In a series of announcements in early October, the Chinese ministry of commerce codified and tightened export restrictions on “rare earth-related technologies and other items”. The new rules limit exports of all Chinese technologies needed for mining, processing, refining and recycling—along with core technologies used in the battery supply chain, from cathode and anode materials to the industrial machines, particularly those that produce batteries for electric vehicles (EVs). All these goods now need export licenses on national security grounds; nothing leaves China without official approval (and if a product has a military-linked end-use, its manufacturers should assume that their request for an export license will be denied).
Even before this round of restrictions, approvals crawled: by early September, Beijing had cleared under 15% of rare earth licence requests from European companies. The situation will likely get much worse. The new regulations go further, applying to every exporter in China and every intermediary, including banks, freight companies and e-commerce platforms.
Europeans should take particular note of announcement 61, which allows China to apply legal provisions beyond its borders. In this manner, Beijing is now openly copying the very tactics it criticised in Washington—using its long-arm jurisdiction to force other countries to bend to its will. Practically, this means that if, for example, a Korean company were to invest in a battery plant in Europe that uses Chinese machines, equipment or rare earths, Beijing would have legal grounds to interfere in the investment.
Implications for Europe
The effects are direct and enormous, particularly for the defence sector. The EU defence industry risks grinding to a halt as inventory shortfalls could leave it struggling to produce and deliver enough weapons for the war in Ukraine. According to the European Central Bank, over 80% of the main European companies are “no more than three” intermediaries away from Chinese rare earth producers—often the intermediaries are US companies. Even if Europeans were able to secure access for their own companies, their large indirect dependence on US intermediaries means they cannot escape China’s coercive leverage.
The delays in export licensing have already disrupted supply chains, pushed up prices and raised concerns over the outflow of economic intelligence to the Chinese authorities. The areas in which the crunch is going to be felt most directly are semiconductor, defence equipment and ammunition production, as well as the entire clean technology supply chain. But the new controls, particularly the ones on lithium-ion battery machinery, also put an end to the European hope of using Chinese technology to de-risk European businesses from direct import dependencies on China, even if the EU were to enforce a robust technology transfer regime. China’s new rules are there to ensure Beijing retains maximum control—no matter where the factories stand.
Negotiations by individual member states with the Chinese leadership are unlikely to create the leverage necessary to force concessions from Beijing or change its current escalatory course. Not even Germany (currently the world’s largest importer of Chinese permanent magnets) has secured sustainable relief since China’s April provisions came into effect, and there is little reason to expect change. As desperation in Europe grows, it will embolden the Chinese leadership. China has had ample time to shield other trading partners from actions directed at the United States. It has chosen not to. Europe is not collateral damage; it is a deliberate target of Beijing’s strategy.
The Chinese leadership is operating from a position of strength—making clear it will not just control access to rare earths and magnets, but block the emergence of an alternative supply chain elsewhere. Any company wishing to diversify away from China will have to ask Beijing for permission to use Chinese technologies or goods to do so. Beijing envisions permanent dependence on China for these products—or at least creating suffocating constraints and delays on those trying to build alternative supply chains. For the Chinese leadership, control over these technologies is no longer about trade; it is about national security. For Europe, it is about survival; the export restrictions are a direct threat for both its military-industrial build-up (and, in turn, the defence of Ukraine) and its industrial and energy transition. Treating this as a trade dispute would miss the point—and would not get Europeans an acceptable deal since Beijing would not agree to any outcome that treats the issue as merely economic. So, Europe’s response cannot be only about trade; it must be geopolitical.
