How China Found Its Most Potent Weapon

“The Middle East has oil, China has rare-earth elements,” Chinese leader Deng Xiaoping declared in 1992. This quote has been repeated a lot lately as Beijing has used its near monopoly on the rare-earth industry to effectively push back against U.S. President Donald Trump’s latest trade war. It is often cited as evidence that implicit in Deng’s statement was a coercive threat: just as Arab oil states weaponized their petroleum exports in 1973—cutting off the West to punish it for backing Israel in the Yom Kippur War—China would one day do the same with rare earths.

The events of the past year have only deepened that conviction. Last November, for instance, after China had announced its licensing regime for rare-earth exports, the bipartisan U.S. House Select Committee on China said that Chinese leader Xi Jinping was “actualizing Deng’s vision.” Trump posted on social media that it was “obviously a plan devised by [China] years ago.” And Miles Yu, who served as chief China policy adviser to Secretary of State Mike Pompeo during the first Trump administration, wrote that “Beijing’s rare earths monopoly is no accident of geology. It is the product of a deliberate, decadeslong strategy to control the extraction and refining of the elements that make up the modern world.”

There is no doubt today that China’s control of rare earths represents a powerful weapon—one that has provoked worldwide alarm and a race to secure alternatives. China not only sits on the world’s largest known reserve of rare-earth elements but also dominates approximately 85 percent of global processing. Despite being a small industry, the role of rare earths in modern technologies is mighty. Because these 17 elements—especially the scarcer heavy rare-earth elements—are so essential to semiconductor production, defense technologies, automobiles, and clean energy, China’s role in their supply chain represents a significant chokepoint in the global economy.

But even though China has sought to take advantage of its position, its dominance is not the result of a grand, far-sighted scheme to hold the world hostage. In reality, it is the result of an idiosyncratic and evolving mix of domestic interests set against a backdrop of broader global economic and technological change. When Deng spoke, for instance, the United States had just concluded the first Gulf War. From Beijing’s perspective, the American-led campaign was a visceral reminder of China’s vulnerabilities in both the conduct of modern warfare and the role that key resources could play in inciting conflict. As Deng pointed out around the same time, “We haven’t paid enough attention to how to use this treasure. We must protect rare-earth resources.”

This was easier said than done. Early efforts to consolidate China’s market position began as an effort to rein in unruly domestic competition that kept prices low and risked depleting Chinese resources. They did not originate in a strategic effort to weaponize supply chains in a geopolitical fight. In fact, China’s rare-earth industry remained so loose and ad hoc that it’s not even clear Beijing had full control over it 20 years later, during the infamous 2010 incident over the island chain known as the Diaoyu in China and the Senkaku in Japan. After China and Japan skirmished over the disputed islands, rare-earth exports to Japan were indeed temporarily restricted—causing the Deng quote to go viral for the first time—but research suggests it might not have been a carefully designed plan to punish Japan. As is the case with many of China’s policies, there is often a large gulf between words and deeds, and studying China’s history with rare earths reveals the amalgam of competing priorities that have shaped its policy.

Beijing has recognized rare earths as a geoeconomic weapon only since 2010—and, in the process, learned how to wield such an arsenal from the United States’ sanctions and export controls. The current rare-earth standoff and ongoing supply chain weaponization do indeed pose a grave threat to global stability and prosperity. But it is less a Chinese master plan coming to fruition than the result of two powers locked in an action-reaction spiral that neither set out to start—and that neither fully controls.

Correcting this narrative and understanding how China came to dominate the rare-earth market matters because it helps illuminate the current security dilemma between Beijing and Washington: when one country takes actions to increase its own security, the other feels threatened, precipitating its own actions and furthering the escalatory spiral. But as China and the United States now race to gain future leverage over each other, the risks are not limited to economic warfare. Fears of future economic and supply chain weaponization have fostered a growing estrangement between the two countries, feeding a broader hostility that empowers more aggressive voices on both sides of the Pacific. Stabilizing this spiral will not be easy. But it will help both countries, and the world, avoid an even worse fate.

CHEAP AND DIRTY

The Bayan Obo mine in Inner Mongolia has anchored China’s rare-earth industry since the late 1950s, and it still holds the world’s largest deposit. In the 1960s, Jiangxi and Guangdong Provinces in southern China had their own discoveries and later emerged as the epicenter of heavy rare-earth mining and processing. But it was not until the early 1980s, after the chemist Xu Guangxian developed a new, cheaper method for separating rare earths from each other, that China achieved high-quality output at scale. Xu’s discovery coincided with the rapid growth of the global semiconductor industry, and domestic and overseas demand for rare earths rose sharply.

