G7 Export Control Multilateral Cooperation Restructuring Discussion: Geopolitical Risk Analysis and South Korea's Response Measures

Executive Summary

The G7 addressed the security of critical mineral supply chains as a key agenda item during its meeting in France; however, China's comparative advantage in the refining and processing stages is expected to remain largely unchanged over the next 3 to 5 years. This is due to the unresolved issues of capital outflow resulting from wage disparities and differences in environmental regulations, despite the United States and Europe injecting subsidies over the past five years. As seen in the case of the Canada-U.S. bilateral trade negotiations, there is a high likelihood that individual bilateral deals between allied countries will continue to significantly influence outcomes, separate from G7 multilateral cooperation. South Korea must respond by separating its symbolic participation as an expanded partner country in the G7 from securing practical benefits through bilateral channels with the United States, Japan, and Australia. At the same time, it is necessary to maintain the use of China's refining network for the time being while concurrently entering the U.S. security-linked supply chain, adopting a dual strategy that limits the scale of equity investments to a level that can absorb policy volatility.

I. Issue Situation Analysis

G7 Export Control Multilateral Cooperation Restructuring Discussion: Issue Situation Analysis

1. Background and Progress

The G7 held its annual meeting in France, addressing the security of critical mineral supply chains as a core agenda item. The background of the meeting includes China's export controls. In recent years, China has formed supply chain choke points through export controls on critical minerals and related technologies. This serves as a response to U.S. export controls and tariff measures against China. At the same time, it has been used as a means of pressure against Japan, particularly in response to Japan's statements regarding potential intervention in Taiwan and the so-called 'rearmament' and 'nuclear armament' controversies.

The roots of this dynamic can be traced back to the COVID-19 pandemic. Early in the pandemic, supply disruptions of masks and pharmaceuticals escalated into issues of dependency on China. Subsequently, the security focus expanded to include semiconductors, batteries, and rare earth elements. The United States opted to inject domestic production subsidies through the CHIPS Act and the Inflation Reduction Act. The logic was straightforward: to bolster production capacity within the West by countering the refining and processing stages dominated by China with subsidies.

However, there have been criticisms in academia regarding flaws in the design of this policy. Researchers at Columbia University's Center on Global Energy Policy diagnosed that public funds were injected without first identifying the binding constraints that deter private capital from entering. They pointed out that the structural limitations preventing capital from flowing to countries with lower wages and looser environmental regulations have not been resolved. This vulnerability has also been confirmed in Europe. Roland Berger analyzed that the European aerospace and defense sector faces strategic vulnerabilities due to its supply chain structure, which is concentrated on a few sources such as titanium and rare earth elements.

2. Current Situation

Japan is directly experiencing the repercussions of China's export controls. According to reports from Nikkei Asia, Japanese materials companies are depleting their stocks of dysprosium and yttrium, barely maintaining deliveries to major clients. Some items have seen an approximately 80% drop in import volumes compared to two years ago. This indicates that China's controls are translating into substantial impacts following the Japanese government's statements regarding Taiwan.

In the United States, there is also a growing skepticism regarding the effectiveness of its own export controls. A survey by the U.S.-China Business Council, cited by the South China Morning Post, indicates that delays in licensing, which can take several months, are resulting in billions of dollars in export losses for U.S. companies. The Council assessed that such regulations undermine U.S. competitiveness and technological leadership without contributing to national security protection. This suggests that discussions on strengthening export control cooperation at the G7 level may conflict with the interests of the U.S. industrial sector.

Meanwhile, Canada and the United States are addressing critical minerals and defense cooperation as trade negotiation agenda items through separate bilateral channels. According to multiple sources from Canada and the U.S., the progress in this area is expected to influence the content of the trade agreement that both countries aim to finalize next week. This indicates a parallel trend of individual bilateral deals between allied countries, separate from G7 multilateral discussions.

China is also taking parallel actions. China is sending scientists to Iran to conduct rare earth exploration and processing cooperation. The National Natural Science Foundation of China has included rare earths in its joint workshop programs with Iran. This is interpreted as China's response to the West's pressure to restructure supply chains by expanding alternative sources and cooperation networks.

3. Key Actors and Interests

Chinaleverages its overwhelming comparative advantage in the refining and processing stages. Its dominance in the refining stage, rather than the mining stage, actually creates choke points. It simultaneously utilizes export control measures as a means of retaliation against U.S. actions and as a tool to constrain Japan's security policies. At the same time, it is expanding resource cooperation with third countries such as Iran to establish alternative channels in preparation for Western constraints.

