China has increasingly incorporated critical minerals and rare earth export controls into its geopolitical coercion toolkit, and portrayed its dominant position in rare earth supply chains as a strategic trump card capable of constraining the United States and its allies. China’s “rare earth card” involves elements such as neodymium, praseodymium, dysprosium, terbium, lanthanum, and cerium. Gallium, although it is not a rare earth element, has also been incorporated into China’s broader toolkit of strategic pressure as a critical mineral.
However, once the rare earth supply chain is broken down into its component parts, it becomes clear that Beijing’s advantage is not rooted in technological leadership. Instead, China’s dominance in rare earths rests to a much greater extent on low labor costs, weak environmental constraints, and a development model in which local governments have long absorbed externalized costs. Therefore, while China can disrupt global rare earth supply chains in the short term, it is far less capable of exercising long-term strategic coercion.
The Truth Behind China’s Rare Earth Advantage
Whether China can leverage rare earths for geopolitical and geoeconomic advantage depends on the structure of the rare earth supply chain itself. Generally speaking, the industry consists of four stages: reserves, mining, refining and separation, and downstream manufacturing (with about half of all extracted rare earths being made into magnets). These four stages represent the full path by which rare earths move from underground resources to marketable commodities.
China dominates the global rare earth supply chain by accounting for 50 percent of global reserves, 65 percent of mining, 85 percent of refining and separation, and 90 percent of magnet manufacturing. However, China’s cost advantages differ significantly across the various stages of the rare earth supply chain.
At the stage of reserves and mining, although approximately half of currently identified rare earth reserves are located in China, these are only identified reserves, not the world’s total reserves. Regardless, reserves and mining primarily reflect a country’s resource base and mining development capacity, rather than any particular technological advantage.
In the next stage, the environmental pollution caused by rare earth refining is one of the hidden costs behind China’s rare earth advantage. The Chinese government has acknowledged that rare earth pollution is a longstanding problem. China’s two major rare earth centers, Baotou in Inner Mongolia and Ganzhou in Jiangxi Province, are among the examples of these costs.
In 2010, areas surrounding the Baiyun Obo mining district in Baotou reported unusually high incidences of cancer among villagers, skeletal deformities, and developmental disorders among children, which were widely linked to the severe environmental pollution generated during rare earth mining and refining.
In 2022, environmental pollution problems resurfaced in Longnan, a county under Ganzhou in Jiangxi Province, once again highlighting the high-pollution risks and long-term governance pressures associated with the development of the rare earth refining industry. After years of rare earth extraction, some local river water was no longer safe to drink.
A 2021 report from Harvard quantified the environmental costs of rare earth separation. Producing one ton of rare earths generates 13 kilograms of hazardous dust, 9,600 to 12,000 cubic meters of hazardous gas, 75 cubic meters of wastewater, and approximately one ton of radioactive residue. Refining and separation are not a high-profit, cutting-edge industry. On the contrary, they constitute a business with limited profit margins, enormous pollution, and high political resistance.
Moreover, although China’s rare earth industry enjoys a price advantage, this advantage is not simply the product of market efficiency or technological leadership. To a considerable extent, it is built on low labor costs, relatively weak labor protections, and industrial conditions in which many external costs have been passed on to others.
For example, take one of the core industries in the rare earth sector. Neodymium-iron-boron (NdFeB) magnets are widely used in electric vehicles, offshore wind turbines, advanced robotics, defense industries, and aerospace equipment. Roughly 30 percent of global rare earth output is ultimately used to manufacture NdFeB permanent magnets.
China’s NdFeB magnet manufacturing accounts for 96 percent of the global market. However, much of its production has followed a low- to mid-end market strategy, that is, capturing market share through lower prices rather than fully dominating the high-end market. High-end NdFeB permanent magnets have long remained dominated by Japanese companies.
Is China’s “Rare Earth Card” Really Powerful?
