Indian Council of World Affairs

Abstract: Rare earth elements (REEs) are vital to modern industries, including electronics, green energy, and defence. China has become a dominant player in the rare earth elements industry, having achieved this position through an early start and strong state-supported incentives 

Introduction 

Rare earth elements (REEs), such as neodymium, dysprosium, terbium, and yttrium are essential components in electric vehicles, wind turbines, defence technologies, and consumer electronics. In April 2025, China imposed new export controls on seven medium and heavy REEs, including dysprosium and terbium, citing national security considerations.[1] These controls, which were applied through licensing requirements, thoroughly disrupted global supply chains and reminded the world how a single country’s policy could impact daily lives, from smartphones to electric vehicles. This paper aims to trace the development of China’s rare earth industry by analysing how it built its REE supply chain and its implications for the rest of the world. 

Evolution of the Rare Earth Element Sector in China

China’s rise in the rare earth sector is the outcome of a long-term state strategy. The foundation was laid in the 1980s and 1990s when China began leveraging its geological advantages and low production costs. Meanwhile, in the US, the Mountain Pass mine in California, which was a leading supplier of the world’s rare-earth elements from the 1960s to the 1990s, had already scaled back its operations due to rising environmental costs.

The closure of the Mountain Pass mine in 2002 followed multiple environmental spills and a lack of investment in downstream processing. Unlike China, which vertically integrated refining and magnet manufacturing, the U.S. outsourced much of its REE supply chain. By the early 2000s, even materials extracted in the U.S. were shipped to China for processing. This hollowing out of capacity allowed Beijing to move beyond being a supplier and become the global gatekeeper of REE value chains.[15] Chinese firms, which were backed by state incentives, entered global markets with cheaper exports.

China holds approximately 39 to 42 per cent of global REE reserves, with key deposits located in Bayan Obo (Inner Mongolia), Mianning (Sichuan), Weishan (Shandong), and ion-adsorption clays in the southern provinces. These deposits allow for the extraction of both light and heavy REEs critical for emerging and defence technologies.[6] Bayan Obo in Inner Mongolia alone contains over 35 million tonnes of Rare Earth Ores. Although ion-adsorption clays are lower in grade, their low radioactivity and simple processing make them economically viable. However, these gains have come at a cost.

Over time, due to decades of unchecked rare earth mining, particularly in southern provinces like Jiangxi and Guangdong, there has been soil degradation, toxic runoff, and heavy metal contamination. [7] Recent policies in China have attempted to address these issues. The problem of environmental remediation will remain a long-term challenge for the foreseeable future.[16]

Source: Roderick G. Eggert, Ruthann Moomy, Yuzhou Shen, “China’s public policies toward rare earths, 1975-2018, 2019

The state’s strategic orientation became visible under Deng Xiaoping’s leadership. In 1986, the “863 Program” institutionalised rare earth research and development (R&D), funding advances in separation technologies and industrial applications.[9] During the early 1990s, China officially classified rare earths as strategic minerals, providing state protection and investment incentives.[8] These early moves provided the technical base that led China to outcompete foreign players not only in mining but also in refining and magnet production.

Under Xi Jinping, China consolidated its dominance in the rare earth industry. In 2014, the Rare Earth Industry Restructuring Guidelines established six state-owned enterprises (SOEs) to control mining, separation and end-use manufacturing, creating a vertically integrated industrial structure.[10] These six SOEs were China Northern Rare Earth Group, China Minmetals Corporation, Aluminum Corporation of China (Chinalco), China South Rare Earth Group, Guangdong Rare Earth Group, and the China Rare Earth Group Co., Ltd. (formed later in 2021 through consolidation). Their combined role ensured state oversight across the full value chain of rare earth extraction, processing, and export. In 2020, the Export Control Law gave legal authority to China's ability to limit REE exports on national security grounds, reinforcing its position as both a supplier and regulator.[11]

China’s regulatory power over rare earths has become a tool of geopolitical signalling. During the recent U.S.-China trade conflict, triggered by Washington’s tightening of semiconductor export restrictions, Beijing retaliated quietly through bureaucratic channels. Chinese customs authorities began selectively delaying export licenses for rare earth shipments bound for American firms. While there was no formal ban, the slowdown disrupted US supply chains, particularly for electric vehicle manufacturers and defence contractors. The production delays led to temporary re-sourcing. For many firms, the message was clear:- access to critical materials could depend on geopolitics and not just procurement contracts anymore.[17]

These strategic tools empowered China to extract more economic value from each unit of REE through downstream integration into sectors like electric vehicles and advanced electronics. According to industry observers, around 90 per cent of global rare earth magnet production remains tied to Chinese processing facilities.[12] When export controls were introduced in 2025, global shipments of rare earth magnets declined by over 70 per cent within the quarter, according to trade reports.[13]

Source: U.S. Geological Survey (USGS), 2024.