Collective countermeasures
Europeans need collective leverage to even start a conversation with Beijing—otherwise acceptance becomes the new normal and Beijing will continue to gradually escalate. Contrary to popular belief, the EU has one of the most powerful geoeconomic tools: the 2023 anti-coercion instrument (ACI). Because it leans on the bloc’s strong trade competencies, rather than its much weaker foreign policy ones, the ACI lets the EU hit back hard—with a variable toolkit designed to create real pressure: import tariffs, services restrictions, export controls, suspension of IP rights, curbing access to finance, banking, or public procurement, or restricting foreign investors. It allows targeting entire sectors, single firms, or even individuals. This is the EU’s sharpest weapon against economic blackmail, especially because it does not require unanimity for decisions
To trigger the tool, a qualified majority of member states in the Council must agree that the EU is being subjected to economic coercion. If China’s recent actions do not meet that threshold, it is hard to imagine what ever will. Once activated, the instrument offers a broad, flexible menu of options that can be adjusted to maximise negotiating space. And China has serious vulnerabilities that Europe can exploit.
Tighten chip chokepoints
Beyond already controlled extreme ultraviolet lithography machines (which the Dutch government blocked in 2019 with significant US pressure to stop China’s access to cutting-edge chip tech), much of China’s semiconductor output still depends on older deep ultraviolet models. These machines are supplied and serviced by European companies whose maintenance and spare parts support could be curtailed in response to coercion, choking China’s chip output.
Clamp down on the aviation sector
China relies on Western turbofan jet engines and advanced machine-tooling to build its indigenous aircraft programme. Beijing’s plan is to be independent of international components anyway, but clamping down on European exports would delay this process.
Italian and German machine-tool makers are market leaders in the production of aircraft and engine parts, such as compressor blades, aircraft structures, and navigation systems. High-precision computer numerical control machine tools, used to make everything from jet engine parts to tiny circuit board components, are dominated by German and Japanese firms. Limiting their export or servicing could threaten production issues across advanced Chinese industries.
China’s passenger air travel is dependent on more than 2,000 European aircraft. Restrictions on production and future sales within China could be put on the table for a more direct and immediate impact. Chinese demand for aircraft is growing massively—it is expected to need almost 10,000 new passenger and freight planes in the next twenty years, so such measures would disrupt a rapidly expanding market.
Stop exporting industrial materials and machinery
China is also relying on European (and Japanese) speciality steel products such as high-precision bearings used in turbines, EV drivetrains and machine tools. German and Swedish players lead in this niche. Powdered superalloys, used primarily in aerospace, power generation and industrial sectors, remain significant Chinese imports. Restricting exports or maintenance could create significant pressure points, complicating Beijing’s ambitions for technological self-sufficiency and industrial expansion.
This dependence extends to heavy-duty gas turbines, which power China’s utilities, industry and parts of its grid. The global market is dominated by German and Italian companies, alongside American, British and Japanese peers. Restricting exports or maintenance of these turbines could have strong effects on Chinese industrial centres.
Hit Chinese exporters
China’s vulnerabilities are not limited to its imports. Thanks to the American tariffs, its exports face an even bigger problem. Chinese exports to the US have plunged by more than 27% year-on-year, while exports to Europe are up by almost 14%. Retaliatory European tariffs imposed on Chinese steel, wind turbines, electric vehicles, electronics and low-end consumer goods could squeeze Chinese exporters further. There are only so many developed markets in the world, and the EU should aim for reciprocity in areas where European companies face barriers in China.
European leaders should focus on sectors they aim to protect anyway but where political consensus is elusive: wind, electric vehicles, telecommunication equipment, medical devices, machine tools and pharmaceutical products, to name just a few. They should probably exclude areas in which Europe does not aspire to regain industrial leadership, like solar panels. Coordinating measures at the G7 level would multiply the impact.
A landing zone
To force Beijing to the negotiating table, European policymakers should take a page out of the Beijing playbook and move into offence. The objective of an escalatory response should be a “landing zone”, a negotiated political agreement with China on the basis of mutually assured destruction—akin to an economic disarmament treaty. The agreement would still allow goods for basic industrial needs to flow, but it would protect core European industries. Failure to honour this agreement would trigger wider measures which could go further than the initial ACI response and could include sensitive areas such as China’s financial sector. The goal for Europe is to buy time; time it needs to decouple its industry from Chinese rare earths.
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