Rare earths, so the US-China clash threatens global business

In early April, Beijing increased the mining threat by adding seven rare earths (REE) to its list of dual-use restricted exports. Many companies are now looking for alternatives to Chinese sources, especially since Beijing has claimed state ownership of all this material

China is targeting an increasing number of supply chains for materials critical to the United States, the so-called rare earths. Metals such as antimony, gallium and germanium have already been sucked into the escalating trade war, with China restricting exports and banning sales to the United States.

It is, as is well known, a response to Trump's tariffs on China. While it is true that on the latter Trump in recent days has alluded to a possible truce with China, the actual scenario is more complex and does not seem to be easily solvable; the consequences are played out in the long term, with impacts on the business of many companies.

Rare earths, the US-China clash

In early April, Beijing increased the mining threat, adding seven rare earths (REEs) to its list of dual-use restricted exports.

On April 15, U.S. President Trump instructed the Secretary of Commerce to initiate an investigation under Section 232 of the Trade Expansion Act of 1962 to examine threats to national security from imports of processed essential minerals and derivative products, namely rare earths.

On April 23, Tesla CEO Elon Musk revealed that production of the company's humanoid robots, known as Optimus, has been affected by recent export restrictions on rare earth magnets imposed by China.

Many companies are now looking for alternatives to Chinese sources, especially since Beijing has claimed state ownership of all this material. However, some of them will have difficulty finding a substitute that can offer the same cost and quality because of Beijing's heavy investment in extraction.

Rare earths are China's latest weapon. The country has a controlling position over every stage of the global supply chain, from mining to processing to producing the permanent magnets that power laptops, electric vehicles and fighter jets. Beijing supplies about 90 percent of the world's rare earth magnets. Which is a big deal, since the magnets themselves have also been placed on China's export control list.

However, although at first glance such restrictions may appear devastating to those who suffer them, they have not been particularly effective in the past and will become even less so if the United States and other countries finally succeed in reducing their dependence on Beijing.

Finally, rare earth restrictions have already been the subject of study. China's ban on exports to Japan in 2010 caused prices to soar, leading China to lose a case at the World Trade Organization.

The rare earth war

China began its "metal war" in July 2023, when the Chinese government announced that it would restrict the export of gallium and germanium, two critical minerals used mainly in the production of solar panels and semiconductors. Over the next two years, China's list of controlled products expanded to include antimony, graphite and other materials. In early April, the Chinese government made matters even worse by subjecting seven rare earth elements to a more comprehensive export licensing program designed to further stifle American companies.

For now, Beijing dominates on rare earths

Although China holds only about 30 percent of global rare earth reserves, it controls 50-60 percent of global extraction and 80-90 percent of the market at the intermediate processing stage. Dependence on the United States is estimated to be around 80%. In 2015, the latter had only one domestic rare earth mine in production, located in Mountain Pass, California, operated by Molycorp, Inc.

In the short term, therefore, companies that need this material could rely on existing stocks or turn to recycled electronics to find it. But eventually, the United States and other countries will be forced to increase domestic mining or reduce their dependence on rare earths, which would make Chinese policies less harmful. "China has a chance and it knows it," said Ian Lange, associate professor of economics and trade at the Colorado School of Mines.

What are rare earths and the Chinese monopoly

The export controls announced by China earlier this month cover samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium, seven elements that belong to the so-called REE family.

REE elements and critical minerals are a group of 17 metals: 15 elements from the lanthanide series and two chemically similar ones, scandium and yttrium.

Each with unique vital properties, they underpin the production, development, delivery and support of essential services such as telecommunications and information technology, food and agriculture, finance, health care, education, transportation and public safety. In the civilian sectors of the economy, strategic and critical materials and related supply chains are essential to countless artifacts, ranging from personal electronics (an iPhone, for example, contains eight REEs) to consumables for fuel, food, and medical supplies, to housing construction and critical infrastructure support.

