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China has reportedly granted temporary export licences for rare earth to suppliers of the top three US automakers. The move has come as a big relief to the US automotive industry and comes shortly after President Donald Trump spoke to his Chinese counterpart, Xi Jinping.
For context, China, which produces around 90% of the world’s rare earth elements that are critical for the production of things like automotive, and are crucial for the green energy transition, restricted their exports in April after Trump imposed massive “reciprocal tariffs” on the communist country.
China Restricted Exports of Rare Earth Elements
The shortage of rare earth minerals had started to hurt US companies, and last month, Ford briefly suspended the production of its Explorer SUV at its Chicago plant due to the issue.
China’s restrictions on rare earth exports had started to bite automakers in other countries, too. “The European automotive supply industry is already experiencing significant disruption due to China’s recent export restrictions on rare earth elements and magnets. These restrictions have led to the shutdown of several production lines and plants across Europe, with further impacts expected in the coming weeks as inventories are depleted, according to the European Association of Automotive Suppliers’ statement.
It added, “The current challenges underscore the importance of constructive China-EU cooperation to ensure stable and resilient supply chains for the global automotive sector.”
Maros Sefcovic, the European Union’s trade commissioner, said the issue of rare earth exports was a “priority” in his meeting with Chinese commerce minister Wang Wentao on Tuesday. The two met on the sidelines of the Organization for Economic Cooperation and Development conference in Paris.
A day after the meeting, Sefcovic said, “I informed my Chinese counterpart about the alarming situation in the European car industry, but I would say industry as such because clearly rare earths and permanent magnets are absolutely essential for industrial production.”
US-China Trade Tensions
Earlier this week, Trump and Xi held a call amid signs that the trade truce that the two countries reached in May was not holding up. Both sides accused each other of violating the agreement that they reached in Geneva.
The call was first announced by Fu Cong, China’s ambassador to the United Nations. Trump later confirmed the call in a Truth Social Post and said, “I just concluded a very good phone call with President Xi, of China, discussing some of the intricacies of our recently made, and agreed to, Trade Deal.”
He added, “The call lasted approximately one and a half hours, and resulted in a very positive conclusion for both Countries. There should no longer be any questions respecting the complexity of Rare Earth products. Our respective teams will be meeting shortly at a location to be determined.”
Trump clarified that the call was entirely focused on “trade” and other issues like the Iran or Russia/Ukraine conflict were not discussed. The two sides are now set to meet in London next week to hold trade talks.
China Has Weaponized Its Rare Earth Exports
Meanwhile, China has weaponized its rare earth exports, which have raised alarm bells in several countries given their centrality to the production of gadgets, vehicles, and consumer goods.
While China has reportedly started issuing licenses for exports of these minerals, many believe they are a potent weapon for China to put pressure on not only the US but also other countries.
“The simple truth is we don’t have a lot of precedent for this. The export controls are a dream tool for Beijing; they can tweak, tighten, loosen, make it apply to all countries or to one country,” said Andrew Gilholm, head of China analysis at consultancy Control Risks.
Citing an analysis from Trivium, a Beijing consultancy, the Financial Times reported, “If Beijing wanted to respond to future escalations, such as further tightening of chip controls by the US, it could restrict flows of materials such as titanium, magnesium, and light rare earths so far excluded from the new licence system.”
According to Jin Canrong, a professor of international relations at Renmin University in Beijing, “I hadn’t realized just how important this rare earth card was before. Now the US side is clearly anxious and eager to resolve this issue.”
He added, “But of course, we’ll link this issue to others – the US is restricting China on chips and jet engines, then China certainly has every reason to make use of this card.”
US Restricted Exports of Advanced AI Chips to China
Notably, the US has restricted the exports of high-end artificial intelligence (AI) chips to China. In April, the-Trump administration announced export controls on Nvidia’s H20 chips. Nvidia had designed these chips for China after the Biden administration had barred the company from exporting its top-of-the-line chips to the Communist country. After the Trump administration’s ban on exports of H20 chips, Nvidia wrote off its inventory by a mammoth $5.5 billion.
There is an apparent AI war between the US and China. While the former blocked companies from exporting top-end AI chips to China, citing possible military use, many, including Nvidia CEO Jensen Huang, believe that the policy hasn’t succeeded.
Some others believe that the US export control rules are counter-productive and have only hastened China’s progress in AI.
“The effects of the controls are twofold. They have the impact of reducing the ability of U.S. companies to access the China market and, in turn, have accelerated the efforts of the domestic industry to pursue greater innovation,” said Paul Triolo, Partner and Senior VP for China at DGA Group.
He added, “The bottom line is, the controls have incentivized China to become self-sufficient across these supply chains in a way they never would have contemplated before.”
On a similar note, after China’s restrictions on exports of rare earth elements, other countries are looking to diversify their supply chain and find alternate sources. However, building a resilient supply chain would take time, given China’s current lead in the industry.
