The New Arms Race Is Underground: Responding to China’s Resource Blackmail

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China’s recent imposition of export restrictions on seven critical rare earth elements has significant implications for global defence industries, particularly affecting the United States and its European allies. These elements are essential for advanced military technologies, including fighter jets, missile systems, and electronic warfare equipment. To mitigate the risks, Europe must develop domestic capacities, invest in processing infrastructure, and foster international collaborations.

China has long held a dominant position in the global supply of rare earth elements (REEs), essential components in modern technology and defence systems. In recent developments, Beijing has intensified its control over these critical materials, implementing export restrictions on seven key REEs: samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium. These elements are vital to producing advanced military hardware, including fighter jets, missiles, and radar systems.

Supply risk for critical raw materials in military applications. (Image: NATO)

NATO has identified 12 defence-critical raw materials essential for Allied defence industries, emphasizing the need for secure and diversified supply chains.

  • Aluminium
  • Beryllium
  • Cobalt
  • Gallium
  • Germanium
  • Graphite
  • Lithium
  • Manganese
  • Platinum
  • Rare Earth Elements
  • Titanium
  • Tungsten

China’s control over rare earth elements has long been a strategic lever in global geopolitics. With recent export restrictions on critical minerals, Beijing has underscored its dominance in the sector, posing significant challenges for Western nations reliant on these materials for defence and technology industries.

Producing vs. Processing

The difference between producing and processing rare earth materials is fundamental — and often misunderstood — in the debate about critical raw materials and strategic autonomy. The extraction of raw rare earth elements (REEs) from the ground. Countries like the United States, Australia, Canada, Sweden, and Finland have rare earth deposits and are increasingly investing in mining them.

Processing involves separating and refining the rare earths into their individual elements in a form that can be used in industry, for example, for magnets in missiles, electric motors, wind turbines, radar systems, or communication devices.

Mining gives you the rock. Processing gives you the power.

Processing: Refining & Separating

  • Technically complex: Different rare earths occur together and need to be chemically separated.
  • Environmentally hazardous: The process creates toxic and radioactive waste if not carefully managed.
  • Capital-intensive: Requires costly, specialised facilities and know-how.
  • Heavily dominated by China: China controls over 85–90% of global rare earth processing, even when the raw ore is mined elsewhere.

REEs Share by Production

  • China: ~70%
  • United States: ~14%
  • Australia: ~6%
  • Myanmar: ~4%
  • Other countries: ~6%

Source: U.S. Geological Survey (USGS) 2023 Estimate.

Image: Bloomberg

U.S. Heavily Reliant on China

The move is seen as a strategic response to escalating trade tensions with the United States, particularly under the administration of President Donald Trump.

The United States is heavily reliant on China for its supply of REEs, with China accounting for approximately 90 percent of global production and processing capacity. The new export restrictions, requiring special licenses for the affected elements, have introduced significant uncertainty and potential delays in the supply chain. This dependency poses a strategic vulnerability, as disruptions could hinder the production and maintenance of critical defence systems.

However, as part of the solution to this problem, the U.S. and Ukraine signed a joint mineral investment fund deal on April 30th, 2025. It gives the U.S. access to Ukraine’s critical minerals, including rare earths, without tying repayment to past American military aid. Profits will be reinvested in Ukraine for a decade.

European Defence Industry Vulnerabilities

The recipe for a tank. (Image: IISS)

European nations, also in the Nordic region, face similar challenges. While countries like Sweden and Finland possess substantial REE reserves, they lack the processing infrastructure necessary to convert these raw materials into usable components for defence applications. This gap leaves European defence industries susceptible to supply chain disruptions stemming from China’s export controls.

In response, the European Union has enacted the Critical Raw Materials Act, aiming to bolster domestic capacities and reduce dependency on single-country suppliers. The Act sets ambitious targets: by 2030, the EU aims to extract 10 percent, process 40 percent, and recycle 25 percent of its annual consumption of strategic raw materials.

In March 2025, the European Commission released a list of 47 strategic projects aimed at increasing domestic production of key raw materials vital for energy security and the green transition. The move is part of the Critical Raw Materials Act.

The projects span 13 EU countries: Belgium, France, Italy, Germany, Spain, Estonia, Czechia, Greece, Sweden, Finland, Portugal, Poland, and Romania. Of the 47, 25 focus on extraction, 24 on processing, and 10 on recycling—some integrating multiple stages.

Lithium features most prominently, with 22 projects. Nickel is included in 12, graphite in 11, cobalt in 10, and manganese in 7, underlining the EU’s push to secure its battery supply chains. Many projects involve more than one material.

The Nordic Advantage

Critical elements are in the North. (Image: Frame)

Finland, Sweden, and Norway do possess significant untapped reserves of rare earth elements. Sweden’s state-owned LKAB has announced plans to extract rare earths from waste material, potentially meeting 18 percent of Europe’s demand in the long term. Norway’s REEtec, with substantial investments, is constructing a separation facility for rare earth metals. Finland, with its rich mineral deposits, is also poised to play a crucial role in Europe’s strategic mineral supply.

Resilient Supply Chain

The United States recognizes the strategic importance of reducing reliance on Chinese rare earths. Collaborations with Nordic countries are being explored to develop a resilient supply chain. The U.S. Department of Commerce and Norway have issued a joint report emphasizing the need for sustainable, high-standard, market-oriented critical mineral mining and processing activities. Such partnerships could enhance the defence capabilities of NATO allies and ensure a stable supply of critical materials.

To mitigate these risks, several strategic measures are recommended:

  • Development of Domestic Processing Capabilities: Investing in the establishment of REE processing facilities within the United States and Europe can reduce dependency on Chinese imports.
  • Diversification of Supply Sources: Engaging with alternative suppliers, such as Australia and Canada, can help diversify the supply chain and enhance resilience against geopolitical disruptions.
  • Investment in Recycling Technologies: Advancing recycling methods for REEs can provide a sustainable and secure source of these critical materials.
  • International Collaboration: Strengthening partnerships between the United States and European allies can facilitate shared investments in REE mining and processing infrastructure, promoting collective security interests.

Building Processing Capabilities

China’s dominance in the rare earth sector is not merely a result of abundant mineral reserves but is largely due to its control over the processing and refining stages. While other countries possess significant REE deposits, the complex and environmentally challenging processing methods have led to a global reliance on China’s capabilities. This dependency has been a growing concern for Western nations, especially given the strategic importance of REEs in defence and high-tech industries.

The strategic imperative for Europe and its allies is clear: develop domestic capacities, invest in processing infrastructure, and foster international collaborations to mitigate the risks associated with over-reliance on a single supplier. The Nordic countries, with their rich mineral resources and political stability, are well-positioned to lead this initiative, ensuring a secure and sustainable supply of critical raw materials for the future.

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