China’s Rare Earth Leverage—Mechanisms and Strategy of Controlled Supply
Experts explore how China balances export
curbs with legal reforms as global partners diversify supplies, firms hunt rare-earth
alternatives
·
China uses
critical material export controls as a strategic tool in response to US and
ally tech restrictions, balancing measured assertiveness with pragmatic execution
to maintain global supply continuity.
·
Modern legal
reforms have unified China’s export control system, making its actions more coordinated
and effective.
·
Actual implementation
by China usually remains calibrated and selective, more about creating bargaining
leverage (“escalate-to-negotiate”) than aggressive disruption.
Limits to China’s Leverage
·
Semiconductor
Self-Sufficiency: China’s self-sufficiency
in semiconductors is low (24% in 2024, projected 30% by 2027). Technical barriers,
especially software (16% self-sufficiency in Electronic Design Automation), make
it vulnerable to expanded US controls.
·
Reciprocal
Risks: Aggressive
material curbs may both pressure rivals and accelerate global supply chain diversification.
·
Global Response:
o
Since May
2025, US, EU, Japan, Australia, and Greenland have accelerated rare earth diversification
through new mines, joint stockpiles, and recycling plans.
o
Research is
increasing into cost-effective rare-earth alternatives, e.g., magnets based on iron,
cobalt, nickel.
·
Selective
Export Approval: China may
differentiate treatment for US-aligned military interests, but may fast-track exports
to non-military firms, seeking to preserve economic advantage while avoiding full
disruption.
China’s Unique Competitive Strengths
·
Global Market
Share:
o
Rare Earth
Reserves: 49%
o
Mining Production:
69%
o
Refined Production:
88%
o
Magnet Supply:
90% (the hardest segment to replicate due to tech know-how)
·
Battery Sector:
o
Electric Vehicle
(EV) batteries: 86% global share
o
Energy Storage
System (ESS) batteries: 92%
o
Advantage
comes from scale, complete value chain, rapid tech development, and cost leadership.
Consequences and Next Steps
·
While China’s
dominance is profound in refining and magnets, reserves are globally dispersed.
Expanding mining elsewhere will take years.
·
China can
manipulate supply chains as leverage, but the risk is accelerating diversification
among global partners and advancing “friendshoring.”
·
China is expected
to sustain dominance in lithium-ion batteries for both EVs and ESS, supported
by its scale and technological progression.
China wields
significant influence over key critical-material supply chains, especially rare
earths and batteries, mainly through refined production and technological know-how.
However, aggressive use of this leverage risks increased “friendshoring,” investment
in alternatives, and global supply chain shifts, making Beijing’s approach measured
and strategically calibrated—not purely disruptive.
The
weaponisation of critical materials was not a bridge that Beijing crossed in the
early years of its trade war with Washington, which began in 2018.
But
China has grown more confident, and leadership has shifted from hesitation to measured
assertiveness on critical-material controls, as demonstrated in its actions this
year amid trade tensions with Washington, according to Morgan Stanley researchers.
With
such leverage in mind, this explainer uses their report – “Navigating China’s Export
Control Playbook and Market Impact”, published on Sunday – to examine the effectiveness
of that tool in Beijing’s arsenal, its limitations, and China’s real strengths in
the rare earth supply chain.
How effectively can China really
implement its control of critical materials?
Beijing
will continue to use critical-material controls as a calibrated system to reshape
the cost-benefit calculus of tech restrictions by the United States and its allies,
the Morgan Stanley report said, and therefore, a complete reversal of the mechanism
is unlikely.
Even
amid a temporary truce after the October meeting between presidents
Xi Jinping and Donald Trump, selective responses remain likely, mirroring the US’
“small yard, high fence” logic.
For
example, the report said that if a US ally were to block exports of chips and lithography
tools to China, Beijing might target critical inputs, such as rare earths, to that
country.
Such
reciprocal escalation aims to deter full alignment with US policies and secure breathing
room for China’s push towards tech self-sufficiency, a top priority in its next
five-year plan, the report noted.
Over
the past five years, Chinese policymakers have strengthened the legal framework
of export controls by transforming the once fragmented regime into a unified legal
architecture, according to the report. Tighter US tech curbs and a slow global buildout
of alternatives to China’s supply chain have also emboldened Beijing to act more
assertively.
While
Beijing may occasionally adopt the “escalate-to-negotiate” approach to create bargaining
leverage and test the boundaries, the investment bank’s analysts – led by economist
Jenny Zheng – said that actual implementation is likely to remain pragmatic and
calibrated, to preserve broad supply continuity, and it is “unlikely” to see “aggressive
execution”.
To what extent can China use
this tool, given realistic limitations?
The
report pointed out that China’s semiconductor self-sufficiency ratio remains low,
at 24 per cent, and expected it to reach 30 per cent by 2027.
Even
for advanced node logic chips, where localisation has made more progress, the report
noted that Chinese graphics processing units (GPUs) could fulfil only half of China’s
artificial intelligence demand by 2027, while software support remains a critical
weakness – with the self-sufficiency ratio of electronic design automation (EDA)
software at 16 per cent in 2024.
In
this sense, the report’s analysts expected that expanded US software controls, in
response, would slow China’s chip localisation by hampering domestic capability
to design advanced semiconductors in the near term.
In
addition, strict critical-material curbs by China could hasten global supply-chain
diversification.
Since
May 2025, the report noted, the US, European Union, Japan, Australia and Greenland
have advanced rare earth diversification through joint procurement, strategic stockpiling,
new mining and processing projects, as well as long-term recycling plans.
Researchers
worldwide are also exploring cost-effective ways to develop rare-earth-free magnets
using alloys of other metals, including iron, cobalt and nickel, the report added,
as these moves reflect coordinated “friendshoring” efforts to secure critical minerals
for advanced technologies, though it may take years.
Meanwhile,
the Wall Street Journal on Monday reported that Beijing planned to ease the flow
of rare earths to the US by designing a system that would exclude companies with
ties to the US military while fast-tracking export approvals for other firms, citing
unidentified sources.
How exactly does China control
key segments of the rare earth production chain?
In
terms of rare earth reserves, China holds 49 per cent of the global market share,
but rare earth elements are “fairly spread throughout the globe”, so reserves alone
do not confer dominance, the report said.
By
mine production, China’s global share is 69 per cent, according to the analysts,
adding that since there is no bottleneck on reserves, expanding mining capacity
materially would take at least three to five years.
By
refined production, China accounts for 88 per cent of the global market share, the
report said, adding that it is “plausible but not easy” to gain a foothold in this
area because of technological barriers and the environmental costs of processing.
And
in terms of magnet supply, the analysts said China controls 90 per cent of the global
market share, and that this is the “most difficult” segment to replicate, due to
the technical know-how.
What about lithium-ion batteries?
In
terms of battery production and sales, China’s global market share is 86 per cent
for electric vehicle batteries and 92 per cent for energy storage system (ESS) batteries,
the report said.
Morgan
Stanley pointed to China’s “strong and sustainable dominance, given China’s complete
value chain, rapid technology iteration, and unmatched scale and cost advantages
in lithium-ion batteries”.
ESS
batteries are core components of larger systems designed to store electrical energy
for later use.
The
analysts expected that Chinese battery producers would “very likely sustain their
competitive advantages”.