Global Pushback

Meanwhile, India, Japan, the U.S., and EU member states are working to diversify their REE supply chains. India’s recently proposed Production Linked Incentive (PLI) scheme worth ₹1,345 crore (approximately $160 million) aims to localise magnet manufacturing and build strategic reserves.[4]  Companies like Mahindra & Mahindra, Uno Minda, and Sona Comstar are exploring indigenous rare earth-based magnet production to reduce dependency on Chinese imports.[5] The U.S. has revived production at Mountain Pass, while Australia has invested in refining technologies in collaboration with Japan and South Korea.[14]

This global momentum reflects a growing awareness of the strategic and human impact of mineral dependencies. When the European Parliament formally rebuked China’s rare earth export controls ahead of a July 2025 Summit,[3] it wasn't just about policy but also about protecting industries, jobs, and economic sovereignty.

It may be recalled that in 2010, after a maritime incident near the disputed Senkaku/Diaoyu Islands, China halted rare earth exports to Japan without an official announcement showcasing an early and pointed example of the weaponisation of rare earth supply chains. Japanese manufacturers, especially in precision tools and hybrid vehicle components, found themselves in a sticky spot scrambling to replace key inputs overnight. The disruption reshaped Japan’s critical mineral strategy and served as a cautionary tale for industrialised economies.[17]

China’s dominance in the rare earth elements (REEs) sector demonstrates its sustained strategic planning deeply rooted in industrial policy, geographic advantage, and geopolitical considerations. Furthermore, its head start, vertical integration, and regulatory leverage make its position difficult to rival in the short term. The 2025 export restrictions indicate that REEs are not merely industrial inputs instead they are strategic instruments in global statecraft.

***** 

*Shreyas Sriram, Research Intern, Indian Council of World Affairs, New Delhi
Disclaimer: Views expressed are personal. 

Endnotes

1. Reuters, "China imposes export controls on key rare earths citing national security," April 4, 2025. https://www.reuters.com/world/china-hits-back-us-tariffs-with-rare-earth-export-controls-2025-04-04/
2. Reuters, "China’s rare earth export controls disrupt global supply chains," July 7, 2025. https://www.reuters.com/world/china/chinas-rare-earth-export-controls-are-good-beijing-bad-business-2025-07-07/
3. Reuters, "EU lawmakers rebuke China over rare earth curbs before summit," July 10, 2025. https://www.reuters.com/world/china/eu-lawmakers-rebuke-china-over-rare-earth-curbs-before-summit-2025-07-10/
4. Mint, "India eyes ₹1,345 crore scheme for local rare earth magnet manufacturing," July 2025. https://www.livemint.com/news/rare-earth-magnet-china-export-curb-local-magnet-manufacture-automobile-industry-electronic-gadgets-machinery-irel-11752246267294.html
5. Reuters, "Mahindra and Uno Minda explore local magnet production in response to China curbs," July 10, 2025. https://www.reuters.com/world/india/india-automaker-mahindra-parts-maker-minda-eye-local-magnet-production-sources-2025-07-10/
6. Zhou, B., Li, Z., Chen, C. (2018). "Global Potential of Rare Earth Resources and Rare Earth Demand from Clean Technologies." Resources Policy. https://doi.org/10.1016/j.resourpol.2018.09.007
7. Rim, K.T. et al. (2019). "Environmental and Health Impacts of Rare Earth Element Mining." Chemosphere. https://doi.org/10.1016/j.chemosphere.2018.12.167
8. Humphries, M. (2018). "Rare Earths: A Review of the Landscape." MRS Advances, Cambridge University Press. https://doi.org/10.1557/adv.2018.7
9. USGS (2011). China’s Rare Earth Industry. U.S. Geological Survey Open-File Report 2011–1042. https://pubs.usgs.gov/of/2011/1042/
10. MIIT (2016). Rare Earth Industry Development Plan (2016–2020). Ministry of Industry and Information Technology. https://www.gov.cn/xinwen/2016-10/18/content_5120998.htm
11. NPC (2020). Export Control Law of the People’s Republic of China. http://www.npc.gov.cn/englishnpc/c2759/c23934/202112/t20211209_384804.html
12. Golev, A. et al. (2020). "Challenges in Securing a Sustainable Supply of Critical Materials." Resources Policy. https://doi.org/10.1016/j.resourpol.2020.101704
13. Washington Post, "Rare earth magnet exports plunge after China enacts controls," June 2025. https://www.washingtonpost.com/world/2025/06/06/china-rare-earths-export-ban-impact/
14. Financial Times, "Global alliances scramble to break China’s rare earth stranglehold," May 2025. https://www.ft.com/content/f8c1a9c4-12dc-4bc4-87e2-94d6a4de6e45
15. U.S. Department of Energy, "Critical Materials Strategy," 2011. https://www.energy.gov/sites/default/files/DOE_CMS2011_FINAL_Full.pdf
16. MIIT, "Situation and Policies of China’s Rare Earth Industry," Ministry of Industry and Information Technology of the PRC, 2010. https://english.www.gov.cn/archive/white_paper/2014/08/23/content_281474983043156.htm
17. William Chou, “Breaking China’s Bureaucratic Chokehold on Critical Mineral Production,” Hudson Institute, June 2024.https://www.hudson.org/supply-chains/chinas-bureaucratic-playbook-critical-minerals-control-technology-transfer-william-chou