Executive Summary

• China is using its dominance in Rare Earth Elements as an element of power
• Breaking free from Chinese rare earth dominance requires a comprehensive strategy
• Brussels has accelerated its strategy for trade alliances and stepped-up talks with India, Indonesia and the UAE.
• Because of low US munitions stockpiles, China has a moment of opportunity if they truly desire a military solution to the Taiwan problem.

China’s Moves on Rare Earths

China is willing to use its dominance in Rare Earth Element (REE) production and processing as an element of power in relations with the West.  China sent shudders through the system when it decided to limit rare earths for magnets to the US and other trading partners.  Key products at the end of the supply chain are magnets. China overwhelmingly dominates the global rare earth magnet industry, producing an estimated 85–90% of all neodymium-iron-boron magnets used in electric vehicles, wind turbines, and defense systems.[1]  This supremacy has been achieved by decades of effort and a focused strategy. Between 1950 and 2018, China filed over 25,000 rare earths-related patents, more than twice those filed in the US. Moreover, years of practice in the very complex chemistry and processing techniques for REEs indicates they possess experience not easily imitated.

Chinas strategic dominance furthers their political agenda.  They are willing to limit exports during territorial disputes as they did against Japan in 2010 after a maritime standoff.  China restricts sales to companies from specific countries.  They give pricing advantages and subsidies as well as a more permissive regulatory structure to domestic companies, a distinct advantage over western manufacturers.  Most importantly, China exerts restrictive controls over their processing technology to ensure their market dominance. China is also the world’s top graphite producer and exporter.  They refine more than 90% of the world’s graphite into a material used in virtually all EV batteries. In October 2023, China began to require export permits for some graphite products to protect “national security. In December 2023, Beijing banned exports of rare earth magnet technology, adding it to an existing ban on refining technology. Domestic production is tightly controlled by quotas which are only granted to state-owned mining companies.

The processes are complex. The five steps necessary can lead to toxic waste biproducts that many countries want to limit or ensure acceptable disposal to protect their environment.  Mining, the first step, can produce 60% to 70% REE material, but also produce radioactive waste from thorium or uranium, leached out using acid that must then be disposed of in some fashion in the second step.  Separation, the third stage, is extremely difficult and produces potential toxic waste materials that can cause cancer.  The products are transformed (stage four) into REEs alloy bricks by electrolysis and finally milled into a powder which is pressed into magnets using a high temperature process called “sintering.”

Recently Reuters reported that China and Malaysia are in talks for a joint project to process rare earths in Malaysia. The report states the sovereign wealth fund Khazanah Nasional is likely to partner with a Chinese state-owned firm to build a refinery in country.  If the joint venture moves forward, it would be a significant policy departure for China. Beijing would concede to exchange its processing technology for access to Malaysia’s nearly untapped REE reserves, which would also limit Australian competitor Lynas Rare Earths, which has a processing plant in the central state of Pahang.  Malaysia estimates it has approximately 16.1 million metric tons of rare earth deposits but lacks the technology to mine and process the materials.  If built, the proposed refinery would likely process both light and heavy rare earths. These elements are critical to the manufacture of a wide range of products including cars, mobile phones and high-tech military equipment.

These discussions are evidently in response to events in the West.  Not only tariffs, but Biden’s reductions in microchip technology exports to China, companies such as USA Rare Earth’s moves to build a mine-to-magnet strategy[2], and the Trump Administrations actions to invest in companies and overseas production in places like Greenland threaten China’s dominance.  China will seek to limit supply in the short term, driving prices higher or eliminating some high-end product exports entirely.

In 2024, China imported ~$1.5 billion in various REE materials for their processing plants.  While they only exported about $170 million worth of processed elements (which industries use for various products), China sold over $2.88 billion in rare earth magnets.  The Trump long term strategy is still emerging, which implies a need for short-term remedies.  Their approach, such as the agreement with MP Materials for a U.S. government supported price floor of $110 per KG and commitments to purchase 100% of MPs magnets, provide a guaranteed demand to anchor long-term production, but it is not enough.  In 2024, 14 years after China weaponized REEs against Japan, DoD published the first National Defense Industrial Strategy.  The goal was to develop a complete mine-to-magnet REE supply chain to meet all U.S. defense needs by 2027.[3]  However, breaking free from Chinese REE dependence requires a comprehensive industrial strategy to achieve autonomy from China through increased domestic mining, refining, recycling, toxic waste elimination and manufacturing. It appears China’s lead in this sector is still very secure.

