According to a report by the Wall Street Journal, China is once again tightening its control over strategic raw materials, and in particular rare earths – despite previously announced easing in the trade dispute with the USA. According to the report, Beijing is preparing a new licensing system that will in principle facilitate exports of rare earth metals, but at the same time specifically restrict deliveries to companies close to the US military.
The core of the plans is a so-called “Validated End-User” (VEU) regime, which is intended to give preferential treatment to companies without ties to the US defense industry. Companies that are classified as non-critical customers could import rare earths and other sensitive materials more quickly and with fewer formalities. For customers with possible military use, however, the hurdles would remain high. With this, Beijing is apparently trying to master the political balancing act between trade relaxation and national security.
Rare Earths as Leverage in the Trade Conflict
China has dominated the market for rare earths for years – both in extraction and processing. This group of metals is crucial for a variety of modern technologies: from electric motors and wind turbines to smartphones and high-tech magnets in electric vehicles. At the same time, magnets made from rare earths are also used in military applications, such as in fighter jets, submarines and drone systems.
As early as April, Beijing had tightened export controls for rare earths and related products. Observers interpreted this step as part of the political negotiating strategy vis-à-vis Washington. The People’s Republic is using its high market share as leverage in the trade dispute, especially where the USA – for example in the processing of rare earth metals – is heavily dependent on Chinese supplies.
Against this background, China and the USA announced a kind of ceasefire in the trade conflict at the end of October and held out the prospect of easing certain export restrictions. Nevertheless, according to US data, exports of permanent magnets made from rare earths fell by 29% in September compared to the previous month – an indication that supply chains have not calmed down despite political signals.
New VEU System: Selective Opening for Rare Earths
The VEU regime now under discussion is intended to place control over rare earths and other strategic materials on a new footing. According to information from the Wall Street Journal, Beijing intends to adopt elements from a similar US system that has been in place since 2007.
In the USA, the VEU mechanism allows certain Chinese companies to import sensitive goods more easily without having to apply for a new export license for each individual delivery. In return, these companies must comply with requirements such as operational audits or documentation obligations.
The Chinese version is intended to function in mirror image: companies at home and abroad that are classified as “validated end users” would receive a kind of general permit to purchase rare earths and other controlled products from China. In return, they would have to accept requirements such as site inspections and transparency about the use of the materials.
In contrast to previous regulations, however, the new system would differentiate more strongly between end customers. Companies with connections to the US defense industry or other defense sectors could be expressly excluded from the simplified approval. For them, exports of rare earths and other sensitive goods would remain tied to stricter case-by-case decisions.
It is still open which companies will be specifically approved as VEUs and how long such status would last. According to the sources quoted, the details of the system are still being worked on and could change before it is actually introduced. China’s Ministry of Commerce has not yet commented on the report.
Consequences for the Automotive, Aviation and Defense Industries
The plans could have far-reaching effects on global rare earth supply chains – especially in Europe and the USA. Many companies in the automotive and aviation industries operate in both the civilian and military sectors. For example, they develop electric drives or lightweight components for passenger aircraft, but also supply defense customers.
If China were to strictly apply the VEU system, such mixed corporations could be subjected to extensive checks in the future when accessing rare earths from Chinese production, or in some cases fall completely through the meshes of the simplified approval. This would make procurement more complex and potentially more time-consuming for component manufacturers, suppliers and end producers.
The situation is particularly sensitive for the US defense industry. Modern weapon systems and communication platforms are heavily dependent on high-performance magnets and special alloys in which rare earths play a central role. In the past, US authorities had already warned of dependencies on critical minerals and launched initiatives to develop alternative sources of supply – for example through recycling, the diversification of imports and the development of their own processing capacities.
The possible introduction of a Chinese VEU regime could reinforce these efforts. At the same time, Western companies face the challenge of designing supply chains in such a way that they simultaneously meet export controls in China, US compliance requirements and their own requirements for transparency and sustainability.
However, the Canadian Ucore Rare Metals (WKN A2QJQ4/ TSXV UCU), which has a method for processing rare earth starting materials – superior to the usual Chinese methods – called RapidSX, foresaw this development years ago and consciously decided to establish itself as part of a Western supply chain for rare earths.
Ucore plans to commission an initial production line as early as the second half of 2026. Further production lines are then to be gradually put into operation in the plant in the US state of Louisiana, which is already being funded by the US Department of Defense with a total of more than USD 22 million. In addition, the company is receiving up to CAD 36.3 million from the Canadian government to produce exclusively the rare earths samarium (Sm) and gadolinium (Gd) in its plant in Kingston, Canada.
In any case, China’s planned move underscores that rare earths remain a geopolitical focal point. For the Chinese leadership, the new licensing system offers the opportunity to formally comply with the agreement to relax export controls without giving up an important instrument of strategic influence.
Through targeted differentiation according to end users, China can maintain the export flow of rare earths into civilian applications – such as in electric cars and consumer electronics – while at the same time making it more difficult for US-military-related institutions and companies to access them.
For Washington and its allies, the report is another signal that dependence on Chinese supplies of rare earths remains a permanent risk – even in phases of diplomatic relaxation. It remains to be seen whether the VEU system will ultimately be implemented in the form now being discussed. However, one thing is already clear: China’s role as the dominant supplier of rare earth metals continues to give Beijing considerable influence over central value chains in modern industry – from the green transformation to defense technology.