The United Stateshas shifted its policy focus from a subsidy-centric approach to more direct government intervention under the Trump administration's second term. The Department of Energy announced a $100 million PROSPECT program for workforce development in critical minerals by August 2026. The State Department gathered over 200 executives and investors from the mining industry in the same month to announce investments in critical minerals and battery projects worth $3 billion. However, the U.S. industrial sector is questioning the cost-effectiveness of its own export controls. In sectors linked to defense demand, such as defense and aerospace materials, there is a possibility that the principle of prioritizing domestic companies will be applied.

Japanis the frontline victim of China's controls. It faces immediate practical pressure due to the depletion of rare earth stocks. Given that Japan's statements regarding Taiwan have made it a target for China, it must seek a balance between the level of security policy statements and supply chain risks.

Australiais working to establish alternative sources. The Nolans project in the Northern Territory, which has a consistent system from mining to separation and refining, has been initiated. It aims to supply the United States, Europe, and Asia.

Europeis becoming aware of the structural vulnerabilities in its aerospace and defense supply chains. The fact that France hosted the G7 meeting can be seen as an attempt by Europe to secure leadership on this agenda. However, there are also assessments that the dominance of China's supply chains in the automotive industry is actually strengthening.

4. Key Issues

The first issue is the tension between multilateral cooperation and national prioritization. The G7 advocates for export control cooperation, but the United States tends to prioritize the protection of its own industry and defense-linked procurement. The second issue is the effectiveness of policies. There are ongoing criticisms that merely injecting subsidies does not resolve the structural disincentives for private capital to enter. The third issue is the timing of securing alternative sources. While new projects in countries like Australia will take considerable time to become operational, China's control measures have immediate effects. This time lag acts as a practical constraint on the supply chain restructuring strategies of G7 member states.

II. In-Depth Issue Analysis

G7 Export Control Multilateral Cooperation Restructuring Discussion: In-Depth Issue Analysis

1. Fundamental Cause Analysis

The fundamental cause of this issue can be summarized in the single fact of geographical concentration in the refining and processing stages. In the mining stage, sources are dispersed across Australia, Chile, and the DRC. However, in the refining and processing stages, China's comparative advantage is overwhelming. Despite the U.S. and Europe injecting subsidies over the past five years, this structure has not changed significantly. Researchers at Columbia University's Center on Global Energy Policy accurately pinpoint this issue. They noted, "Private capital has disappointed us. It has been drawn to the ultimate gravity point through labor arbitrage and arbitrage of negative externalities." This means that no matter how large government subsidies are, if they do not address the fundamental variables of wage and environmental regulation disparities, capital will ultimately return to China's refining network.

This structural disadvantage has combined with the political tool of export controls, transforming it into a security issue. China's export controls are not merely trade retaliation. They are a response to U.S. tariffs and export controls against China, while also serving as a punitive measure aimed at Japan's statements regarding Taiwan and the rearmament controversy. In other words, the choke points originated from economic comparative advantages, but the manner in which they are exercised is thoroughly subordinated to political objectives. This is the fundamental background against which the G7 seeks to respond through multilateral cooperation.

2. Structural Context

From an economic structure perspective, the West's supply chain restructuring policies are inherently positioned at the intersection of conflicting fiscal logic and market logic. The United States has injected subsidies into domestic production through the CHIPS Act and the Inflation Reduction Act. However, the Trump administration's second term shows a trend of shifting from a subsidy-based approach to more direct government intervention. The $100 million PROSPECT program announced by the Department of Energy in August 2026 exemplifies this. This indicates a shift from an approach that fills market failures with fiscal measures to one where the state directly acts as the designer and demander of industrial policy. EY's analysis supports this trend, diagnosing that the vulnerabilities exposed by the COVID-19 pandemic, combined with U.S.-China tensions, have moved industrial policy from the periphery of economic thought to the mainstream.

From a political structure perspective, the fact that G7 multilateral cooperation and the bilateral interests of individual member states do not necessarily align poses a challenge. Canada and the United States are addressing critical minerals and defense cooperation in bilateral trade negotiations separate from G7 discussions. According to multiple sources from Canada and the U.S., the progress in this area is expected to influence the content of the agreement that both countries aim to finalize next week. This suggests that the multilateral cooperation espoused by the G7 may actually be realized as a sum of individual bilateral deals among member states. The situation is similar within Europe. Roland Berger analyzed that the European aerospace and defense sector faces strategic vulnerabilities due to its reliance on a few sources such as titanium and rare earth elements. The Financial Times reported that China is strengthening its grip on the European automotive supply chain, indicating that Europe's industrial base is not free from dependence on China.