In the defense industrial sector, strategic and critical materials ensure the expansion of production and development of military items (an F-35 fighter jet contains about 420 kilograms of REE, and these are essential for guided missiles) and the conduct of armed forces operations. Their demand is expected to increase over the next two decades, particularly as the world acts to eliminate net carbon emissions by 2050.

The Chinese government's recent decision to restrict the export of samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium is justified because they are part of a smaller subset of "heavy" rare earth minerals over which the country has more control than others, explains Gracelin Baskaran, director of the Critical Minerals Security Program at the Center for Strategic and International Studies.

China occupies a leading position in the global rare earths (REE) and essential minerals supply chain, from extraction to processing to end use. There are mainly two reasons for this success.

The strategic mistake made by the U.S. with the abandonment of public support for the mining sector-which led to the abandonment of private entrepreneurs-and Beijing's great ability to move up the value chain with heavy investment in research and development and accumulated experience in the intermediate stages of production.

Currently, Beijing's dominance is due more to its investment in separation and refining than to trade or industrial policies.

This monopoly, then, was built over decades as China established a strong supply chain for these minerals and the rest of the world moved away from what is a niche and heavily polluting industry.

"China processes virtually 100 percent of the world's heavy rare earths, which means it has not just a comparative advantage, but an absolute advantage," says Baskaran. However, although REEs are used in a wide variety of products, these products typically contain only minute amounts of them and often only in supporting roles.

According to the U.S. Geological Survey, the U.S. imported about $170 million worth of rare earth elements last year, including some that China has not yet restricted.

Alternative solutions (and problems) for businesses

In the past, Chinese restrictions on REE have worked poorly. In fact, U.S. companies sourced through intermediary countries. Belgium, for example, is one such country.

According to some analysts, it has emerged as a re-export hub to "transport" germanium-one of the minerals that Beijing first restricted in 2023-from China to the United States. This is because it remains difficult for the Chinese government to disrupt this trade flow expecting that the European Union has much closer ties with Washington than with Beijing.

The fact, then, that the price of critical minerals has increased only slightly since Chinese policies were first implemented is a sign that Chinese export controls have not been very effective. "Whatever they did in 2023 did not really change the status quo" in the market, says Prof. Lange.

However, the latest Chinese restrictions are more extensive and there is already some evidence that things may be different this time. Companies that need these items have been forced to buy them from other companies with existing private stocks, which have become more valuable in recent weeks. "There is a very strong increase in prices to reduce inventories right now," says Baskaran, citing conversations he has had with rare earth traders.

Moreover, many exporters have already predicted delays due to the new export requirements introduced by China. However, Tesla is one of the first companies to publicly state the impact of China's export bans on its plans and production.

The U.S.-based company also said Trump's tariffs have had a major impact on Tesla's energy business, especially as the company imports battery cells from the country. "The impact of the tariffs on the energy sector will be greater as we source LFP (lithium iron phosphate) battery cells from China," Musk said during the press conference. "We are in the process of commissioning equipment for local production of LFP battery cells in the U.S."

As early as 2023, Tesla announced that it had reduced the use of such minerals in its EV engines by 25 percent and intended to get rid of them completely in the future. The automaker, however, has not clarified what it will use instead, but experts speculate that it may turn to other types of magnets that do not rely on rare earths.

In the long run, therefore, companies may be able to find technological solutions to address the potential shortage of rare earth minerals.

Optimus production is delayed due to a "magnetic problem"

Tesla's humanoid robot Optimus, which the company says is designed to do household chores, recently encountered a production problem, which Elon Musk called a "magnetic problem."

Specifically, during a conference call on financial results, Musk said the restrictions are part of China's response to U.S. tariffs, which restrict the supply of essential minerals used in weapons, electronics, and consumer goods.

Musk explained that China is seeking assurances that rare earth magnets will not be used for military purposes, a condition Tesla is facing as it works with Beijing to obtain the necessary export licenses.

"China wants guarantees that these will not be used for military purposes, which of course they are not. They are just working on a humanoid robot," Musk clarified. "It's not a weapon."