India/EU Trade Agreement

While America is redefining global trade with a tariff-based approach to friends and competitors alike, the EU is working hard to finalize a free trade pact with India by the end of 2025.  The United Kingdom’s May 2025 free trade agreement with India created pressure for the European Union to finalize its lethargic negotiations with New Delhi.  The EU is India’s second-largest trading partner, accounting for trade in goods worth €120 billion in 2024, or 11.5% of India’s total trade. India is the EU’s 9^th largest trading partner, accounting for 2.4% of the EU’s total trade in goods in 2024, (the US at 17.3%, China 14.6%, and the UK at 10.1%). Trade in goods between the EU and India has increased by almost 90% in the last decade.  EU’s imports are mainly machinery and appliances, chemicals, base metals, mineral products, and textiles. The EU’s main exports to India consist of machinery and appliances, transport equipment, and chemicals. EU firms dominate Indian imports in medical devices, electric-vehicle batteries and offshore-wind components.  Trade in services amounted to €59.7 billion in 2023 (with a deficit for the EU of €7.9 billion). The EU’s share of foreign direct investment (FDI) stock in India reached €140.1 billion in 2023, up from €82.3 billion in 2019, making the EU a leading foreign investor in India. Some 6,000 European companies are present in India.[4]

Challenged by Trump’s tariffs, Brussels has accelerated its strategy for trade alliances, finalizing agreements with Mexico and the South American Mercosur countries (Argentina, Brazil, Paraguay, Bolivia, and Uruguay) and stepped-up talks with India, Indonesia and the UAE. India’s Trade Minister said negotiators were working hard for a balanced and mutually beneficial deal that would unlock opportunities for both sides in trade, investment, technology transfer, and deeper economic engagement.[5]  The deal had been delayed for many years by New Delhi’s reluctance to lower tariffs in some areas.  Talks were suspended in 2013 but in the last two years there have been 13 rounds of discussions with the next round in Brussels between October 6^th and 10^th. The European Union wants India to lower tariffs of more than 100% on imported cars, whiskey and wine.  Given the unstable relationships between the EU and US, India and the US, and the US with China, trade agreements to help offset the effects of US tariffs and ensure some economic stability in these nations are becoming more common.  Anil Wadhwa, a former Indian diplomat, said in an interview that Trump’s tariffs created unpredictability and unreliability in the India-US trade partnership and eroded trust, creating a rift which will take a long time to fill.[6]

The agreement is far from a slam-dunk, however.  India’s trade system and regulatory environment remain more restrictive than the EU. The list of issues includes: Technical barriers to trade; sanitary and Phyto-sanitary (SPS) measures (regulations designed to protect plant health (phytosanitary) and animal health/human health (sanitary) from risks like pests and diseases that could spread internationally and impact food safety); deviation from internationally agreed standards (a huge part of EU regulations); and India’s discrimination based on legislative or administrative measures which affect many sectors, including goods, services, public procurement and investment.[7]  In June of this year the EU imposed tariffs against Indian exports of optical fiber cables from India to protect their domestic fiber cable industry against alleged Indian government subsidies.  Still, the prognosis is good for an agreement given the push from both sides and the need to ensure markets for goods and services can still thrive in the shade of Trump’s tariff system.

Impact of US weapons deficit and Russia’s assistance to China on Taiwan’s security

Low munitions inventory quantity is a decades-long problem for the DoD.   Because munitions deliveries can be scaled year-to-year by ramping production quotas up or down (within some limitations), munitions have been a shock absorber to balance the budget for decades.  If a service budget exceeds DoD or OMB guidance, it is not uncommon for munitions orders to be scaled back.  Rarely, if there are un-executable funds in a particular year, munitions orders might be increased.  These adjustments are made in discussions with industry suppliers by scaling back production line quantities to a level that keeps the lines open but does not utilize maximum capacity in a given fiscal year.  Although the services have asked for increases in funding for munitions, those often come at the expense of other essential programs instead of being funded as a stand-alone requirement.

