China’s rare-earths export controls hit EU rearmament – but open a strategic window

In the third in a series of three articles about Beijing’s rare-earths export controls, Niklas Hintermayer and Antonia Hmaidi argue that the new rules create a problem for European defense companies – but that Brussels has the legal and financial frameworks to address it. 

Please note that this analysis is embargoed until September 30, 2025, 10 am CEST.

The European Union has been vocal about the economic risks of China’s export restrictions on seven rare earth elements (REE) and permanent magnets. Industry Commissioner Maroš Šefčovič has lamented the “alarming” situation for manufacturers and Commission President Ursula von der Leyen the “strain” they face. But they have proved consistently shy to make another crucial point: China’s move imperils not only Europe’s car makers, but also its ability to re-arm. REE magnets, for example, are needed for motors and sensors in fighter jets as much as wind turbines – and the EU imports 98% of these components from China. 

One likely reason for this reluctance is that Europe’s dependency on China for raw materials is not new – the EU’s Critical Raw Materials Act (CRMA) entered into force in May 2024, committing the region to securing a secure and resilient supply of 34 “critical raw materials”. But this and previous efforts to tackle the raw material dependency have been hampered by the long timelines and large sums of money necessary for actual change: Mining and processing projects usually take up to 15 years to mature, and the CRMA did not commit to any funding from public coffers, for example, to guarantee demand at specific prices.

Europe’s defense industry continues to rely on China for REE

Europe’s defense industry continues to rely on China’s mining, extraction and processing capacities to supply REEs for key defense systems and technologies. European missiles use neodymium, praseodymium and samarium for permanent magnets and dysprosium for heat stabilization in guidance, targeting and control systems. The Meteor long-range air-to-air missile – made by defense contractor MBDA in a joint project involving Germany, Italy, France, Spain, Sweden and the UK – also uses gallium nitride for radio-frequency seekers and praseodymium for actuators that convert energy into mechanical motion. How much is unknown—no capital will say (only Washington once said that an F-35 fighter contains around 400 kg of REEs).

But Europe now has a strategic opportunity to make credible commitments to investing in and procuring REE like these. Russia’s war on Ukraine and US President Donald Trump’s skepticism towards NATO has seen EU member states’ defense spending rise to a projected 381 billion Euros in 2025, up 37 percent from 2021. On top of that, the EU is planning to invest 800 billion Euros in defense through its ReArm Europe Plan/Readiness 2030, and Germany alone is looking to spend another 500 billion on additional defense investments over the next decade. Europe would be wise to channel some of these funds into REE sourcing.

European countries have recently invested in domestic REE extraction, processing and recycling. France, for example, has teamed up with Japan to create Europe’s first large-scale REE recycling and refining facility by 2026, with one of its goals being to meet 15 percent of global dysprosium and terbium oxide demand. But like others in Europe, the Caremag project is entirely dependent on commercial demand, which makes it dependent on the strength of Europe’s car and wind-turbine industry and the region’s economy as a whole. Finding the long-term contracts needed to make investments like this profitable will be hard.

But the EU and member states could reduce companies’ commercial risks in a number of ways. For example, European governments could include REE recycling or sourcing mandates in defense procurement contracts, stimulating demand for REE magnets recycled in the region from decommissioned wind turbines or from sources other than China. The US government has recently committed to price guarantees for US REEs and taken an ownership share in US mining and refining company MP Materials. Europe could establish a similar security-of-supply regime through 2023’s European Defence Industy Programme. 

Government intervention can help in reducing REE dependencies

Germany is a good illustration of how government intervention can help in reducing REE dependencies. The country aims to have the strongest conventional army in Europe and is accelerating the defense procurement process so that weapons reach the Bundeswehr more quickly. But, as MERICS data show, Germany still imports 95 percent of REEs from China. A private-sector raw-materials consortium called “Rohstoffallianz” was mandated in 2011 to purchase crucial raw materials for German companies, but was dissolved in 2015 for lack of interest. Last year, German state development bank KfW will provide preferential loans for mining, processing and recycling projects, but without backstops like price guarantees. 

Europe’s additional defense funds could help fill this void, giving the CRMA the public-funding guarantees that have so far made it ineffective. In addition, the EU should widen the CRMA’s scope beyond its current mandate of 34 critical raw materials – which include only seven of the 17 REEs used by industry – and beyond its currently funded projects – only five out of 47 focus on REEs. Lastly, the projects would benefit from more centralized co-ordination, rather than being left to the initiative of individual member states. This could also relieve them of difficult decisions about environmental, social and governance standards.

Any CRMA update should also draw on the experiences of other countries, especially Japan’s example in increasing its supply chain resilience after economic coercion by China in 2010. The EU has agreed to 14 partnerships or memoranda on raw materials with countries as far afield as Canada, Kazakhstan, Rwanda and Argentina, and launched 13 strategic projects aimed at securing supplies of strategic raw materials from outside the bloc. This shows that many elements of a REE strategy are already in place. Success now primarily depends on the EU’s political will – which can only be fostered by openly discussing REEs and re-armament.