For months Donald Trump pushed tariffs and trade restrictions on China to unprecedented levels, part of a strategy to force Xi Jinping into talks the US president expected would help cut the trade deficit and boost American manufacturing, according to Bloomberg.
With US tariffs soaring to 145 per cent and the Trump administration boasting that it had the upper hand with China, Beijing turned the tables, essentially shutting down exports of one thing the modern world can’t function without: rare earth magnets.
As slowing deliveries of products with obscure elements like dysprosium and terbium began to pinch industries from autos to defence, the US and other nations quickly hit their pain threshold. Ford Motor Co and Suzuki Motor Corp idled some production, Elon Musk said shortages were hurting his robotics business and governments rushed to secure the few suppliers outside of China. A two-way trade spat became a global crisis.
“It’s just created an urgency,” said Rowena Smith, chief executive officer of Australian Strategic Materials Ltd, which produces alloys for magnets at a plant in South Korea. “The phones are running hot, and they are not just running hot from the US. Everyone is impacted by it.”
That pressure, along with prohibitive tariffs, prompted the US and China to agree to a truce in Geneva last month. Duties on trade came down and the US thought it was getting a supply of rare earth magnets. Yet Beijing still required companies to get licenses to purchase the critical materials, leading to delays that again raised tensions.
The US went back on the offensive, ratcheting up curbs on chip design software, jet engine parts and even threatening student visas. Eventually, Trump got what he long wanted: A call with Xi to get the relationship back on track. Then late Tuesday, US and Chinese trade negotiators announced a breakthrough following a second day of talks in London. Though critical details remain vague, there was little doubt over what was at the heart of the negotiations.
“FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA,” Trump said in a social media post announcing his acceptance of the deal on Wednesday. “RELATIONSHIP IS EXCELLENT!”
Major questions remain. Commerce Secretary Howard Lutnick said he thinks the London deal will be approved within days and that he didn’t expect a written version of the pact to be released, meaning it could be tough to know exactly what both sides agreed to beyond general outlines.
Hours after the agreement was announced, a major Chinese manufacturer of rare-earth magnets, JL Mag Rare-Earth Co, said it received export permits to countries including the US. Its Hong Kong-listed shares surged as much as 12 per cent. But confusion remained about a backlog of requests, with the Wall Street Journal reporting that Beijing is putting a six-month limit on licenses for rare earth exports. And China is unlikely to allow companies to build up inventories, especially in the defence industry.
“They might well be restarting enough of the export licenses so that the commercial buyers can get what they need,” said Arthur Kroeber, partner and head of research at Gavekal, an independent research firm, who has written about China for more than three decades. “But they are not going to issue enough licenses so that people can stockpile. They are not going to give up their leverage.” For all the US bluster, company executives and analysts said the latest episode demonstrated how quickly China’s advantage in the rare earths trade can be deployed to secure concessions from countries whenever tensions rise, as they almost surely will.
“While the US appeared to take the lead in reviving trade talks, China may have quietly secured the upper hand,” said Hebe Chen, an analyst at Vantage Markets in Melbourne. China “weaponized its dominance in rare earths to shift the negotiating balance,” she added.
That’s in part because the new permitting China established around exporting rare earths and other critical minerals is so detailed that Beijing is building up a sophisticated understanding of where every kilogram that it produces is ending up and why, according to two people familiar with the process, who asked not to be identified citing the sensitivity of the issue. In the latest flare-up, bottlenecks emerged when China slowed approvals for products -- mainly magnets -- containing even miniscule amounts of seven rare earths, in addition to limiting sales of the raw elements. That insight will be a “sword of Damocles” hanging over all kinds of negotiations for years to come, one of the people said. And not just with the US.
“By slow-rolling the approval of licenses for the past few months, China has sent an unambiguous message to Europe: we can hurt you if we feel the need to,” said Noah Barkin, a senior adviser at the Rhodium Group.
China’s Xinhua News Agency said before Tuesday’s deal that export controls on rare earths aren’t trade countermeasures and don’t target any single country. Commerce Ministry spokeswoman He Yongqian said last week that the “obvious dual-use attributes” of rare earths also justified export controls.
The new export permit process may have contributed to delays, but the repercussions were clear and the country’s leverage isn’t going away soon. Rare earths aren’t technically rare, but they aren’t often found in significant concentrations, making it hard to build up economically-viable businesses. The process of extraction and processing is technical, energy intensive and polluting -- and most Western nations lack the technology and skilled workforce to do it.
That’s left China and its state-driven economy with a large and long-term advantage, the supplier to the world on metals used not just in LED lights and medical lasers but in the tiny yet powerful “permanent magnets” essential in F-35 jets, wind turbines and electric vehicles.
“China played the card of the rare earths very well,” Steve Brice, global chief investment officer at Standard Chartered, said at the Bloomberg Invest Conference in Hong Kong this week.