However, although this robot is designed as a replacement for a domestic employee, its inherent humanoid design makes it useful for other tasks, including what China might consider "military applications." As an aside, Musk's other companies, such as SpaceX, have active contracts with the U.S. military. Musk is closely allied with the U.S. president and works with him directly through the Department of Government Efficiency (DOGE). This could cause Beijing to object to granting any entity related to him a license for these crucial materials.

Despite the restrictions, Musk also made it clear that Tesla still plans to produce thousands of Optimus robots this year. The company has continued to advance its plans to develop and produce humanoid robots, considered a key element of Tesla's expansion beyond electric vehicles.

Trump's Section 232 investigation into imports of critical minerals, rare earths and derivative products

The future scenario moreover looks set to become more complicated.

On April 15, 2025, President Trump directed the Secretary of Commerce to initiate an investigation under Section 232 of the Trade Expansion Act of 1962 examining the threats to national security from imports of processed critical minerals and derivative products.

The latest Section 232 investigation follows the Trump Administration’s April 1, 2025 initiation of Section 232 investigations against imports of pharmaceuticals and semiconductors.

The investigation covers “critical minerals” and “rare earth elements” in the form of processed minerals such as critical mineral oxides, oxalates, salts, and metals. It also includes within its scope derivative products such as semiconductor wafers, anodes and cathodes and final products such as permanent magnets, motors, electric vehicles, batteries, smartphones, microprocessors, radar systems, wind turbines and their components, and advanced optical devices.

The term “critical minerals” refers the list of 50 minerals included in the “Critical Minerals List” published by the United States Geological Survey and includes uranium. The term “rare earth elements” refers to the 17 elements identified by the Department of Energy in the April 2020 publication titled “Critical Materials Rare Earths Supply Chain.”

In the Executive Order directing the probe to be conducted, President Trump notes the U.S.’s heavy dependence for essential materials on foreign sources including adversarial nations, and the risk of exposing the economy and U.S. defense sector to supply chain disruptions and economic coercion. In determining the effects of imports on national security, the Secretary of Commerce is required to evaluate the following factors:

U.S. imports of all processed critical minerals and derivative products;
Foreign sources by percentage and volume of all processed critical mineral imports and derivative product imports, the specific types of risks that may be associated with each source by country, and identification of source countries deemed to be of significant risk;
Distortive effects of predatory economic, pricing, and market manipulation strategies and practices used by countries, including on domestic investment and the viability of United States production.
How the strategies and practices described above permit such countries to maintain their control over the critical minerals processing sector and distort U.S. market prices for derivative products;
Demand for processed critical minerals by U.S. and global manufacturers of derivative products and the extent to which demand for processed critical minerals originates from countries that engage in manipulative practices; and
Current and potential capabilities of the United States to process critical minerals and their derivative products.

July 2025

A draft interim report is due within 90 days of the Executive Order or July 14, 2025. A final report with recommendations is due within 180 days from the initiation date for the investigation. It is anticipated that the final report will be published in the month of October.

Recommendations may include imposition of tariffs or other import restrictions, adoption of safeguards to avoid circumvention of the measures, and/or adoption of domestic policies to incentivize domestic production, processing and recycling.

A Fact Sheet accompanying the Executive Order clarifies that any resulting Section 232 tariffs would take the place of the current reciprocal tariff rate.

This is not the first time that a U.S. Administration has undertaken a Section 232 investigation on the national security effects of critical minerals. In 2021 the Biden Administration initiated an investigation into imports of neodymium-iron-boron (NdFeB) permanent magnets ultimately finding that the United States has no domestic production of rare earth oxides or metal and is dependent on foreign sources, especially China, for NdFeB magnets. The report made several recommendations on bolstering supplies but did not recommend imposition of tariffs. The first Trump administration initiated a Section 232 investigation on imports of uranium. Although the Commerce Department found that uranium imports threaten to impair the national security of the United States and recommended a phased reduction in imports, President Trump refused to impose quotas or tariffs.