China's Intensified Rare Earth Export Controls and Japan's Supply Chain Diversification Strategy: Geoeconomic Weaponization and South Korea's Strategic Response

Total Summary

Executive Summary

In 2025, China implemented rare earth export controls twice targeting Japanese companies and research institutions, effectively halting the supply of high-performance magnet materials such as dysprosium and terbium to Japan. This is assessed as a typical case of weaponizing economic interdependence as a geopolitical pressure tactic in response to Japan's security policy shift, including increased defense spending and the formalization of counterstrike capabilities. In response, Japan is pursuing a multifaceted supply chain diversification strategy, including launching rare earth recycling initiatives, investing in processing startups based in allied nations, and strengthening core mineral diplomacy with India and Australia. However, there are clear limitations to structurally replacing China's dependency in the short term. Given that the probability of a short-term diplomatic resolution of the Sino-Japanese conflict is only 20%, and the most realistic outlook with a 55% probability is a basic scenario of escalating supply chain fragmentation due to sustained structural tensions, South Korea needs to adopt a proactive approach, positioning itself not as a bystander but as a strategic beneficiary of this conflict. Specifically, South Korea should leverage its strategic ambiguity, maintaining economic ties with China while upholding its security alliance with the US and Japan, as a diplomatic asset. Furthermore, it should aim to become a hub for the core mineral network among allies, starting with the restart of the Yeongwol tungsten mine, and proactively secure technological sovereignty in advanced rare earth functional materials, where China is vulnerable, thereby transforming the structural changes in supply chains into an opportunity for enhanced national competitiveness.

I. Issue Situation Analysis

Analysis of the Issue Situation: China's Intensified Rare Earth Export Controls and Japan's Supply Chain Diversification Response

1. Background and Progression of the Issue

Rare Earth Elements (REEs) are critical materials for modern advanced industries and defense industries, including electric vehicle motors, advanced weapons guidance systems, and semiconductor manufacturing. China has maintained an absolute advantage in the supply chain by accounting for over 60% of global REE production. China's precedent of using REEs as a tool for diplomatic and economic pressure dates back to 2010. At that time, China effectively halted REE exports to Japan following the Senkaku (Diaoyu Islands) dispute, a decisive event that made Japan acutely aware of the strategic necessity of supply chain diversification. Since then, Japan has systematically invested in building supply relationships with Australia, securing processing capabilities in Vietnam, and developing domestic recycling and alternative magnet technologies, thereby strengthening its preparedness [10].

However, China's economic pressure intensified again around 2025. On February 24, 2025, China's Ministry of Commerce announced the first export control list targeting Japanese companies and research institutions [5]. On June 30 of the same year, a second measure was taken, adding 20 Japanese institutions, including the National Institute for Defense Studies, to the export control list and placing 20 companies, such as Mitsui E&S, on a watch list [3][7]. China officially stated that these measures were intended to curb Japan's military capability enhancement and were a legitimate response to deter Japan's so-called 'neo-militaristic actions' [5][11].

2. Current Situation (Latest Trends)

The current rare earth conflict between China and Japan is escalating beyond a mere trade dispute into an economic security confrontation. According to Japanese media reports, exports of dysprosium and terbium, essential for manufacturing high-performance magnets, have fallen to virtually zero (0) levels, and the supply of tungsten-related products has also been suspended [7][11]. This is directly impacting Japan's defense industry and advanced manufacturing sectors, revealing the fragility of its supply chain in reality.

In response, Japan is seeking multifaceted self-help measures. Firstly, Mitsubishi Electric launched Japan's first recycling initiative in June 2025 to extract rare earths from discarded air conditioners [1]. This process involves specialized companies handling each stage. Additionally, Phoenix Tailings, a US rare earth processing startup supported by Sumitomo Corporation's venture arm Presidio and Yamaha Motor Ventures, aims to operationalize its US production facility by 2028, leveraging Asia's manufacturing capabilities and raw material supply chains [2]. This is seen as a move to strengthen the core mineral network among allied nations.

On the diplomatic front, Japan is accelerating supply chain diversification. In early July 2025, Japanese Minister of State Sanae Takaichi officially visited India and signed agreements with Prime Minister Modi on energy security, artificial intelligence, and metal cooperation [9]. India, possessing significant rare earth reserves, is emerging as a strategic partner for Japan [7]. The deepening cooperation between the two countries is provoking concern in Beijing, as it could gradually weaken China's supply chain leverage [6]. Meanwhile, in South Korea, US-based Almonty Industries is restarting its tungsten mine in Yeongwol County after 32 years, aiming for exports to the US and Japan, signaling visible moves towards reorganizing the regional core mineral supply chain [4].

