The EU is making efforts, as is the U.S., to diversify its rare earth supply away from China, but this is the work of many years.
The EU is trying to work out its response to the massive surge in imports of Chinese electric vehicles (EVs) and hybrids.
As discussed in the latest Capital Letter, Brussels imposed a tariff of up to 45 percent on EVs in 2024. That slowed the rate of increase at which Chinese EVs were coming into the EU. The 10 percent tariff on hybrids was left unchanged. The result, predictably enough, was that Chinese exporters switched their attention to hybrids. Imports of this category have soared, albeit from a low base. The EU would now like Beijing to agree to a “voluntary” 15 percent cap on China’s share of its hybrid market, down from about a third today.
Hybrids matter. In the EU in 2026 (up to August), “conventional” hybrids have led the new-car market with a 36.6 percent share, followed by traditional internal combustion engined cars (ICEVs) with 29 percent, and plug-in hybrids with 10 percent. “Pure” EVs have taken 21.7 percent.
As a reminder, conventional hybrids are usually divided into “full” and “mild.” The battery in a “mild” hybrid provides little support to the internal combustion engine but may be used in starting the car, assisting in regenerative braking, powering AC, and so on. With “full” hybrids, the battery does more, but typically only for a minimal range before gas takes over. With a plug-in hybrid, the battery-powered range is more than nominal, perhaps, depending on the age of the model, 30–60 miles (or maybe more with the newest) before gas has to take over, making them, some argue, a good car for urban driving. Most recently, EREVs (extended range EVs) have started to be sold in Europe. These are hybrids in which the internal combustion engine is used only to charge the battery. With gas and battery combined, these have a 500–700-mile range and look promising.
Hybrids have been an obvious way forward for those who favor electrification but believe that it should owe less to the methods and thinking of the command economy. One major difficulty, however, is that hybrids’ (greater or lesser) reliance on internal combustion engines offends climatists, who as cultists tend to be, are obsessed with absolute purity. Under the EU’s current law, the sale of new hybrids will be banned from January 1, 2035. The EU Commission has proposed easing this and other restrictions, but not by very much.
Meanwhile, fears of Beijing’s retaliation if the EU tries to stem the inflow of Chinese EVs are rising among German manufacturers.
German companies are rushing to stockpile critical raw materials, alarmed by the risk that Beijing could restrict rare earth exports if next month’s trade talks between the EU and China break down. . . .
China has already demonstrated the disruption it can cause. Export controls imposed on seven rare earth elements in April last year led to severe shortages, with European automakers forced to halt some production lines and factories in other industries cutting utilization rates.
The EU is looking at tariff hikes or quotas, perhaps akin to the “voluntary” export quotas that Japan agreed with U.S. in the 1980s in autos, steel, machine tools, and autos. There’s also a suggestion in the Politico report that another alternative might be for Brussels to convince Beijing to import more EU goods. That last has almost no chance of success. The lack of domestic demand is one reason for the export surge. Besides, as China has upgraded its industrial base, there’s less and less that it needs to import from the EU — or anywhere else. Indeed, that was what Beijing wanted to achieve.
Politico:
China’s biggest source of leverage is its dominance of the processing of “heavy” rare earths such as dysprosium and terbium, as well as of the production of high-performance permanent magnets crucial to the automotive industry, where EU dependence on China nears 100%, said Tobias Gehrke, a senior fellow at the European Council on Foreign Relations.
“Last year’s restrictions showed how quickly this can become an industrial crisis, when production slowdowns and shortages emerged within weeks,”
In a recent report on rare earths, the International Energy Agency noted:
If these rare earth export controls were implemented in full, the economic value of downstream production at risk would reach USD 6.5 trillion per year for countries outside China. The United States and Europe face the greatest exposure with potential direct economic losses estimated at over USD 1.5 trillion each. The automotive sector is set to face the single greatest impact with over USD 3 trillion in potential direct losses outside China, followed by electronics and other transport (aviation, trucks and trains) sectors. Additional vulnerable sectors include defence and data centres. The impacts of a disruption extend far beyond the loss of direct product sales, given the wide range of high-value services that depend on rare earth-enabled products.
It is, of course, highly unlikely that China would fully cut off the supply of its rare earths to the EU, at least for any length of time. Triggering an economic crisis within such a good customer would be bad for business and would be inconsistent with a geopolitical strategy in which a patient creation of dependency has played such a part.
Meanwhile the EU is making efforts (as is the U.S.) to diversify its rare earth supply away from China (something of which Beijing is well aware), but this is the work of many years, and the next meeting between the EU and China is this month.