Supply crunch: Rare earths in China impact global economy

China's rare earth export restrictions are disrupting global supply chains, affecting key sectors such as automotive and technology in Asia.

Global supply chains are facing increasing pressure in the wake of China's new export restrictions on rare earth magnets, directly impacting key industries such as automotive, electronics, and semiconductors across Asia and beyond.

The global economy is feeling the impact of a strategic decision by China: the implementation of new export rules requiring government permits for all shipments of rare earth magnets. China, which controls nearly 90% of the world's processing of these critical minerals, is using its dominant position to influence global supply chains. This measure, which is being interpreted as a response to rising trade tensions and tariffs imposed by the United States, is causing significant disruptions affecting the European Union, the United States, Japan, and India.

This action is not simply a trade measure; it is a clear geopolitical strategy to exert pressure on economic rivals. By controlling an indispensable resource for high-tech industries, China is weaponizing its dominance in the supply chain, demonstrating an evolution of the trade war into a competition for control of strategic resources. This forces dependent nations to seek to diversify their supply sources, a long and costly process that, in the short term, translates into higher costs and potential production delays, directly affecting consumer prices and the adoption of new technologies.

Several industrial sectors are experiencing the consequences of these restrictions:

Automotive: The automotive industry is one of the hardest hit. Manufacturers such as Bajaj Auto have warned that delays in obtaining magnets from China could "seriously impact" electric vehicle production starting in July. Bosch and BMW have also reported disruptions to their supplier networks. Indian companies, for example, are importing complete engine assemblies from China to circumvent bureaucracy, which increases costs and could delay the country's electric vehicle goals.

Electronics and Semiconductors: Elements such as neodymium and dysprosium, vital for the production of smartphones, laptops, and high-performance chips, are in short supply. Industry analysts anticipate cost pressures and possible production delays in these sectors.

Telecommunications, Batteries, Industrial Machinery, and Defense: These sectors are also facing supply chain disruptions. Since April 4, no Indian company has received import authorization for rare earth magnets from China, leaving Indian manufacturers in a bureaucratic bind, even for low-end magnets.

In response, Indian ministers are considering sending a delegation to Beijing to seek clarity on the new permitting system and resolve disruptions to rare earth imports.

Despite growing tensions in supply chains and the trade war, Asian stock markets performed mixed, suggesting differentiated economic resilience across the region. This mixed performance indicates that investors are shifting their bets within Asia, seeking refuge in economies with strong domestic fundamentals or proactive policies.

South Korea's Kospi and India's Sensex posted significant gains, driven in India by a rate cut by the Reserve Bank of India, which sought to stimulate demand. On the other hand, Hong Kong's Hang Seng and Australia's S&P/ASX 200 experienced slight declines. Hong Kong, more exposed to the China-US dynamic, and Australia, which is linked to commodities, are more sensitive to global uncertainty. For companies, this underscores the importance of understanding the specific economic dynamics of each Asian country, rather than treating the region as a homogeneous bloc, when making investment and expansion decisions.