How China’s rare earth restrictions could disrupt the U.S. defense industry
China’s sweeping restrictions on rare earth exports threaten the U.S. defense industry and give President Xi Jinping a strong advantage over President Donald Trump in upcoming trade talks.
Beijing will not allow exports of rare earth materials for use by foreign militaries Ministry of Commerce According to critical minerals expert Gracelin Baskaran, these are China’s first restrictions specifically targeting the defense sector. Center for Strategic and International Studies.
“What this essentially means is that foreign armies and companies that produce finished goods for military purposes are denied licenses,” Baskaran told CNBC. “It undermines the development of the defense industrial base at a time of rising global tensions. This is a very powerful negotiating tactic because it undermines national security.”
Rare earth magnets are key components in U.S. weapons systems such as the F-35 fighter jet, Virginia and Columbia-class submarines, Predator drones, Tomahawk missiles, radars, and the joint line of direct attack munitions of smart bombs. Department of Defense.
China dominates the global supply chain for rare earth elements. It controls 60% of mining and more than 90% of refining worldwide. International Energy Agency. The United States depends on China for about 70% of its rare earth imports, according to the U.S. Geological Survey.
“It is scandalous that we have no rare earth strategic reserves and allow China to monopolize 90% of the refining of rare earth materials,” Jeremy Siegel, a professor emeritus of finance at the University of Pennsylvania, told CNBC on Monday. “Where were we?”
‘Hugely devastating’
Beijing also implemented broad controls requiring: Foreign companies will receive export licenses if the rare earths processed in China are less than 0.1% of the value of their products. Companies will also need licenses for products based on Chinese rare earth technology for mining, smelting, separation, magnet production and recycling.
“If these rules were to be strictly enforced and indefinitely, they would be massively disruptive not only to the United States but globally,” Wolfe Research analyst Tobin Marcus said in an Oct. 10 note to clients. Rare earths are also important inputs for the semiconductor and automobile industries.
The restrictions will affect every sector of the U.S. economy, but the defense, semiconductor and electric vehicle industries will face the heaviest blow, according to economist Alicia Garcia Herrero of French investment bank Natixis. Defense contractors, Apple, Nvidia, Intel, Tesla, Ford and GM are at high risk, Hererro told clients in a Monday note.
The Trump administration is trying to create a domestic supply chain. The Department of Defense struck an unprecedented deal with MP Materials, the largest U.S. rare earth miner, in July, which included a stock, floor price and purchase agreement.
“This will also certainly accelerate U.S. efforts to develop our own rare earth resources,” Marcus said. U.S. rare earth stocks rose as investors predicted the Trump administration would make deals with other miners.
Tension in South Korea
The restrictions threaten to reignite the trade war between China and the United States after months of relative calm.
Trump responded by imposing 100% tariffs on Chinese goods starting November 1. The massive import tariffs would effectively cut off trade between the world’s two largest economies, on top of the 44% tariff rate already imposed on China, according to Wolfe Research.
“There is little need for further escalation for us to return to the embargo-like situation that prevailed in the spring,” Marcus told clients.
The US stock market lost nearly $2 trillion in value on Friday after Trump threatened massive tariffs against China, according to Bespoke Investment Group. The S&P 500 rebounded Monday to regain more than half of Friday’s losses after Trump eased tensions with China by saying “everything will be okay.”
Trump and Xi are expected to meet during the Asia-Pacific Economic Cooperation summit in Seoul, South Korea, later this month, Treasury Secretary Scott Bessent said. he told Fox Business On Monday.
The most likely scenario is that “both sides pull back from the most aggressive policies and talks lead to a further (and possibly indefinite) extension of the tariff hike pause reached in May,” Goldman Sachs told clients on Sunday.
But Marcus said Beijing’s strategy was unclear and the tariff deadline was just weeks away, increasing the risk that a deal could not be reached in time.
“We are concerned that without greater conviction about Beijing’s strategy here, they will not be willing to back down quickly enough to prevent these 100% tariffs from taking effect, at least temporarily,” the analyst said.