Chinese leaders started to see rare earths as a natural resource the country could not afford to squander. As early as 1982, Deng and Vice Premier Fang Yi ordered the country to “increase the production of rare-earth metals and rare metals.” But throughout the 1980s, the central government’s first priority was to accumulate more foreign exchange reserves, so it tolerated a relatively lax set of controls in the rare-earth sector to encourage exports. “Cheap and dirty” became the defining features of destructive, small-scale mining, with most of the exports going to Japan, the United States, and Europe. China’s output surged to more than ten times its 1978 level by 1986, and China surpassed the United States as the world’s largest rare-earth producer by the early 1990s.

The United States and Europe welcomed the development. Rare earths are not, in fact, rare: the historical misnomer results from unfamiliarity at the time of their discovery. But it is relatively unusual to find rare earths in concentrations that make mining worthwhile, and processing them is both technologically demanding and incredibly polluting. Improving raw ore, for instance, involves releasing water that is contaminated with radioactive pollutants, creating health issues for workers and local residents. From a Western perspective, offshoring the extraction and processing of rare earths to China both lowered prices and moved the pollution elsewhere.

Throughout the 1990s, China’s fledgling rare-earth industry was thus seen as a win for the country’s development. After declaring rare earths “protected and strategic minerals” in 1990, China began to restrict foreign investment in exploration and processing. The industry satisfied Beijing’s desire for export-led growth, and local governments scaled up quickly to meet development imperatives and increase tax revenue. But with little regulatory enforcement or oversight, China’s rare-earth industry resembled the Wild West by the turn of the century: rampant overproduction led to domestic price wars and weaker export pricing. Environmental and public health effects also took a toll. The Baogang tailings dam, which lies just north of the Yellow River, became the “world’s largest rare-earth lake” with 200 million tons of contaminants. And Ganzhou, a city in Jiangxi with heavy rare-earth mining, recorded an acid rain frequency of more than 90 percent.

Many analysts today argue that China deliberately pushed down the price of rare earths to beat out foreign competition. But Chinese officials actually saw low rare-earth prices as a problem to be solved. In China, rare earths were described as selling at “the price of cabbage or dirt,” which was considered a sign of weakness. In this narrative, developed countries were exploiting China for its cheap raw resources while hoarding their own.

By 2002, Beijing decided to rein in the disorderly competition. The central government cracked down on unlicensed mining and polluting practices, which helped it gain leverage over price negotiations in the global market. Then, in 2005, Beijing abolished export tax rebates for rare earths and, in 2007, officially implemented a ten percent export tariff on all rare-earth ores, oxides, and compounds.

The actions reflected Beijing’s pivot from maximum output and export focus to a determined effort to address overcapacity and ensure resilience. Rare earths, after all, are not renewable—a country’s supply can be exhausted—and Beijing was increasingly recognizing the elements’ role in fueling China’s own industries. Authorities were wary of depleting China’s supply and someday becoming dependent on imports, as the country is for oil and gas. In addition to the export quotas introduced in 1999, they instituted a set of production quotas in 2006 to decrease the volume of rare earths sent out of the country. By mid-2010, even before the crisis with Japan, reported Chinese exports had declined by over 50 percent since 2005.

CRISIS AND CONFUSION

Throughout this process, however, China’s local governments resisted the central initiatives since they often cut into tax revenue. As late as 2010, overall output exceeded production quotas by more than 35 percent, with rampant illegal operations in southern China supplying half of global consumption of heavy rare earths. This decades-long resistance and selective implementation led one Western report to conclude that the only real competitors to China were “the crime rings within the country’s borders.”

The contretemps later that year with Japan only further raised doubts about Beijing’s command over the industry. When a Chinese fishing trawler collided with a Japanese coast guard patrol near the disputed Diaoyu/Senkaku Islands, Japan detained and prosecuted the captain. Beijing was so angered it tolerated a spate of anti-Japanese protests, hoping to harness nationalist fervor—and around the same time, reports widely suggested it had blocked rare-earth exports to Japan as punishment. Japan’s electronics industries immediately felt the pinch, and Japan, the United States, and the European Union jointly issued a complaint with the World Trade Organization. At a press conference with her Japanese counterpart, U.S. ​​Secretary of State Hillary Clinton called China’s export restrictions a “wake-up call” for the world. “Because of the importance of these rare-earth minerals, I think both the minister and I are aware that our countries and others will have to look for additional sources of supply,” she said.

