Rare Earth Elements: The Limits of China’s Geo-Economic Weapon

It is an extremely rare occurrence for a strategic raw material to take such a prominent place on the international political agenda. However, when it comes to rare earth elements (REE), we find ourselves in precisely such an extraordinary situation. Beijing has elevated geopolitical tensions to a new level through the export restrictions it has imposed throughout 2025; to the extent that this structural showdown between Washington and Beijing now touches not only trade balances but also the raw material infrastructure of an entire technological civilization—spanning from weapons systems to electric vehicle motors, from artificial intelligence data centers to wind turbines and nuclear submarines.

However, succumbing to the allure of this picture and concluding that the tool in China’s hands provides absolute strategic superiority is a fallacy into which analysts easily fall. However, when the layers of the NTE supply chain are dissected and examined, it becomes evident that Beijing’s dominance relies less on technological depth and more on its capacity for cost internalization—that is, its willingness to bear the environmental and social costs. This article aims to analyze this structural reality from an international relations perspective and to discuss both the effectiveness and limitations of China’s “rare earth card.”

The Anatomy of a Chain: On the Source of China’s Dominance

To understand China’s position in the NTE sector, it is necessary to examine the four distinct links of the supply chain—reserves, mining, refining and separation, and downstream production—separately. Just as these links have independent dynamics, Beijing’s relative power also varies at each stage.

According to 2024 data from the U.S. Geological Survey (USGS), global NTE reserves are estimated at approximately 90 million tons, of which 44 million tons belong to China. On the production front, China extracted 270,000 tons in 2024, accounting for approximately 69% of global production. This share rises to 85–90% in refining and separation capacity, and in magnet manufacturing, it amounts to a near-monopoly: China accounts for 94% of global NdFeB permanent magnet production, and the 300,000 tons it produced in 2024 is approximately 300 times the amount the U.S. aims to produce by 2025.

So what lies behind these overwhelming figures? The answer is not, as many analysts might expect, insurmountable technological barriers. While Western countries closed their doors citing environmental concerns and high operating costs starting in the late 1980s—when China began investing early and decisively in this sector—Beijing took over the market by undercutting prices, accumulated processing know-how, and achieved economies of scale. Today, the world is paying the price for this long-term strategic patience.

To understand why the refining and separation stages have not taken root in other countries, one need only look at the environmental economics: Producing one ton of rare earth elements generates 13 kilograms of hazardous dust, 9,600 to 12,000 cubic meters of toxic gas, 75 cubic meters of wastewater, and approximately one ton of radioactive waste. Baotou in Inner Mongolia and Ganzhou in Jiangxi Province have become symbols of this heavy environmental toll; reports of abnormal increases in cancer cases, skeletal deformities, and developmental disorders in children in surrounding villages document the profound social vulnerabilities generated by industrial operations. This is a dominance created not by competitive advantage, but by externalized costs.

“The Rare Earth Weapon”: Theoretical Framework and Practical Limits

In the literature on economic coercion in international relations, a state’s capacity to transform its resource power into a strategic pressure tool is tied to three fundamental conditions: the degree of dependency, the absence of substitution options, and the impact of the cost of compliance on the target. When we apply these three variables to the NTE issue, we see that China’s hand is strong but limited.

China has begun to systematically leverage this geo-economic trump card. The 2010 Japan crisis went down in history as the moment this strategy was first tested in the open: During the Senkaku/Diaoyu Islands standoff, Beijing effectively halted NTE exports, shaking Tokyo with a sweeping market shock. This intervention caused deep fluctuations in global prices, leading many countries to recognize the fragility of their supply chains; but it also accelerated Japan’s process of breaking its 90% dependence on China. By 2025, the escalation had taken on a much more comprehensive form.

In April 2025, an export licensing requirement covering seven critical rare earth elements and their derivative products came into effect. This move by China’s Ministry of Commerce, coming immediately after the “Liberation Day” tariffs, clearly demonstrated that it was the product of a strategic calculation rather than mere diplomatic intent. In October 2025, the restrictions expanded further: new measures covering 12 NTE elements were announced, and a licensing requirement was imposed even on products containing Chinese raw materials or technology that were manufactured abroad and exported. China has thus reversed and implemented on a global scale the “Foreign Direct Product Rule” (FDPR)—a tool Washington has used for years to restrict semiconductor exports.

The severity of the short-term impacts is undeniable. A May 2025 survey by the American Chamber of Commerce in China revealed that 75% of U.S. firms anticipated their NTE inventories would be depleted within a few months. Some manufacturers were forced to halt production in June 2025; despite the short-term truce reached between the U.S. and China, delays in license approvals have sustained market uncertainty. However, China’s persistent and deep reliance on this leverage is creating structural dynamics that could erode its long-term impact.

The Paradox of Power Asymmetry: How Powerful Is the Leverage?

In strategic literature, the effectiveness of coercive tools is measured not only at the moment they are applied but also by the structural reactions their use generates. In this context, the question of to what extent China can transform its “rare earth card” into a consistent and enduring instrument of dominance is of critical importance.

First, we must examine the economic realities: Unlike oil, rare earth elements are not truly scarce. A significant portion of global reserves lies outside China; Australia, Brazil, India, Vietnam, Canada, and—recently in the spotlight—Ukraine and Greenland are among these regions. Prices are also not exceptionally high; some rare earth oxides trade for less than $1 per kilogram. While the spot price of the critically important praseodymium-neodymium oxide hovers around $75, one of China’s two major refining companies, North Rare Earths, reported a net profit of $139.4 million, while the other posted a loss of $39.9 million. This represents an extremely modest profit margin in a sector purported to be of vital importance.