The issue is historic. It began with the “peace dividend” in the early 1990s as politicians turned down military funding because their view of the future was limited to their view of the recent past. This approach continued through the Gulf War’s severe depletion of munitions, followed by sequestration (mandatory budget cuts to targets unrelated to the national defense strategy or world events).  In 2014, the U.S. discovered that it lacked enough precision-guided missiles to take on a non-state actor, ISIS, in a limited campaign. By 2019 the US Air Force reported the coalition had used over 112,000 precision guided weapons against ISIS in a limited campaign.  It required several years to replenish those stocks to “acceptable” levels.  Less than a decade later, it has become apparent that the problem persists, as the effort to arm Ukraine has dangerously depleted America’s stores of artillery shells.  In 2023, the Center for Strategic and International Studies published a paper that declared a conflict in defense of Taiwan would empty some of the bins of weapons for the US military in less than one week.[8]  These are not artillery shells, but long-range systems needed to stem an invasion.  For these systems, the US does not have enough to destroy the current (not forecast) Chinese naval fleet even with a 100% (e.g., perfect) hit rate.  Supplementing stores with unproven weapons in this scenario, like the Joint Air to Surface Standoff Missile, and torpedoes, will likely not halt an invasion.

Apparently, Russia is helping Chinese efforts to have the capability to invade Taiwan by 2027.  A recently released 800-page collection of contracts and correspondence indicates Russia is helping China prepare its military for a potential invasion of Taiwan.  Russia has agreed to equip and train the PLA to air-drop armored vehicles and special reconnaissance capabilities based on their experience in Ukraine.  Russia agreed in 2023 to supply the PLA with a complete set of weapons and equipment and training for an airborne battalion, as well as other special equipment necessary for airborne intrusion of special forces.[9]  The Chinese problem with an invasion is how to cross the strait (about 80 to 100 nautical miles) with naval and/or air forces and establish a sufficient force to defeat Taiwan’s military and get control of the island.  With sufficient munitions, stored nearby in readily accessible bunkers, US and allied forces have a good chance of destroying enough Air and Naval invasion craft before they can build up enough force to control the island.  Without these munitions, Chinese PLA forces will quickly overwhelm any defense.  China has advanced weapons systems including anti-ship ballistic missiles with homing warheads, other precision-strike weapons threatening American and allied bases in the region, quiet submarines that could approach U.S. ships undetected, and threats against American cyber, space, and communications systems all eroding the United States’ advantage.

The US might be able to catch up on weapons production using recent authorities granted by Congress for multiyear procurements (incentives for industry) and waiver authority for some process requirements that add time to the delivery schedule.  If having adequate inventories of weapons is a deterrent, then not having those weapons in sufficient quantities is encouragement.  Combined with Chinese advances in Counter-space, unmanned systems, hypersonic glide and anti-ship missiles the US lack of munitions offers a short-term strategic advantage to the Chinese. Presuming the Chinese are not paying attention is a poor assumption.

Conclusions

China’s leadership has a clear strategy for REEs but is willing to make compromises when it is in their interests.  Breaking free from our dependence on Chinese REEs requires a comprehensive industrial strategy and a review of policies that shift risk to industry instead of the US government.  For India and the EU, the prognosis is good for an agreement given the push from both sides and the need to ensure markets for goods and services can still thrive in a tariff centric world.  In the South China Sea, with the help of Russia and the US’s lethargic approach to weapons funding, China has a moment of opportunity if they finally decide on a military solution to the Taiwan problem.

[1] See:  Rare Earth Exchanges Chinas Dominance

[2] See:  https://miningdigital.com/news/has-usar-found-the-final-link-in-us-mine-to-magnet-chain

[3] See:  https://www.businessdefense.gov/docs/ndis/2023-NDIS.pdf

[4] See:  European Commission on India Trade relations

[5] See: Reuters India Trade Talks Enter Crucial Phase

[6] See:  https://www.dw.com/en/india-europe-trade-trump-tariffs-graphics-products/a-74014445

[7] See:  EU Commission Trade Relationships

[8] See:  CSIS Empty Bins

[9] See:  RUSI Russia Helping China Prepare to Invade Taiwan

Learn more about the author, Advisory Board member and retired U.S. Air Force Major General Michael Snodgrass.