From a security structure perspective, the defense supply chain is identified as the most vulnerable link. The Diplomat pointed out that the manufacturing of advanced weapons by the U.S. military is impossible without composite materials that include rare earth elements. Most of the key components, such as magnets, sensors, radar, and laser systems, fall into this category. If the principle of prioritizing domestic companies operates in the defense materials supply chain, there is a real risk that even allied countries could be excluded from this sector. This foreshadows a tension between the G7's proclaimed 'fair burden-sharing among allies' and the 'domestic prioritization' demanded by U.S. domestic politics.

3. Historical Precedents and Comparative Cases

The current G7 discussions bear a strong resemblance to the rare earth crisis of 2011. At that time, China effectively halted rare earth exports in response to the territorial dispute with Japan over the Senkaku (Diaoyu) Islands. Similarly, China is now using export controls as a punitive measure against Japan's statements regarding Taiwan and the rearmament controversy. Unlike 15 years ago, however, this time the response is not limited to Japan but also includes a reaction to U.S. export controls and tariffs against China. In other words, the targets have diversified, and the intensity and persistence of the controls have increased.

Reports from Nikkei Asia support this. Japanese materials companies are depleting their stocks of dysprosium and yttrium, barely maintaining deliveries to major clients. Some items have seen an approximately 80% drop in import volumes compared to two years ago. This indicates that despite Japan's efforts to diversify its sources since the 2011 crisis, structural dependence has not been resolved even after 15 years. This serves as a case illustrating that supply chain restructuring involves a significant time lag between policy announcements and actual capability acquisition.

The early pandemic supply disruptions of masks and pharmaceuticals in 2020 also exhibited a similar pattern. At that time, the issue of dependency on China escalated into security concerns, expanding the focus to semiconductors, batteries, and rare earth elements. However, even five years after the security focus was established, China's comparative advantage in the refining and processing stages has not significantly shaken. This indicates a recurring pattern of a gap between the speed of policy discourse dissemination and the actual pace of industrial structural change.

The debate over the effectiveness of export controls in the United States is also not a new phenomenon historically. A survey by the U.S.-China Business Council, cited by the South China Morning Post, pointed out that delays in licensing, which can take several months, are resulting in billions of dollars in export losses for U.S. companies. The Council assessed that these regulations "undermine U.S. competitiveness and technological leadership without contributing to national security protection." There is a historical precedent during the Cold War when the Coordinating Committee for Multilateral Export Controls (COCOM) system saw the effectiveness of controls gradually weaken as targeted countries secured bypass routes. The current G7 discussions are similarly situated in a structural dilemma where multilateral control systems are eroded over time by bypass and evasion routes.

4. Key Variables in Issue Development

The first variable is the actual investment speed of private capital. The time lag between policy announcements and actual capital execution is the most direct factor determining the success or failure of this restructuring. The case of U.S.-China competition surrounding the DRC cobalt supply chain exemplifies this. The U.S. announced a $3 billion investment, but the actual execution speed of private capital has not met the announcement. If this time lag repeats across critical minerals, the multilateral cooperation measures agreed upon by the G7 may remain at the declarative level.

The second variable is the independent negotiating power of resource countries. The DRC government is pursuing a ban on the export of cobalt and copper ore while promoting the securing of domestic refining stages. This reflects the local actors' calculations to enhance their negotiating power through resource sovereignty rather than aligning with either the U.S. or China. Australia is also undertaking a project to establish a consistent system from mining to separation and refining in the Northern Territory. If resource-rich countries move beyond being mere suppliers to nationalize the processing stages, the very concept of supply chain restructuring centered on Western consumer countries may need to be readjusted.

The third variable is the diversification of China's response strategies. China is sending scientists to Iran to conduct rare earth exploration and processing cooperation. This is interpreted as a circumvention strategy where China expands its cooperation with target countries in response to the West's pressure for supply chain diversification. There are also predictions that the next stage of the 'China Plus One' strategy, including Vietnam, will become more complex. If China responds by transferring refining and processing technologies and personnel to third countries, the West's efforts to reduce dependence on China will encounter new forms of circumvention routes.

The fourth variable is the coherence of U.S. domestic politics and the interests of allied countries. If the principle of prioritizing domestic companies is strengthened in the defense and aerospace-linked materials sector, there is a real risk that allied companies could be excluded. At the same time, there are emerging cases where critical minerals and defense cooperation are being used as leverage in trade agreements, as seen in the Canada-U.S. context. How the multilateral framework of the G7 aligns with the bilateral negotiations of individual allied countries will serve as a measure of the practical binding force of this restructuring discussion.