China’s rare earths squeeze leaves US dangerously exposed

The recent intensification of US-China trade frictions, marked by China’s expanded export controls on rare earth elements (REEs) announced on October 9, 2025, and President Donald Trump’s subsequent 100% tariff threat on October 10, underscores the deepening mistrust between the world’s two largest economies.

China, which controls 85-90% of global rare earth processing capacity, introduced the measures through a series of Ministry of Commerce notices affecting rare earths, processing technologies, batteries, and superhard materials, with most taking effect on November 8.

In response, Trump threatened an additional 100% tariff on top of a previous 30% levy imposed on all Chinese imports starting November 1, while casting doubt on the planned Trump-Xi meeting at the APEC summit on October 31.

Markets reacted sharply, erasing over US$1.5 trillion in value in just two days. The exchange, coming amid prior US measures, signals a shift toward deeper bifurcation of supply chains, with broader implications for global trade.

A key distinction from earlier actions lies in the scope of China’s October controls compared to those in April 2025. The April measures targeted seven REEs, primarily raw exports, and led to temporary shortages that were mitigated through several in-person bilateral talks from May to mid-September, resulting in a relatively limited impact on global companies dependent on REEs for EVs, semiconductors and precision military equipment.

In contrast, the recent tightening of export controls add five heavy REEs essential for EV magnets and precision-guided munitions, while extending restrictions to refining technologies, equipment and products containing as little as 0.1% Chinese-processed REEs. Export licenses are now required, with automatic denials for military or dual-use applications.

In addition, the controls also include extraterritorial elements, such as “Chinese persons” rules that prohibit Chinese nationals from engaging in overseas REE activities without government approval, similar to America’s “US persons” restrictions on sensitive technologies.

This mirrors the US “foreign direct product” rule and could lead to a Chinese “Entity List” to monitor global end-users, extending enforcement beyond China’s borders. These provisions target broader supply chains, affecting industries that rely on REEs for magnets, lasers and etching processes.

The impacts will ripple across industries, particularly in the US. Up to 30% of US Pentagon initiatives, including F-35 avionics, could face delays due to REE shortages. Aviation giant and defense contractor Boeing may also encounter production setbacks from limited access to specialized magnets.

In semiconductors, firms like Nvidia, Intel and Apple may see costs rise by around 25%. The EV sector, including Tesla, Ford, and GM, faces potential production cuts of 15-30% due to shortages.

Beyond the US, European companies like Airbus and automakers such as Volkswagen, Hyundai and Toyota, along with Taiwan’s TSMC chip maker, also stand to be significantly affected.

China’s provocative timing, just before the APEC summit, appears linked to recent US actions and potentially Taiwan-related developments.

On September 29, the US Commerce Department implemented the “Affiliates Rule,” extending Entity List restrictions to entities owned 50% or more by listed parties, limiting Chinese evasion tactics.

That same day, the Senate passed the BIOSECURE Act as an amendment to the National Defense Authorization Act, prohibiting US biotech sourcing from designated Chinese firms.

It also advanced the FIGHT China Act, which would block outbound investments in Chinese semiconductors, artificial intelligence and quantum sectors. These steps reflect a bipartisan push for economic security. 

Taiwan may represent another layer of concern for China, helping explain the sharp escalation. On September 30, US Commerce Secretary Howard Lutnick proposed a “50-50” split in chip production to boost US domestic output and enhance Taiwan’s security.

But on October 1, Taiwan’s president rejected the plan, citing risks to the island’s “silicon shield” and noting that TSMC intends to locate only 20% of its advanced production in Arizona by 2030.

Still, China is likely concerned about the possibility that Taiwan could transfer its advanced chip technology and capabilities to the US. Furthermore, the extraterritorial provisions in China’s new export controls could hit TSMC’s chip sales to US firms by requiring Beijing’s licensing for essential materials. A potential inclusion of TSMC on a Chinese Entity List would further complicate the US AI supply chain.

While Chinese officials have begun signaling a desire to resume negotiations and de-escalate tensions, China’s initial response to Trump’s 100% additional tariff threat included an antitrust probe into Nvidia’s AI chip practices, intensified port inspections on Nvidia and Qualcomm semiconductors in Shanghai and Shenzhen, and new fees on US-linked vessels.

Looking ahead – even if a truce is reached again to save the Trump-Xi in-person meeting this month in Seoul – deepening mistrust and the potentially significant consequences of the ongoing export control war are likely to accelerate the bifurcation of supply chains.

As the US suffers from REE shortages – or the threat of them – it will likely ramp up investment in alternative REE sources and refining capabilities.

China, for its part, will continue reducing its dependence on US technology as well as the US market, accelerating its push for more self-reliance. Global companies, particularly in semiconductors, EVs, and defense, will face higher costs as they adjust to parallel systems.

Alicia Garcia Herrero is chief economist for Asia Pacific at NATIXIS and senior research fellow at Bruegel.