How vulnerable is the euro area to restrictions on Chinese rare earth exports?

Prepared by Mattia Banin, Mario D’Agostino, Vanessa Gunnella and Laura Lebastard

On 4 April 2025 China imposed export restrictions on rare earth elements, raising production challenges for some firms. The measures were introduced in retaliation for increased US tariffs on Chinese goods during escalating US-China trade tensions. They restrict Chinese exports of rare earth elements, compounds and related products, such as permanent magnets that are used across the defence, electric vehicle, energy and electronics industries (European Commission, 2020). The decision caused a supply shock: in May Chinese shipments of rare earth magnets dropped by approximately 75% compared with the previous year, which forced some carmakers to pause production.

The euro area is exposed to supply chain risks linked to Chinese exports of rare earth elements – it relies on direct imports from China and indirect supply via third parties. China dominates the global rare earth market, producing 95% of the world’s rare earths. It also has a central position in refining other critical raw materials, such as lithium and cobalt (International Energy Agency, 2024). This underscores the pivotal role of China in global supply chains and highlights euro area vulnerabilities to geopolitical disruptions (International Relations Committee Work stream on Open Strategic Autonomy, 2023; Attinasi et al., 2025). China supplies 70% of the euro area’s rare earth imports (Chart A, first column). Even where the euro area sources secondary products containing rare earth elements from countries other than China (Chart A, second to fourth columns), the suppliers depend heavily on China for raw rare earth elements. For example, the United States imports 80% of its rare earth elements from China – so the euro area remains indirectly exposed to Chinese supply chains when importing US products that use rare earths.

Chart A

Imported products facing Chinese export restrictions

(percentages)

Supply shortages of rare earth elements would affect substantial parts of the manufacturing industry and cause widespread negative spillovers. Rare earth elements play a crucial role in the production of specific goods, including cars, computers and phones, in sectors that are central to the euro area production chain. A network analysis based on a Bloomberg database of companies’ supplier-customer relationships indicates that over 80% of large European firms are no more than three intermediaries away from a Chinese rare earth producer (Chart B).^[1],[2] According to the data, only a few euro area firms procure rare earths directly from Chinese suppliers – for instance Airbus and BASF. Around a quarter of all firms – including Volkswagen, Renault and Telefónica – rely on just one intermediary. The intermediaries are often US tech firms making products with rare earths supplied by Chinese companies. This reliance on indirect supply chains amplifies the exposure of euro area companies to potential disruptions, as even minor interruptions in Chinese exports can cascade down to intermediaries and affect a broad range of industries.

Chart B

Number of intermediaries between euro area firms and Chinese rare earth suppliers

(percentages of euro area firms, weighted by revenue)

The nature of rare earth dependencies differs across sectors. Manufacturing industries are particularly exposed, as shortages of rare earth materials can potentially stop production. The car industry, for instance, relies heavily on permanent magnets made from rare earth elements. Similarly, the energy sector is highly dependent on rare earths for the neodymium magnets used in wind turbines. By contrast, services sectors are less vulnerable, as rare earths are typically used as a one-off intermediate input.

The network of Chinese rare earth suppliers reveals a dense web of global industrial linkages. Direct customer relations are at the core of the rare earth network, which involves firms across Asia (outside China, mostly Japan), the European Union and North America. Many of these operate in tech, energy and advanced manufacturing sectors. Figure A illustrates the network of Chinese rare earth producers and derivatives, showing direct links between euro area firms and rare earth producers, as well as linkages via single intermediary firms (corresponding to the first two columns of Chart B). Out of the 1,767 euro area firms in the sample, 11 direct links from rare earth companies to euro area firms are visible; there are 16 links to rare earth derivative firms and 223 firms are linked via just one intermediary (around 13%).^[3]

Figure A

Linkages between Chinese rare earth producers and euro area firms

A sudden stop in the supply of rare earth elements from China to the United States would have significant repercussions for euro area firms because of the central position of US firms in the global supply network. US firms serve as the largest pivotal intermediary, supplying euro area firms with transformed goods derived from rare earth elements (Chart C). The US firms – including prominent tech companies such as Microsoft, Apple and Intel – operate in strategic industries like semiconductor fabrication, precision magnet production and chemical processing, and they depend on sourcing raw materials from China. This demonstrates the euro area’s indirect exposure to Chinese rare earth suppliers. Only 157 US firms act as direct intermediaries between euro area firms and Chinese rare earth exporters. However, these firms supply products to many euro area counterparts – disruptions to sources of rare earth elements could cause cascading effects across supply chains.

Chart C

Nationality of intermediaries between euro area firms and Chinese rare earth firms

(percentages of euro area firms, weighted by revenue)

The restriction of rare earth exports by China has already caused disruptions in the global value chain and affected some European firms. The euro area had generally not stockpiled rare earth elements before the restrictions came into effect – by June, aggregate imports from China were below typical levels (Chart D). In that month, the European car industry raised the alarm, citing critically low stocks causing several production lines and plants to shut down across Europe (European Association of Automotive Suppliers, 2025). China’s delay in processing export licence applications caused part of these disruptions. However, European authorities have since negotiated to enable some European firms to fast-track licence approvals.

Chart D

Euro area imports of rare earths from China

(tonnes, cumulative since January)

China is leveraging its quasi-monopoly on rare earth elements in international trade disputes. By restricting exports of rare earths in response to US tariffs, China has shown its willingness to use these elements to pressure trading partners. In a similar manner, China could use rare earths to exert pressure in ongoing trade negotiations with the EU. The European Parliament has urged the Commission to address these vulnerabilities by quickly implementing the Critical Raw Materials Act (CRM Act). Among other things, the CRM Act aims to improve Europe’s position by diversifying imports of critical raw materials and enhancing recycling efforts (European Parliament, 2025).

The euro area remains exposed to inflation-related and economic risks as a consequence of its reliance on China supplying rare earth elements to critical industries. Supply chain disruptions stemming from China’s export restrictions could lead to higher input costs for manufacturers, particularly in the automotive, electronics and renewable energy sectors. This increase in costs could drive up consumer prices and contribute to inflationary pressures. In addition, shortages of materials could also halt production, which would weigh on industrial output and dampen overall economic activity. The pandemic highlighted the fragility of global supply chains and showed how sudden disruptions can cascade across industries and sectors. Model-based estimates suggest that disruptions to the supply of critical inputs, like rare earth elements, could disproportionately affect downstream industries (Attinasi et al., 2025). Current indicators do not suggest that supply chain pressures and price increases are immediately imminent. However, it is crucial to remain vigilant and closely monitor developments given the potential for rapid shifts in global supply dynamics. Network analysis, as demonstrated in this study, could serve as a monitoring tool to identify potential supply chain vulnerabilities.

References

Attinasi, M.-G., Boeckelmann, L., Gerinovics, R. and Meunier, B. (2025), “Unveiling the hidden costs of critical dependencies”, Economic Bulletin, Issue 5, ECB.

European Association of Automotive Suppliers (2025), “Urgent action needed as China’s export restrictions on rare earths disrupt European automotive supply chains”, press release, 4 June.

European Commission (2020), “Critical raw materials for strategic technologies and sectors in the EU”, Publications Office of the European Union.

European Commission (2025), “Critical Raw Materials Act”.

European Parliament (2025), “Commission must tackle China’s export restrictions on rare earth elements”, press release, 10 July.

International Energy Agency (2024), “Global Critical Minerals Outlook 2024”, IEA Publications.

International Relations Committee Work stream on Open Strategic Autonomy (2023), “The EU’s Open Strategic Autonomy from a central banking perspective”, Occasional Paper Series, No 311, ECB.