Yet the origins of this decision to restrict rare-earth exports remain unclear. There was never a formal announcement of the ban from Beijing, and research by the geographer Julie Klinger suggests that the embargo may not have resulted from a central directive. According to her interviews, angry military personnel, port workers, and local customs officials in a port city north of Nanjing saw themselves as standing against “a contemporary manifestation of Japanese aggression.” They decided on their own to withhold shipments of rare earths. It wasn’t until the Japanese customs authority lodged an inquiry, in this telling of the incident, that authorities in Beijing realized what was happening. Throughout this period, Beijing denied its occurrence.

Regardless of Beijing’s initial involvement, the crisis prompted the central government to think about this new form of leverage and take more aggressive actions to control its rare-earth industry, including curbing illegal industrial activities. The global market, after all, had signaled that even a small-scale disruption in rare-earth exports could have significant effects: the price of neodymium, an element essential to many powerful magnets, had surged nearly sixfold by mid-2011.

Outside the offices of a rare-earth producer in Baotou, China, April 2026 Maxim Shemetov / Reuters

Calls for imposing export controls on rare earths began to circulate in Chinese media. While some pointed to the geopolitical potential, more populist voices stressed protectionist concerns. One widely reposted article urged China to “defend” its rare-earth resources by “immediately banning exports, maintaining only the output scale needed for domestic production and R & D, or simply purchasing from abroad.”

Still, Beijing remained cautious. Hong Feng, the former division director of the Rare Earth Office under the State Planning Commission, warned against using rare earths as “political chips.” Russia’s frequent weaponization of natural gas had shown how coercion would incentivize target countries to diversify over the long-term. China also had its own heavy dependence on oil, iron, and copper imports, which could be used as retaliation, and Hong underscored that “the strategic nature of rare-earth resources lies in their application, which requires joint research and development around the world.” If China stopped selling rare earths to the world, in other words, it might induce a backlash that could disrupt China’s access to foreign resources.

China’s rare-earth industry also still lacked a consolidated structure to implement such moves effectively. Only in 2012 did Beijing begin asserting central oversight. It stockpiled a strategic reserve of rare earths, for instance, to safeguard domestic needs. And in 2014, the Ministry of Industry and Information Technology initiated a successful revamping of the industry into six state-controlled groups, a precursor to the eventual 2025 consolidation into two national champions. In 2015, China also complied with the World Trade Organization ruling against China’s rare-earth export restrictions and abolished its export quota system. It turned instead to traceability requirements and investments in overseas mining projects to manage growing domestic demand and global diversification.

As a recent RAND report noted, Beijing’s overarching goal with rare earths during the 2010s was to pursue “resilience before weaponization.” In Chinese government documents and public discussions, many officials voiced concerns about future scarcity. Although this fear was likely overstated, there was a sense that China could squander its opportunity if it wasn’t careful. Yang Danhui, a professor at the Chinese Academy of Social Sciences and an adviser to the Ministry of Commerce, warned in a 2015 book that if extraction continued at the 2008 rate, “the Bayan Obo mine in Baotou will be exhausted within 25 years. (Should this occur, China would need to import rare earths from abroad at very high prices.)”

BACK WITH A VENGEANCE

The Diaoyu/Senkaku Islands incident marked an inflection point for the world, too, laying bare for the first time China’s growing economic leverage in geopolitics. A decade before terms such as “decoupling” and “de-risking” entered the lexicon, Japan accelerated efforts to build alternative sources: today it imports only 60 percent of its rare earths from China, down from 90 percent in 2010. Besides resorting to the World Trade Organization’s dispute settlement system, Washington also began to rethink the risks of overdependence on rare-earth imports. Yet domestic investments, including in the Mountain Pass mine in California, continued to sputter because of scarce profits, price volatility, and technological challenges. The annual value of trade in rare earths, which reached $4.2 billion in 2011, was still less than an average day’s worth of global trade in oil. By 2014, the global value of trade in rare earths had fallen to $1.2 billion, compounding the challenges of private-sector-led diversification.

The rare-earth issue thus slipped into the background of the U.S.-­Chinese relationship and didn’t reemerge until the end of the decade, when Washington began imposing significant economic pressure on China. Beijing’s tightened control over the private sector and its increasingly coercive behavior in international disputes hardened American suspicions of China’s intentions. In 2019, the Trump administration launched a campaign against Huawei, one of China’s largest telecom giants, by placing it on an export blacklist, effectively barring U.S. companies from doing business with it. The administration also pressed allies to exclude Huawei from their 5G networks, arguing that the company posed a national security threat because its equipment could give Beijing backdoor access to critical communications infrastructure.