3. Key Actors and Their Positions/Interests

Chinadefines these export control measures as legitimate security actions to deter Japan's military buildup. China's Ministry of Commerce has clearly stated its policy of a complete ban on exports of dual-use items to Japanese military users and for military purposes [11]. The state-run media outlet Global Times disparaged Japan's recycling efforts as "unrealistic" and merely "an international laughingstock," arguing that this only proves that China's export controls are precisely targeting Japan's weak points [1][5]. However, China also has vulnerabilities. According to research published by the University of Science and Technology of China, key patents in the field of advanced rare earth functional materials are still dominated by Japan and the United States, confirming that while China holds an advantage in resource reserves and production capacity, it lags behind in cutting-edge technology fields [8].

Japanhas a clear strategic intention to reduce its dependency on China through supply chain diversification and technological innovation. Minister of State Takaichi has stated that there are "no problems" with the rare earth issue [5], but in reality, Japan is pursuing a multi-layered response including recycling, cooperation with allied nations, and investment in startups. Japan's interests are strategically highly significant as they are directly linked to securing autonomy in the defense industry supply chain, beyond mere material acquisition.

Indiais emerging as a key partner for Japan, leveraging its rare earth reserves and growing manufacturing capabilities [7][9]. The Modi government has an interest in fostering its own core mineral industry and enhancing its position in the global supply chain through cooperation with Japan. However, both India and Japan face the practical limitation of being unable to establish an industrial ecosystem that can immediately replace China in the short term [6].

South Koreais seeking to escape dependency on China by restarting the Yeongwol tungsten mine, while also keeping open possibilities for supply chain cooperation with the United States and Japan [4]. South Korea faces a complex situation, having high economic interdependence with China while simultaneously facing pressure from the US-led supply chain reorganization, requiring it to maintain strategic balance while maximizing economic security interests.

United Statesis not directly intervening as a primary actor but is leading the supply chain reorganization from behind the scenes by supporting the establishment of a core mineral network among allied nations through startups like Phoenix Tailings [2]. The investment by Almonty Industries in the South Korean tungsten mine can also be seen as an example of US capital driving regional supply chain diversification [4].

4. Summary of Key Issues

The key issues of this topic can be summarized into four main dimensions.

First, the issue of the possibility and effectiveness of the weaponization of rare earths. While China's export controls are indeed inflicting substantial damage on Japanese industries, China itself harbors structural vulnerabilities, such as its patent inferiority in advanced rare earth functional materials [8]. Weaponizing the supply chain may be effective in the short term, but it could paradoxically lead to the weakening of China's market dominance in the long run by strengthening the diversification motives of importing countries.

Second, the debate over the feasibility of Japan's response strategy. While China dismisses Japan's responses, including recycling, cooperation with India and Australia, and startup investments, as mere short-term palliative measures [1][5], there is also a counterargument that Japan possesses more systematic response capabilities than before, based on its diversification experience accumulated since 2010 [7][10]. The key question is whether these alternatives can be scaled up at a pace and volume that can substantially replace Chinese rare earths.

Third, the issue of the linkage between economic security and military security. China cites the deterrence of Japan's 'neo-militarism' as the justification for export controls [3][11], indicating that this conflict is not merely a trade dispute but a complex conflict intertwined with security discourse. This acts as a factor that further complicates the path to conflict resolution.

Fourth, the geopolitical implications of regional supply chain reorganization. The deepening Japan-India cooperation, the restart of South Korea's mine, and the expansion of US capital investment in the region are forming a trend of gradual reorganization of the China-centric supply chain order [4][6][9]. In this process, the positioning adopted by intermediate countries such as South Korea, India, and Australia is emerging as a key variable determining the future direction of the regional economic security order.

II. In-depth Issue Analysis

In-depth Analysis of the Issue: China's Intensified Rare Earth Export Controls and Japan's Supply Chain Diversification Response

1. Analysis of the Root Causes of the Issue

The root cause of the current China-Japan rare earth conflict lies not in a simple trade friction, but in the structural deepening of 'weaponized interdependence,' where China transforms economic interdependence into a strategic coercion tool [11]. China not only dominates over 60% of global rare earth production but also functions as a key actor in supply chain power, beyond a mere resource-possessing nation, by integrally controlling the entire supply chain from mining to refining and processing. Based on this structural advantage, China is utilizing rare earth export controls as a means to deter Japan's military buildup, with China's Ministry of Commerce explicitly formalizing this as a "measure to prevent the enhancement of Japan's military capabilities" [3][5].

