Europe is wide open to China’s economic blackmail

Rare earth minerals have become the focal point of renewed competition between the world’s major powers. These materials are crucial to the manufacture of all manner of products, ranging from weapons to medical products, and AI hardware to cars.

In this new panorama, the United States and Europe are at a disadvantage, as China controls as much as 90% of the global trade in rare earths. This is largely because it has been quietly but continuously promoting the extraction and refining of these raw materials for decades.

As early as the 1950s, China began mining the Bayan Obo deposit in Inner Mongolia, which is now the world’s largest rare earth mine. By the 1990s it had significantly increased its investments to become the world leader in production and refining.

Today, it extracts these raw minerals both within its own borders and in other countries, especially in Africa, though much of the refining is still done in China.

This means that, when the ongoing push for renewable energy and high-powered AI systems caused demand for rare earths to surge, Beijing already had an extensive network for the extraction and refinement of these products.

Critical materials

At the other end of the spectrum, Europe lags behind both the US and China in production. Yet, it needs these critical materials and rare earths to manufacture high-tech products like pharmaceutical goods and electric cars.

So, it ends up importing a very high proportion of them from China – between 40% and 100%, depending on the source and the raw materials included.

Over the past year, the three-way tariff war unleashed by the Trump administration – which involves the US, the European Union and China – has underscored the EU’s vulnerability, as it urgently needs to maintain supplies at reasonable prices.

China, for its part, is well aware of its economic, geopolitical and strategic advantage, and is determined not to lose it.

Beijing is evidently prepared to go to great lengths to protect its monopoly. In April, it introduced drastic cutbacks on its exports This dominated much of the discussion at the EU-China summit in July, where a tentative deal was made to lift the restrictions.

Still, in September the Dutch government decided to take control of Nexperia, a Chinese-owned company based in the Netherlands that mainly produces computer chips for the automotive industry.

The measure was taken against Nexperia for attempting to circumvent intellectual property legislation. In October 9, Beijing retaliated with the announcement that it would again limit the export of rare earths and technology to the EU.

Specifically, it was going to require export licenses for all products manufactured using more than 0.1% of rare earths from China, and also banned all exports of the minerals for the production of weapons.

Massive strain

The measures threatened to put a massive strain on European manufacturing. Last month, things temporarily cooled after the Dutch government announced that the seizure of Nexperia would be suspended as a gesture of “goodwill.”

The situation posed by China’s export restrictions was so serious that the EU considered at a European Council meeting in October to activate its “anti-circumvention” mechanism. This measure was established in 2023, to be used in case of economic blackmail by third countries.

The EU, which has not yet activated the mechanism in any context, is trying to follow two complementary lines of action to improve its situation in relation to rare earths. These involve negotiation with China and diversifying supply chains.

As for negotiations, Brussels has created a “special channel” of communication with Beijing to try to secure supplies. Within this framework, European and Chinese officials can work together to prioritize requests made by EU companies. It has proved successful so far.

Over half of a total of 2,000 requests have been approved within just a few days of the measure’s announcement.

Furthermore, in November, the EU finally joined the agreement reached by the US and China – a one year freeze on export restrictions. At this time, Brussels was also considering other measures, including tariffs in kind, to compel China to supply it with rare earths.

Since Beijing is evidently open to leveraging its dominance of rare earths, the EU will also need to secure them elsewhere. To this end, it already approved a new regulation aimed at ensuring the supply of critical raw materials in 2023.

It has also announced the RESourceEU plan, which is explicitly inspired by the REPowerEU energy diversification policy launched after Russia’s 2022 invasion of Ukraine.

Environmental costs

This diversification will be based on the production of these materials within the EU and on imports from third countries other than China. Since Europe currently has no active rare earth mines, much of the raw materials will also come from a raft of recycling initiatives.

Although this strategy poses a number of challenges in terms of economic and environmental costs, it is a battle that Brussels cannot afford to lose if it wants to stand any chance of achieving a favorable position in the world order.

Gracia Abad Quintanal is a Professor of International Relations at the Universidad Nebrija in Madrid.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.