The Huawei restrictions were seen as a major escalation and served as Beijing’s own wake-up call. Chinese state media suggested the possibility of leveraging rare earths as retaliation, but Beijing still held back. Instead, it chose to use tariffs against carefully selected exports, such as soybeans and energy, from Republican-supporting districts. The Huawei episode had exposed the vulnerability in China’s own industrial system—that it needed access to advanced semiconductors—and Beijing seemed to recognize that playing its rare-earths card too soon could backfire. As Zhang Anwen, deputy secretary-general of the Chinese Society of Rare Earths, observed in June 2019, “Only by developing advanced technology and gradually localizing high-end rare-earth and critical metal products can we reduce that dependence [on foreign high-value products] and leverage rare earths to maximum effect.”

Beijing prepared across all fronts. In May 2020, it launched a “dual circulation” strategy to reduce its dependence on foreign technology by building up its own domestic industries—starting with semiconductors. In late 2020, it adopted an Export Control Law to provide a domestic legal basis for restricting overseas sales. And in December 2021, it directed the formation of the China Rare Earth Group, through which the State Council, China’s cabinet, would oversee the rare-earth industry.

But it wasn’t until after Washington unveiled a set of extraterritorial export controls, which for the first time would deny China access to advanced chips and chip-making equipment, that Beijing finally opted to retaliate with critical minerals. After the Biden administration mooted the expansion of its October 2022 export controls to include Nvidia’s A800 chips in late June 2023, China announced in July that exporters of gallium and germanium—two minerals essential to chip-making—would need to apply for licenses and disclose end-use information. The move, while not an outright ban, set off alarms in the market, and with good reason. If China decided to implement a total ban on those two minerals, according to a U.S. Geological Survey estimate, it could potentially decrease U.S. GDP by $3.4 billion.

Six months later, the U.S. House Select Committee on China issued a report that advocated for tax incentives to rebuild domestic rare-earth magnet manufacturing capacity. Just a week after the report’s release, on December 21, 2023, China announced a ban on rare-earth processing technology, which would slow de-risking efforts in the global supply chain. One year later, China issued its first rule that explicitly named the United States as the target of an export ban; Chinese exporters trying to sell gallium to U.S. end users had to assume their licenses would be denied.

This tit-for-tat dynamic has escalated sharply during the second Trump administration. After Trump’s “Liberation Day” tariffs were announced, on April 2, 2025, Beijing retaliated two days later by adding seven rare earths, as well as the permanent magnets made with them, to its export control list for dual-use goods—those valuable to both the military and the commercial sector. When tens of thousands of license applications first poured in, China’s export control bureau was staffed with only 30 members. The subsequent backlog led to significant delays in approval, with Chinese exports of rare-earth magnets plummeting 74 percent in May from a year earlier. In response, Washington imposed new restrictions on jet engines and semiconductor design software. Only when the United States retracted those measures and agreed to further talks, in June, did China agree to resume exports of rare earths and magnets.

Then, on September 29, the Trump administration expanded the list of Chinese “affiliates” subject to U.S. export controls. With this move, any entity that is at least 50 percent owned by a foreign company on the entity list would also be blacklisted. China hit back just ten days later with its own extraterritorial export control regime: for the first time, China asserted the right to license any foreign-made product in the world that contained even a sliver of controlled Chinese rare-earth elements or was built using Chinese processing technology. As designed, the series of rules would impact a wide array of downstream sectors, including defense, aerospace, semiconductors, and AI data centers. The International Energy Agency has estimated that if China were to fully implement the new restrictions, industries outside China would lose $6.5 trillion.

At that point, the U.S.-Chinese economic war reached a climax. Both sides preferred mutual retrenchment to the devastation that would have ensued had the spiral continued. At the Busan Asia-Pacific Economic Cooperation Summit later that month, Beijing agreed to a one-year suspension of its extraterritorial export controls, matched by Washington’s reciprocal suspension of the affiliates rule.

THE LIMITS OF LEVERAGE

Having looked into the abyss in 2025, both Beijing and Washington have pulled back—at least for now. But hawks on both sides are already casting this lull as an opportunity for both countries to hone their weapons for the next fight. As Wess Mitchell wrote in these pages, “If it focuses on consolidation [of critical minerals capacity and reshored supply chains], the United States has a historic chance to regain its bearings as a great power and prevail in a sustained competition with China, the most powerful adversary in U.S. history.” In China, prominent economic nationalists such as Di Dongsheng of Renmin University have urged the Chinese government to “seize the initiative” and accelerate efforts to de-Americanize China’s supply chains. Both governments, meanwhile, have expanded their domestic and global investments in rare earths to insulate their economies from future coercion.