Permanent magnets make up by far the biggest value of China’s rare earth-related products. In 2024, the country exported magnets worth about $2.9 billion, or more than 90 per cent of all downstream rare-earth related products, and more than five times the value of all rare earths in rawer form.
WTO fight
China’s grip on rare earths isn’t new. Beijing introduced quotas for its exporters in the early 2000s, but first deployed the elements as a trade weapon in 2010, when shipments to Japan were stalled amid a maritime dispute. That kickstarted Tokyo’s efforts to wean itself from China, a process that ended up taking longer and costing more than the government expected. China eased its export quotas in 2015 after losing a case at the World Trade Organization, but demand has only soared since then.
One lesson from Japan -- which has proposed greater cooperation on rare earths with the US in its latest talks over tariffs -- is that while processing can be sped up and permitting simplified, even with robust financial support any new mine is several years away.
So, facing an onslaught of trade restrictions following Trump’s return, China found a way to respond that had a global impact. The auto industry, from the US to Europe to India, was particularly hard hit.
Along with Ford and Suzuki’s production slowdowns, Volkswagen AG began asking suppliers to use components with fewer rare earths and to find alternatives for certain parts, according to a person familiar with management's thinking who asked not to be identified. The company hasn’t dialled back production because of shortages, but management is on alert for that risk and the supply chain is fragile, the person said.
German auto supplier ZF Friedrichshafen AG warned it could pause or suspend production without additional licenses from Beijing.
“With the currently existing export licenses, we have the situation under control,” a ZF spokesperson said via email. “However, we need additional licenses from the Chinese Ministry of Commerce to avoid short-term production stoppages.” Even the battlefields of Ukraine were feeling the crunch. The curb of magnets to Western nations was beginning to impact the delivery of drones and drone parts to Ukraine, Bloomberg reported last month. European officials linked that to China’s export restrictions on drone components, including magnets, while noting that deliveries of drones and drone parts continued to Russia.
Another technology hit by the shortage of magnets was the still-nascent market for humanoid robots. That market could grow from about $20 billion in 2030 to $1.2 trillion in 2040, Morgan Stanley said in a May 21 note. Demand at that level will make the market for rare earths even tighter if new supplies or faster processing isn’t brought online.
Musk raised an alarm about that on Tesla Inc’s quarterly earnings call in April, when asked for an update on the company’s Optimus robots.
“Optimus was affected by the magnet issue from China, because the Optimus actuators in the arm do use permanent magnets,” Musk said, explaining that the magnets “were affected by the supply chain, by basically China requiring export licenses to send out any rare earth magnets.”
Nicolaus Radford, CEO of Houston-based Personal AI, said relying less on China is an issue for the entire robotics industry. His company, which has a partnership with Korea’s HD Hyundai Robotics and HD Korea Shipbuilding & Offshore Engineering to build humanoid robots that can do dangerous and complex welding work in shipyards, has sought alternative supplies with little success.
“When you get to the heart of it, those magnets are sourced in China,” Radford said in an interview.
Not all industries which need rare earths were hit equally. Siemens Healthineers AG said that while it buys small amounts of rare earths for use in its health care equipment, it found a way to wean its MRI scanners from the metals a decade ago. The company now uses superconducting magnets made from copper, titanium and niobium — all more easily sourced. Some consumer tech products that require magnets avoided a hit because they are manufactured in China and exported as finished products, said Michael Deng, a geoeconomics technology analyst at Bloomberg Economics.
Tuesday’s detente in London doesn’t resolve all the trade measures the US has placed on China, some dating back to the Biden administration. It mostly rolls tensions back to where they were earlier this year, before the surge in tariffs and the responding tit-for-tat moves between the two countries took effect. But it comes after Trump and his aides insisted for months that China couldn’t withstand Washington’s onslaught.
“The ball is in China’s court: China needs to make a deal with us, we don’t have to make a deal with them,” White House press secretary Karoline Leavitt told reporters in April.
The reality was always more complicated. Despite years of controls on high-tech chip imports, Beijing has focused on self-reliance and consistently managed to find workarounds. Under Xi, China has made steady progress in positioning his nation to dominate the industries of the future, including artificial intelligence, drones, semiconductors and electric vehicles. Washington’s measures have looked more like road bumps, not barriers.
Though the near-term outlook for rare earths is still a China story, Beijing’s lead won’t last forever. The latest crisis will likely be enough to spur the investment needed to get rare earths supply chains developing elsewhere, even if it takes a decade or more.
“The pain the industry is going to go through, it’s going through today and will go through in the months to come, is what is going to incentivize people to actually start putting the investment” into new rare earths projects, said Smith, the Australian Strategic Materials CEO. That pain “has unfortunately been a necessity to trigger this movement.”