictions on their extraction in response to fluctuations in both domestic and international demand, as well as during diplomatic tensions with other nations. For instance, in 2010, following the detention of a Chinese fishing trawler captain by Japan, China temporarily halted rare earth exports. In 2022, amid the trade conflict with the United States during the initial Trump administration, China threatened to cease rare earth exports to the US.

Recently, China's Ministry of Commerce (MOFCOM) and the General Administration of Customs (GAC) implemented export controls on seven rare earth elements—samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium—citing the need to protect national security and fulfill international obligations regarding non-proliferation, as stated by a MOFCOM representative.

What are the implications of these actions? The New York Times reports that the availability of rare earth elements varies across different sectors, making it challenging to predict the timeline for the impact of these restrictions. The Economist has pointed out that China's significant position in this industry suggests that the effects will soon become apparent. Prices are expected to surge as buyers begin to accumulate stock. Neha Mukherjee from Benchmark Minerals estimates that the price of dysprosium could rise to $300 per kilogram, up from the current $230. Many of the restricted rare earth elements, including dysprosium, are difficult to substitute and are essential for applications such as magnets used in offshore wind turbines, aircraft, and spacecraft.

Consequently, alternative sources will need to be explored. For example, during the 2010 dispute, Japan swiftly began to stockpile rare earth elements, develop and acquire mines in countries like Australia, and enhance recycling efforts. According to the World Economic Forum, this strategy reduced Japan's reliance on Chinese rare earths from 90% at that time to 60% in 2023. While this remains a significant proportion, the response indicates a concerted effort to diversify and reduce dependency.

This approach has been reflected in ideas such as 'de-risking', which advocate for the diversification of supply chains away from China while still preserving trade relations with the country. The complexities introduced by increasing globalization in recent decades make this a challenging endeavor, yet the ongoing tariff conflict has emphasized its necessity.

At the same time, numerous Western analysts contend that years of investment in essential industries, coupled with the advancement of science and technology education, have enabled China to circumvent US restrictions. Despite recent reports indicating a decelerating economy and demographic issues, there remains a sense of optimism in China, particularly due to innovations like the AI Large Language Model DeepSeek. A report from The Economist noted earlier in April that this development is viewed as evidence that the nation can innovate in response to America's semiconductor embargoes.