The direct justification provided by China is its response to Japan's so-called 'neo-militaristic actions.' Japan's security policy shifts, including increasing defense spending to approximately 2% of GDP, formalizing the possession of counterstrike capabilities, and deepening military cooperation with the United States, serve as grounds for China to legitimize economic pressure [5][11]. China's Ministry of Commerce including the National Institute for Defense Studies in Japan on the export control list was a symbolic measure that highlighted this military-security linkage [7]. In essence, China is employing rare earth export controls not as a purely economic tool, but as a means of sending geopolitical signals to correct Japan's security policy direction.

Another root cause can be found in the aspect of preemptive response to China's own technological vulnerabilities. According to an analysis by researchers at the University of Science and Technology of China, while China holds an overwhelming advantage in rare earth resource reserves and production capacity, key patents in the field of advanced rare earth functional materials are still dominated by Japan and the United States [8]. This suggests a strategic intention by China to compensate for its technological inferiority by strengthening control over resource supply and to preemptively block the conversion of Japan's advanced material technologies into military applications.

2. Structural Context

Political Structure

The China-Japan rare earth conflict arises at the intersection of historical tensions in bilateral relations and current regional power competition. Japan has been pursuing a shift in its security policy consistently since the Abe Shinzo administration, and this trend continues under Prime Minister Sanae Takaichi. Immediately after taking office, Prime Minister Takaichi visited India and signed an agreement with Prime Minister Modi covering energy security, artificial intelligence, and core mineral cooperation [9], which is interpreted as a diplomatic response to China's supply chain pressure. China perceives these diversification efforts by Japan as actions that erode its strategic influence, creating a vicious cycle where intensified export controls are met with further diversification.

Another key element of the political structure is the role of the United States. Japan's supply chain diversification strategy for rare earths is unfolding based on its alliance network with the US. The plan by Phoenix Tailings, invested in by the Sumitomo group, to establish production facilities in the US utilizing Asian manufacturing capabilities [2] aligns with the supply chain reorganization strategy at the US-Japan alliance level, beyond mere corporate investment. China perceives this as part of the US-led encirclement strategy against China, which is acting as a political driver for intensified export controls.

Economic Structure

From an economic structure perspective, the core of this conflict is the asymmetry in supply chain dependency. Japan has historically relied on China for most of its heavy rare earths, essential for manufacturing high-performance magnets such as dysprosium and terbium. The current situation, where exports of these items to Japan have virtually ceased, is directly impacting Japan's defense industry and advanced manufacturing sectors [7][11]. This asymmetrical dependency structure grants China asymmetrical coercive power and empirically demonstrates that economic interdependence can become a source of vulnerability.

However, this structure also entails certain costs for China. The more China restricts rare earth exports, the stronger the incentive for diversifying countries, including Japan, to diversify their supply chains, potentially weakening China's market dominance in the long run. Alternative suppliers such as India and Australia are gradually expanding their supply capabilities [6], and the restart of South Korea's Yeongwol tungsten mine [4] symbolically represents the acceleration of this de-Sinicization of supply chains. The fact that Chinese analysts dismiss Japan's countermeasures as "unrealistic" [1][5] can paradoxically be interpreted as reflecting China's anxiety about these structural changes.

Security Structure

From a security perspective, the current conflict exemplifies the 'securitization of economy,' where economic security and traditional security are merging. China's explicit mention of Japan's military capability enhancement as a justification for export controls and its inclusion of defense-related institutions in the export control list have established a structure where economic tools are directly mobilized for security purposes [3][7]. This signifies the institutionalization of economic coercion, extending beyond mere trade regulation.

Conversely, Japan's response is also blurring the lines between economy and security. The Indo-Japanese Economic Security Initiative aims beyond mere supply chain diversification to build a trusted network [7], reflecting a structural shift where economic cooperation is increasingly taking on the character of a security alliance. However, the success of the Indo-Japanese Economic Security Partnership hinges not only on strategic convergence but also on tangible industrial capabilities in manufacturing, processing, refining, design, and scaling [7], making the gap in industrial capabilities between the two countries a structural constraint.

