China sweeping restrictions on rare earth exports threaten the U.S. defense industry, providing President Xi Jinping with a powerful leverage over President Donald Trump in upcoming trade talks.
Beijing will not allow the export of rare earth materials for use by foreign militaries, China’s Ministry of Commerce announced on Oct. 9. These are the first restrictions imposed by China that specifically target the defense sector, according to Gracelin Baskaran, a critical minerals expert at the Center for Strategic and International Studies.
“What this essentially means is that it will deny licenses to foreign militaries and companies that are producing military use end goods,” Baskaran told CNBC. “It undermines the development of the defense industrial base at a time when there is rising global tension. It is a very powerful negotiating tactic because it undermines national security.”
Rare earth magnets are crucial components in U.S. weapons systems such as the F-35 warplane, Virginia and Columbia class submarines, Predator drones, Tomahawk missiles, radars, and the joint direct attack munition series of smart bombs, according to the Department of Defense.
China dominates the global supply chain for rare earths. It controls 60% of mining and more than 90% of refining worldwide, according to the International Energy Agency. The U.S. is dependent on China for around 70% of its rare earth imports, according the U.S. Geological Survey.
“It’s scandalous that we don’t have a rare earths strategic reserve, that we let China monopolize 90% of the refining of rare earth materials,” Jeremy Siegel, University of Pennsylvania professor emeritus of finance, told CNBC on Monday. “Where were we?”
‘Massively disruptive’
Beijing also imposed broad controls that require foreign companies to obtain an export license if rare earths processed in China make up as little as 0.1% of their products’ value. Firms also need licenses for products that rely Chinese rare earth technology for mining, smelting, separation, magnet manufacturing and recycling.
“If these rules were to be strictly and indefinitely enforced, they would be massively disruptive, not just to the US but globally,” Wolfe Research analyst Tobin Marcus told clients in an Oct. 10 note. Rare earths are also also crucial inputs for the semiconductor and automobile industries.
The restrictions would impact every sector of the U.S. economy but the defense, semiconductor and electric vehicle industry would face the brunt, according to Alicia Garcia Herrero, an economist at French investment bank Natixis. Defense contractors, Apple, Nvidia, Intel, Tesla, Ford and GM are all highly exposed, Hererro told clients in a Monday note.
The Trump administration is working to build out a domestic supply chain. The Defense Department struck an unprecedented deal with the largest U.S. rare earth miner MP Materials in July that included an equity stake, price floors and an offtake agreement.
“This will certainly also further accelerate US efforts to develop our own rare earth resources,” Marcus said. U.S. rare earth stocks have surged as investors speculate that the Trump administration will strike deals with other miners.
Standoff in South Korea
The restrictions threaten to reignite the trade war between the China and the U.S. after months of relative calm.
Trump has responded with 100% tariffs on Chinese goods starting Nov. 1. The huge import taxes would come on top of the 44% tariff rate already in place on China, effectively cutting off trade between the world’s two largest economies, according to Wolfe Research.
“It wouldn’t take much re-escalation to get us back to the quasi-embargo situation that prevailed in the spring,” Marcus told clients.
The U.S. stock market erased about $2 trillion in value Friday after Trump threatened massive tariffs against China, according to Bespoke Investment Group. The S&P 500 rallied Monday to regain more than half of Friday’s losses after Trump appeared to de-escalate, saying “it will all be fine” with China.
Trump and Xi are still expected to meet on the sidelines of the Asia-Pacific Economic Cooperation summit in Seoul, South Korea later this month, Treasury Secretary Scott Bessent told Fox Business on Monday.
The most likely scenario is “both sides pull back on the most aggressive policies and that talks lead to a further—and possibly indefinite—extension of the tariff escalation pause reached in May,” Goldman Sachs told clients Sunday.
But Beijing’s strategy is unclear and the tariff deadline is just weeks away, raising the risk that an agreement might not be struck in time, Marcus said.
“Without more conviction about Beijing’s strategy here, we’re concerned that they won’t be willing to back down fast enough to prevent these 100% tariffs from kicking in, at least temporarily,” the analyst said.