For the United States, such diversification of the supply chains for critical minerals and rare earths is necessary. Defensive investments that began under the Biden administration and have continued under the second Trump administration are important for resilience. If these efforts succeed, they will reduce acute vulnerabilities and China’s incentives to exploit these chokepoints. But they won’t eliminate interdependence—nor do they need to. A little diversification goes a long way, and a credible alternative can constrain China’s ability to exercise market or geopolitical leverage. In some cases, U.S. government–affiliated analysts have argued that sourcing as little as a third of the U.S. supply of rare-earth elements from places other than China may be sufficient to reduce Beijing’s pressure.

Still, there is no way to de-risk every rare-earth element. Some analysts, for instance, have called yttrium—a material critical to chip-making, jet engines, and turbines—“the killer chokepoint” because investments in diversification may take years to realize. China’s chokehold, however, has an important limitation that the United States should keep in mind when planning for the future: China still lags behind both Japan and the United States in parts of the rare-earth value chain, including recycling technologies. Even China knows that its leverage has limits.

In this way, the rare-earth market resembles other chokepoints, such as the U.S.-dominated, dollar-based financial system and the Chinese-dominated market for pharmaceutical ingredients. Although they appear to create leverage, they are difficult to weaponize for the long haul. The United States cannot cut a country of China’s economic heft out of the global financial system without doing major economic damage to itself. Nor can China readily cut off U.S. access to the pharmaceutical ingredients it dominates without great risk to its own biotech sector, which depends on access to American technology and markets.

It is this persistence of mutual dependence that makes the conditions for stabilization more likely to endure. In both countries, analysts are starting to recognize the limited efficacy of export controls. They may impose short-term pain, but they don’t work for long, especially since they jump-start efforts to get around them. Attempts to build alternative supply chains also face the difficult reality that many countries with viable rare-earth mines do not want to choose between China and the United States. Rather than a zero-sum contest between blocs, continued interdependence and overlapping supply chains will likely remain the norm.

THE $13 TRILLION MISTAKE

Still, a grudging recognition that these economic tools are limited in their utility goes only so far. To slow the spiral of weaponized interdependence, the United States must pursue a combination of reciprocal de-escalation, deterrence, and investments in a more positive-sum future. To discourage Chinese escalation, the United States must be willing to hit back; but to discourage Chinese hubris, it must also be willing to invest in the competitiveness, innovation, and resilience of the American economy, workforce, and science and technology ecosystem.

Efforts to reduce critical dependencies must also be coupled with steps to encourage bilateral trade and investment with China. Because Chinese companies lead in key technologies, such as batteries, joint ventures and technology licensing are essential for American companies to compete globally, including alongside China, not only against it. Negative reciprocity—the back-and-forth expansion of sanctioned entities and lists—must be balanced by positive reciprocity. Managed carefully, a more resilient and diversified interdependence becomes less a vulnerability than a source of mutual restraint and interest in stability.

The alternative is both dangerous and costly. Fully excising China from American technology and manufacturing supply chains would cost $13 trillion over the next 25 years, according to an economic analysis published in the Financial Times. Even if this reality constrains the effort to decouple, the perception that it is necessary undercuts Washington’s leverage—including the ability to deter Chinese aggression against Taiwan. As the political scientist Thomas Christensen has pointed out, “Coercive diplomatic leverage would be lost if a growing sense in China were that U.S. markets and inputs might be cut off from China on an unconditional basis.” The United States must therefore carefully balance the need to de-risk against the need to deter aggression.

This will be a tricky act to pull off. But the best way to foster stability is to increase the benefits, not just mitigate the harms, of the ties between these two economic giants. Trying to build economic security without shared benefits would risk a cold peace in which neither society can flourish or succeed against common challenges. Both sides should instead accept that a degree of resilience and diversification will be necessary for continued bilateral trade and investment. Otherwise, they risk a race to accumulate leverage that each side can use to choke the other, which hurts ordinary citizens and makes a hot conflict more likely. The first step in averting this spiral toward catastrophe is for both Beijing and Washington to bear in mind that these economic tools were not designed as weapons. That means the two countries have the opportunity, and the obligation, to ensure that they never serve that purpose.

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