Why the World’s Hedging Responses to China’s Rare Earth Dominance Have Failed

China’s dominance over the global supply of rare earth minerals – and related export controls – have been one of Beijing’s key geoeconomic levers in recent years. Since the second wave of U.S. trade sanctions in April 2025, China has ramped up restrictions. Most recently, in June 2026, Beijing added more new U.S. companies and created a reporting mechanism for violations, thereby further weaponizing its rare earths dominance. Government efforts to diversify away from China in Asia, North America, and Europe have been moderately successful, foremost regarding light rare earths. But Beijing still possesses such extraordinary leverage, particularly in the heavy rare earth elements (HREEs). These materials are essential in the production of high-temperature permanent magnets and are widely used in advanced defense systems, electric vehicles, and offshore wind turbines. It is evident China is the lone superpower in this field. It currently dominates all three stages of the value chain, with International Energy Agency (IEA) statistics showing China controls nearly 60 percent of HREE mining, 91 percent of refining, and 94 percent of magnet production in 2024. Notably, China’s dominance increases as it moves downstream. China has the world’s largest reserves of rare earths, with nearly 44 million metric tons, nearly 48 percent of global reserves, according to the USGS. But that’s only part of the story. China’s main advantage lies in the refining and production stages that turn rare earths in usable inputs. This is the result of decades of investment in perfecting the technical know-how and the supporting ecosystem that cannot be simply replaced. Recreating China’s supply chain is therefore not a resource issue, but an expertise and ecosystem one. There is no single competitor that currently possesses China’s combination of resources, processing capacity, technical expertise, manufacturing scale, and downstream demand. Much of the capability that exists outside of China is fragmented geographically. Other nations seeking to diversify their supply chain away from Chinese dominance are facing an extremely difficult job. How to compete with an actor that has dominance across multiple subsectors, both down and upstream, and by such large margins, and which was built over years? Efforts to address the issue are numerous: from the EU’s Critical Raw Materials Act (CRMA), to U.S. governmental efforts, including Project Vault, as well as Australia’s and India’s new initiatives and policies. With strategies full of keywords like “self-reliance” and “diversification,” the intent is clear, but it remains to be seen how effective these programs will be. They may never fully succeed. Instead, Asian nations should look back at recent Cold War history and apply hedging strategies. While hedging is often understood as balancing between two political superpowers, it can be equally applied to a single-power economic domain. With China as the clear, lone, superpower in the rare earths sector, all other nations, middle powers and beyond, should understand that coordination is the key variable. An effective counter-response should focus on diversification and cooperation, across commercial entities and state actors, in terms of rare earth mining and processing. But equally vital – and frequently still absent – alignment in domestic policies toward rare earth minerals development. Simultaneously establishing similar policies across several states will be good for critical minerals stock indexes but will only lead to further competition among states that are all pursuing the same purpose. Ironically and counterproductively, independent diversification efforts could lead to further reliance on China, as individual states undercut each other through competition. Fortunately, states are increasingly understanding the necessity for cooperation: Most recently, Japan has reportedly expressed interest in jointly mining rare earth elements from deposits in India, after a preliminary pact – the Memorandum of Cooperation between the Geological Survey of India and Japan Organization for Metals and Energy Security – provided a framework for joint geological surveys and mineral exploration. Already, Toyota Tsusho’s rare earth venture in Andhra Pradesh, running through subsidiary Toyotsu Rare Earths India, processes thousands of tons of rare earth oxides for export to Japan. This partnership makes perfect sense. India is believed to hold the world’s third-largest rare-earth reserve, yet its output is less than 1 percent globally. Japan, on the other hand, possesses technological expertise, shown through firms such as Toyota Tsusho or Mitsubishi, but has virtually no deposits to explore. In addition to a partnership with India in the mining phase, Japan and France have jointly backed Caremag’s rare-earth project in Lacq, France. The plant is designed to process both recycled magnets and raw ore and separate them into individual rare-earth oxides, bolstering Japan’s foothold in the processing stage and guaranteeing supply to the Japanese market in the future. Japan’s JOGMEC and Iwatani are participating in this project, with Japanese support of roughly 100 million euros; France is providing 106 million euros through subsidies and tax credits. While specialization pathways seem to offer a path toward competing with China’s vertically integrated industry, in practice, this runs directly against another objective shared by many of these governments: bringing critical supply chains home. At the heart of the global effort to diversify away from Chinese supply of critical minerals is the tension between friendshoring and strategic autonomy. There are, essentially, two major economic statecraft strategies in tension. Major countries with the technical expertise to process rare earths, such as Japan and South Korea, possess almost no deposits. In contrast, countries with credible reserves for effective mining and refining operations possess little technical expertise. At the same time, these same countries are eager to build strategically valuable industries locally, with more value added downstream, rather than being purely resource-extraction locations. Take India, for example. India does not want to be simply the ore provider for Japanese manufacturers. What countries like India, Brazil, and Vietnam are looking for is to move up the supply chain, further increasing their added value by capturing the technical expertise for mining, refining, and magnet production inside these countries. Therefore, India has incentives to cooperate with Japan, but also wants to capture more of the supply chain itself. Conversely, Japan wants diversified resources and processing outside China. However, Japan also has incentives to preserve its own advanced manufacturing and technological capabilities, which are its comparative advantage. That raises questions about whether Japan will agree to the sort of technological transfer and high-value production India – and other potential partners – is looking for. The same issue plays out in other contexts. The United States wants diversification; yet simultaneously, U.S. industrial policy seeks domestic mining, processing, and magnet production for local manufacturing. So what happens when Washington’s definition of supply chain security means homeshoring the same industries that its allies also want? That is without mentioning the heavy tariffs levied by Washington on many countries that are essential to build a rare earth supply chain. Europe similarly talks about international critical mineral partnerships while simultaneously pursuing strategic autonomy and greater domestic processing and manufacturing. These tensions are already occurring and are slowing the much-needed, much-talked-about diversification effort. Everyone agrees that dependence on China is dangerous. They don’t necessarily agree about who should replace China at each stage of the supply chain, let alone consider that cooperation and specialization are key variables to establish alternative hedges against the continuing Chinese dominance in this field. The success of rare-earth diversification will depend less on whether China’s competitors possess the necessary resources than on whether they can overcome their competing industrial ambitions. Breaking China’s rare earth chokepoint therefore requires its competitors to decide whether securing the supply chain together matters more than owning it individually. While initiatives like Pax Silica show that the problem is being recognized and attempts are attempted to resolve, there is a long way to go before such cooperation can translate into a partly sustainable alternative to China.