This distinction, which sets China’s dominance apart from ASML’s position in lithographic equipment or TSMC’s in semiconductor production, is strategically decisive. ASML holds a monopoly on EUV technology, which took decades to develop; TSMC, meanwhile, has made the know-how it acquired in 3–5 nm process technology nearly impossible to replicate. China’s dominance in NTE, however, stems not from technical superiority but from low environmental standards, externalized costs, and strong state coordination. This distinction is of vital importance in defining the theoretical framework for substitution and diversification efforts.

On the other hand, how often China will resort to export restrictions is also a matter of strategic calculation. The more frequently and comprehensively these restrictions are applied, the stronger the motivation for Western countries and sensitive actors like Japan to diversify their supply chains. The 2010 Japan crisis serves as the strongest historical evidence of this: Following the crisis, Japan reduced its dependence on China from 90% to below 60%, expanded its joint investment in Australia’s Lynas company, developed its recycling infrastructure, and intensified research into alternative technologies.

Counter-Move Dynamics: The West’s Supply Chain Transformation

The year 2025 marked a period in which it became clearly evident that China’s restrictive measures simultaneously accelerated the West’s response. The U.S. Department of Defense has committed over $439 million in investments for NTE supply chain development since 2020. A key milestone was the $400 million equity investment in MP Materials in July 2025; with this step, the U.S. government became the company’s largest shareholder and safeguarded its commercial sustainability through a ten-year price floor guarantee.

In Australia, Lynas Rare Earths maintains its position as the largest producer of separated NTE outside of China and is expanding its heavy rare earth processing capacity. The memorandum of understanding signed between Noveon Magnetics and Lynas is viewed as the first concrete step toward establishing an integrated supply chain—from mine to magnet—on U.S. soil. Similar efforts have gained momentum in Japan, South Korea, Germany, Vietnam, and Estonia; the IEA’s Global Critical Minerals Outlook 2025 report documents this acceleration, projecting that non-Chinese projects will account for a significant share of global refining capacity by 2028.

However, it should not be overlooked that building alternative capacity is an extremely slow and costly process. MP Materials will produce 1,000 tons of NdFeB magnets annually once all its facilities are operational—this is less than one percent of China’s production. In the U.S., it takes an average of 29 years for a new mining project to obtain a license and reach full production. Consequently, the strategic buffer period will last at least 10–15 years; this underscores that China’s short-term leverage should not be underestimated. Indeed, the one-year moratorium agreement reached during the Xi-Trump meeting in November 2025 has once again demonstrated just how dynamic this playing field is.

The Future of Geo-Economic Competition: Whose System Is More Sustainable?

Looking at the medium-term picture, it becomes clear that NTE competition is not built around a single actor “winning” or “losing.” What is at stake is a multidimensional competition in which the system that can better establish a holistic balance among cost structures, environmental standards, technological capacity, and political resilience will prevail.

In this context, China’s sustainability dilemma should not be overlooked. The internalized costs of the current NTE processing model are increasingly encountering political and social resistance within China itself. Rising environmental standards, internal pressure regarding workers’ rights, and growing demands for transparency have the potential to erode China’s current competitive advantage in the medium term. On the other hand, price increases resulting from export restrictions could backfire on China itself: Higher prices will make mining and processing projects in non-Chinese territories financially attractive.

Recycling and substitution technologies are playing an increasingly significant role in this equation. Advanced separation methods developed in the West, such as membrane filtration, Flash Joule Heating, and peptide targeting, are yielding promising results in both reducing the environmental footprint and enhancing the capacity to process secondary NTE raw materials derived from recycling. The intensification of research into “magnet-free” technologies in motor design could also fundamentally transform the demand structure in the medium to long term.

On a geopolitical scale, it is observed that resource-rich countries like Turkey are gaining increasing strategic weight on this chessboard. The shift in negotiations regarding the Eskişehir-Beylikova deposit from China to ongoing discussions with the U.S. serves as a striking example illustrating the decisive pressure of global NTE competition on medium and small powers. Ankara’s policy choices in this area carry not only an economic but also a geopolitical dimension.

Conclusion: A Bargaining Chip or a Vicious Cycle?

China’s rare earth card is the prototype of tools classified as “geo-economic weapons” in the literature on international relations: In the short term, they create panic, drive up costs, and force supply chain planners to the negotiating table. However, the more indiscriminately this weapon is used, the faster the structural reactions it triggers; coalitions building alternative supply systems gain strength, and the weapon’s effectiveness gradually erodes over time.

China holds a genuine advantage in the NTE sector; to deny this would be an analytical fallacy. However, the source of this advantage lies not in technological depth but in the capacity to externalize costs. This distinction provides crucial insights into the sustainability of the said advantage. To transform temporary dominance over a raw material into a sustainable geopolitical lever, it is not enough to merely control the supply side; for the global system responds to this threat through the capacity of actors who perceive it to form new alliances, redirect investments, and develop technology.

Just as those who controlled the oil wells dominated the oil age, the question of who will hold which raw materials today has once again risen to the top of the agenda. But for a raw material to govern the world, it must be so unique that neither alternative sources can be opened nor technological substitutes found. Rare earth elements, contrary to the implication of the word “rare” in their name, are not actually that rare. And this reality will continue to be the key factor determining which actors can complete their structural transformation before Beijing’s hand runs out of cards.