In the short term, if China chose to deploy the “rare earth card” as a coercive tool against other countries, new energy industries would be the most exposed. Electric vehicles (EVs) and wind power systems depend on rare earths. A battery electric vehicle typically requires 2 to 3 kilograms of rare earth permanent magnets, while a large 3-megawatt direct-drive wind turbine may consume roughly 715 to 1,100pounds of rare earth materials. A sudden supply cutoff would therefore hit these sectors first and hardest, not only because their demand is enormous, but also because alternative supply chains are still too immature to absorb a major shock in the near term.
However, in other industries, China’s export restrictions on relevant critical minerals would not necessarily cause equally serious effects. For example, semiconductor manufacturing does involve critical minerals such as gallium, as well as cerium oxide (CeO2) used in polishing and processing. China has previously imposed export restrictions on some of these elements, and such moves have been seen as a potential means of pressuring firms like Taiwan Semiconductor Manufacturing Company (TSMC).
However, since these materials account for only a limited share of total cost and total input volume, and because firms usually purchase advance inventories, the more likely outcome would be reduced production, rising costs, and adjustment pressure, rather than immediate paralysis. In response to the threat of a potential supply disruption, TSMC’s relevant stockpiles could support operations for one to two years. If companies such as the United States’ MP Materials and Australia’s Lynas can build up alternative capacity together with their allies during that one- to two-year window, China’s critical mineral and rare earth export controls can only have a temporary deterrent effect.
The same applies to the defense sector. The F-35 fighter jet requires substantial quantities of rare earths for motors, actuators, sensors, and radar components. Precision-guided munitions require permanent magnets to drive control surfaces. Nuclear submarines also depend on rare earth materials to ensure quiet propulsion and detection accuracy. All of this shows that rare earths are vital foundational materials for modern defense industries. At present, the United States still maintains a certain degree of strategic reserve, including 1,100 tons of lanthanum reserves, 300 tons of oxide reserves, and 450 tons of magnet reserves. According to the U.S. State Department, if these were used solely for military production, they could support output for roughly six months to one year. Therefore, if the U.S. and its allies can rebuild part of the supply chain during this buffer period, that may be enough to cope with China’s deployment of the “rare earth card.”
In fact, rare earth prices per se are not particularly high. Precisely because most rare earths are not truly scarce and total demand remains relatively limited, this industry is unlikely to generate sustained windfall profits in the way oil can. Some rare earth oxides are priced at less than $1 per kilogram, while the market price of the key precursor praseodymium-neodymium oxide is only around $75 per kilogram.
When prices remain low, industry profits are naturally limited. In 2024, the net profits of China’s two major rare earth smelting and separation companies – Northern Rare Earth and China Rare Earth – were $139.4 million and negative $39.9 million, respectively. Among several major downstream permanent magnet firms, profits ranged from $40.4 million to just $1.7 million. Whether upstream or downstream, this is not a highly profitable sector capable of easily covering massive environmental costs.
The Illusion of China’s “Rare Earth Card”
Technologically, China’s dominance in rare earths is not comparable to the positions of ASML and TSMC in semiconductor manufacturing, whose positions rest on hard-to-replicate technological barriers. Nor is it like Gulf oil, whose strategic weight is grounded in extraordinary resource rents.
China’s dominance in rare earths is better understood as a form of geoeconomic advantage: it is willing to maintain a supply chain that other countries are reluctant to engage in deeply, by tolerating lower environmental standards, weaker cost internalization mechanisms, and stronger state coordination. In other words, this is an advantage rooted in who is more willing to absorb the costs, not in who exclusively controls the technologies of the future.
As a tool of geoeconomic coercion, China’s “rare earth card” can indeed create short-term supply panic, raise costs, and force firms and governments to reassess critical mineral security. Nevertheless, the more frequently it is used, the more it will spur the United States, Japan, Australia, the European Union, and Southeast Asian countries to accelerate the construction of alternative supply chains, refining and separation capabilities, and strategic reserve systems. This means that future competition over rare earths and critical minerals will not simply hinge on who holds more deposits underground, but on who can build a more sustainable industrial system – one that better balances costs, environmental protection, technological capability, and political resilience.