3. Comparison with Historical Precedents and Similar Cases

2010 China-Japan Rare Earth Dispute: A Precedent as a Prototype

The most direct historical precedent for understanding the current conflict is the de facto suspension of rare earth exports from China to Japan following the 2010 Senkaku Islands dispute [7]. At that time, China, without officially declaring an export ban, effectively blocked rare earth supplies through measures such as customs delays and intensified inspections, which severely impacted Japan's manufacturing sector. This incident left two important historical lessons. First, it demonstrated China's willingness and capability to employ economic coercion in response to traditional security issues like territorial disputes. Second, it prompted Japan to pursue a systematic supply chain diversification strategy, leading to a better-prepared response when China intensified export controls again in 2026 [7][10]. This serves as an example of how economic coercion can paradoxically strengthen the target country's resolve for self-reliance.

Comparison with China's Economic Coercion Against Australia

In 2020, when Australia demanded an independent investigation into the origins of COVID-19, China imposed import restrictions on Australian barley, wine, coal, and beef. This case illustrates that China's pattern of converting diplomatic grievances into economic retaliation is structurally identical to the rare earth controls imposed on Japan. However, what is noteworthy about the Australian case is that China's economic coercion prompted Australia to diversify its export markets and strengthen economic security cooperation with countries like the United States, Japan, and India. This aligns with the current trend of Japan deepening supply chain cooperation with India, Australia, and others [6][9], suggesting a recurring pattern where China's economic coercion inadvertently strengthens regional solidarity against it.

Structural Similarity with Russia's Weaponization of Energy

Russia's use of natural gas supplies to Europe as a tool of diplomatic pressure shares structural similarities with China's weaponization of rare earths. The key lesson from the Russia-Europe energy conflict is that while high supply dependency leads to significant short-term coercive effects, it ultimately accelerates the demand side's investment in energy transition and diversification, thereby weakening the supplier's leverage in the long run. China's weaponization of rare earths follows the same structural dynamics, and the current trend of countries like India, Australia, and South Korea pursuing alternative supply chains can be seen as a repetition of this pattern [4][6].

4. Key Variables in Issue Development

Variable 1: Speed and Effectiveness of Japan's Supply Chain Diversification

The most crucial variable in the development of this issue is the speed and substance with which Japan diversifies its supply chains. Currently, Japan's initiatives, such as recycling scrapped air conditioners, establishing processing facilities within the United States through Phoenix Tailings (targeting 2028) [2], and cooperating on supply chains with India and Australia [9], are largely deemed insufficient to replace China's dependency in the short term [1][5]. However, contrary to the underestimations by Chinese analysts, these diversification efforts, if accumulated, could gradually weaken China's leverage in the medium to long term [6]. Therefore, the speed and scale of diversification will act as the key variable determining the direction of the conflict.

Variable 2: Speed of India's Industrial Capability Development

India possesses significant rare earth reserves and has expressed strategic commitment to critical mineral cooperation [7][9], but its actual mining and processing capabilities remain in the early stages. The success of the Indo-Japanese Economic Security Partnership depends not only on strategic intent but also on how rapidly India's industrial ecosystem matures [7]. If India can quickly enhance its rare earth processing capacity, it could create cracks in China's supply monopoly; otherwise, Japan's vulnerability will persist.

Variable 3: Scope and Intensity of China's Export Controls

The extent to which China expands its export controls is also a key variable. Currently, China applies export controls primarily to military-related institutions and companies [3][7]. However, if these controls are extended to encompass civilian high-tech industries, the impact on the Japanese economy would be qualitatively different. Conversely, if China excessively expands export controls, it faces a dilemma where it must carefully calibrate the level of control, as it could accelerate the relocation of Japanese companies away from China's supply chains and weaken the market position of China's rare earth industry.

Variable 4: The Role of the United States and the Cohesion of the Alliance Network

The extent to which the United States actively supports Japan's supply chain diversification is also a crucial variable. The establishment of processing facilities in the U.S. by Phoenix Tailings [2] and the strengthening of critical mineral cooperation within the Quad framework are heavily dependent on U.S. strategic intent. As the U.S. institutionalizes supply chain cooperation with its allies and increases investment, China's economic coercion will be weakened. However, political uncertainties within the U.S. or fissures in alliance management could further exacerbate Japan's vulnerability.

Variable 5: China's Ability to Overcome Technological Gaps

Another important variable is how quickly China can catch up to the core patented technologies held by Japan and the United States in advanced rare earth processing and functional materials [8]. Currently, China holds a dominant position in raw material supply control but is at a disadvantage in high-value-added technology sectors. If China overcomes this technological gap, its control over the entire supply chain will be further strengthened, narrowing Japan's room for maneuver. Conversely, if the technological gap persists, Japan's technological superiority could provide a certain degree of negotiation leverage despite China's resource control [8].