Chinese companies that manufacture powerful rare-earth magnets are developing innovative and legal strategies to bypass their own government's stringent export controls. Their goal is to maintain the flow of these critical components to Western buyers, from carmakers to defence contractors, without violating Beijing's regulations.
Navigating the New Export-Licensing Regime
Earlier this year, in April, Chinese authorities established a new export-licensing regime for rare earths. This move, seen as a response to trade tensions with the Trump administration, effectively choked off the supply of these vital materials. Rare earths are essential for manufacturing a vast array of products, including electric vehicles, wind turbines, consumer electronics, and advanced military hardware like jet fighters.
While an October deal between President Donald Trump and Chinese leader Xi Jinping led to a temporary postponement of some restrictions, Western businesses remain anxious about long-term supply security. This uncertainty has spurred Chinese magnet producers to find workarounds to keep their international customers supplied.
The Technical Workaround: Reformulating Magnets
One primary strategy involves significant technical innovation. The export rules introduced in April specifically target magnets containing even trace amounts of certain "heavy" rare-earth elements, namely dysprosium and terbium. These elements are crucial for allowing magnets to function reliably at high temperatures, such as those found in car engines and industrial machinery.
Obtaining an export license for such magnets can take weeks or months, with no guarantee of approval. In response, Chinese companies have launched a concerted effort to develop high-performance magnets that do not require these restricted materials.
Firms like Yonjumag, Anhui Hanhai New Material, Zhaobao Magnet, and X-Mag are at the forefront of this push. They are achieving heat resistance through alternative methods, such as grinding the magnet material to an extremely fine powder—a process that requires specialised machinery and increases costs. X-Mag has publicly shared charts detailing its progress, stating in an October social media post that developing these alternative magnet grades "has become increasingly critical" as global supply chains tighten.
The Assembly Workaround: Embedding Magnets in Final Products
Another clever tactic exploits a regulatory gap. While the export of standalone rare-earth magnets is restricted, the finished products that incorporate them—such as motors—are not. Consequently, Chinese companies are increasingly collaborating with local parts manufacturers. They now ship complete motors or other assemblies with the magnets already embedded inside, thus circumventing the direct magnet export controls.
Despite these creative solutions, companies are treading carefully due to the high political sensitivity surrounding rare earths. Beijing has recently announced crackdowns on the smuggling of critical minerals. Many magnet makers have even appointed compliance officers to ensure their novel export methods remain within legal boundaries.
A Cat-and-Mouse Game with Regulators
The situation has evolved into a technological and regulatory cat-and-mouse game. Earlier, after the April rules were announced, some manufacturers began substituting the restricted terbium and dysprosium with another rare-earth element, holmium. However, Chinese regulators moved swiftly to close this loophole, adding holmium to the restricted list in October. The subsequent US-China deal did provide a temporary reprieve, delaying the enforcement of holmium controls by one year.
Traders and industry insiders warn that these workarounds are only short-term fixes. They caution that Beijing could leverage its dominant position in the rare-earth market again for geopolitical advantage, potentially imposing even stricter controls. This persistent threat is motivating Western buyers to actively seek alternative rare-earth sources outside China.
As one Chinese magnet company employee recounted, a foreign buyer delivered a stark message: "When those sources are mature and viable, we’re done with you." This sentiment underscores the fragile nature of the current supply chain and the high-stakes battle over the materials that power modern technology.
