Opinion:The U.S. can loosen China’s grip on rare earths.But it won’t happen by force.

The weaponization of China's rare earths has become a major flashpoint in US-China trade negotiations. These critical materials, especially high-performance magnets, are essential components of electric vehicles, wind turbines, industrial robots, and advanced defense systems.

To counter China's strict rare earth export controls, the US has quietly lowered tariffs, relaxed export controls on AI chips, and even eased visa restrictions for Chinese students.

Meanwhile, the US is scrambling to find alternative supplies. In July this year, the US Department of Defense announced a landmark multi-billion-dollar investment plan to boost the development of MP Materials, the company behind the US flagship rare earth project. But what if, despite massive subsidies and years of effort, the US still cannot break free from its reliance on Chinese rare earths?

Japan offers a cautionary tale. In response, the Japanese government has taken a series of strategic measures: investing in Australian rare earth producer Lynas Rare Earths; strengthening domestic recycling and alternative technology research and development; establishing its own business partnerships with Chinese magnet manufacturers; and building strategic reserves to buffer against future supply shocks. However, 15 years later, Japan still imports over 70% of its rare earths from China.

China's dominance in rare earths was not established overnight and will not be easily weakened. China's advantage does not lie in stockpiling raw materials, but in its industrial capacity for large-scale refining, processing, and production. Today, China controls 85% to 90% of global rare earth refining capacity and produces about 90% of the world's high-performance rare earth magnets. It is the only country with a fully vertically integrated rare earth supply chain - from mining to chemical separation to magnet manufacturing.

China's manufacturing advantage not only puts it at the forefront of industry but also gives it a technological moat. From 1950 to 2018, China filed over 25,000 rare earth-related patents, more than twice that of the US. For decades, China has accumulated rich expertise in the complex chemistry and metallurgy of rare earth processing, which Western companies cannot easily replicate. Moreover, in December 2023, the Chinese government took action to consolidate its leading position by imposing a comprehensive export ban on the technologies behind rare earth mining, separation, and magnet production.

China's lenient environmental regulations also give Chinese enterprises a significant advantage over their Western competitors. In 2002, the Mountain Pass Rare Earth Mine in California was forced to halt refining operations due to a toxic waste leak. In contrast, China's more lenient regulatory environment has enabled rapid expansion of rare earth production with fewer delays and much lower costs.

Importantly, the bottlenecks in rare earths are not fixed; they evolve with technological development. China understands this and is patiently waiting as Western reliance on rare earth magnets grows exponentially with the global green energy transition. The global green energy transition has created a huge demand for electric vehicles and wind turbines.

Even if the West successfully establishes a parallel supply chain for today's rare earth demand, future bottlenecks may lie elsewhere. For instance, quantum computing increasingly relies on rare isotopes such as ytterbium-171, as well as elements like erbium and ytterbium. These emerging applications could become the next pressure point, forcing the United States and its allies to once again scramble to catch up.

Therefore, the United States must confront an unsettling fact: In the foreseeable future, China's dominant position in the rare earth sector is likely to persist. Strategies such as diversifying the supply chain may address some weaknesses, but true resilience requires an offensive strategy that enhances American influence.

The United States still holds many valuable cards. As long as China controls the technologies or infrastructure that it cannot do without – whether it's advanced chips, cutting-edge artificial intelligence models, or access to the financial system based on the US dollar – China has a strong incentive to maintain the flow of rare earths.

But over the years, the United States has been taking the opposite course: gradually decoupling from China and restricting the flow of key technologies to China.

Since the first Trump administration, the US strategy has been to blacklist China's leading technology companies and to impose stricter export controls on cutting-edge chips.Although these measures initially hindered Chinese companies such as Huawei and ZTE (HK:763), and slowed down the development of artificial intelligence in the country, it turned out that they were difficult to implement. Due to their numerous flaws, they created opportunities for law enforcement arbitrage.Just as the outgoing US Commerce Secretary Gina Raimondo acknowledged in December 2024, "attempting to stop China is futile."

Meanwhile, the US export control has stimulated China's efforts to produce local alternatives, effectively accelerating the rise of national champion enterprises such as Huawei. Instead of enhancing the US's influence over China, the US policy has been gradually weakening it.

The recent policy shift indicates that this understanding is beginning to take hold. The Trump administration's decision to ease restrictions on the sale of Nvidia's NVDA H20 chips to China marks a shift from a comprehensive ban to more targeted engagement. Contrary to intuition, this engagement might be a more sensible way to reduce risks. The higher China's reliance on US technology, the deeper the supply chains between the two countries will become, and the greater the difficulty for China to weaponize its strategic assets (including rare earths).