Export Licenses More Fearsome Than Tariffs… The Materials War Cutting Across EVs, Defense, Semiconductors, and Renewable Energy
Executive Summary
The greatest risk to global supply chains in 2026 is not tariffs, but materials. Following its sweeping reinforcement of rare earth export controls in October 2025, China put dual-use item controls into actual operation against Japan in 2026, demonstrating the execution capability of the "weaponization of resources." Although many core measures remain suspended until November 10, 2026, as a result of the U.S.-China summit agreement, a suspension is not a cancellation. Rare earth prices have continued their upward surge since the beginning of the year, and industry analyses indicate that medium and heavy rare earths procured outside of China carry a premium reaching 4 to 6 times the domestic price within China. KBR analyzes that this bottleneck—connecting electric vehicles, the defense industry, semiconductors, and renewable energy—is highly likely to pressure the cost structures of global manufacturing into the second half of the year.
Background: How the "Rare Earth Card" Became Institutionalized
On October 9, 2025, China's Ministry of Commerce comprehensively expanded rare earth export controls through a series of announcements. The scope of rare earths subject to export controls increased from 7 to 12 types, with the extraterritorial application clause drawing particular attention. This clause mandates that products produced overseas using Chinese rare earth content exceeding 0.1% of the product value, or utilizing Chinese mining, smelting, and separation technologies, must also obtain approval from the Chinese government when exported to third countries. This is evaluated as the first instance of China adopting a method similar to the Foreign Direct Product Rule (FDPR), which the United States has utilized in semiconductor regulations against China.
Around the same time, China broadened the scope of its controls to the battery supply chain. Measures announced in October 2025 included lithium-ion battery cells and packs with a gravimetric energy density of 300 Wh/kg or higher, lithium iron phosphate (LFP) cathode materials, ternary precursors, synthetic graphite anode materials, and related manufacturing equipment and technologies. However, following the U.S.-China summit in late October 2025, China's Ministry of Commerce announced in a November 7 notice that the enforcement of many of these new measures would be suspended for one year until November 10, 2026. Nevertheless, existing systems—such as the export licensing system for battery-grade graphite implemented in December 2023 and the controls on gallium and germanium implemented in August 2023—remain fully active. In effect, the framework of the controls is maintained even during the suspension period. This suggests that China is holding the valve in its hands, capable of tightening it at any moment, and adjusting the degree of opening and closing depending on the negotiation phase.
Case 1: Japan Experiences "Actual Combat Without Suspensions"
The suspensions were not applied to all countries. Following Japanese Prime Minister Sanae Takaichi's remarks regarding "intervention in the event of a Taiwan contingency," China announced export controls on dual-use items targeting Japan on January 6, 2026, and implemented them immediately. On February 24, it placed 20 Japanese companies and institutions, including those affiliated with Mitsubishi and Kawasaki, on its export control list. The results are confirmed by statistics. According to an analysis of trade statistics from China's General Administration of Customs by the Nikkei Shimbun, China's rare earth exports to Japan fell by 88% and 82% year-on-year in March and April 2026, respectively, while combined exports of the 7 regulated categories dropped by 34% from January to April compared to the same period last year. In particular, exports of dysprosium and terbium—which are essential for the heat resistance performance of EV motors—were reported to have dropped to virtually "zero" to Japan since January 2026.
Estimated damages vary widely depending on institutions and underlying assumptions. Industrial linkage analyses by organizations such as the Nomura Research Institute reportedly project an economic loss of approximately 2.6 trillion yen if rare earth imports are halted for a year, while the Daiwa Institute of Research has mentioned potential industrial damages reaching up to 7 trillion yen under a scenario where controls persist for a year. Although the range of figures is broad, there is no disagreement on the directional outcome of trillions of yen in losses. The Japanese case illustrates two key points. First, China's export controls are not diplomatic bluffs for negotiation, but genuinely enforceable weapons. Second, the targets of control can shift from the United States to specific countries at any time. For South Korea, which relies on China for more than half of its critical minerals, this is a matter that cannot be viewed as someone else's problem.
Case 2: MP Materials and Lynas—The First Milestones of a Non-China Supply Chain
On the other side of the bottleneck, the establishment of alternative supply chains is gaining momentum. In July 2025, U.S.-based MP Materials formed a partnership with the U.S. Department of Defense guaranteeing a price floor of $110 per kilogram for neodymium-praseodymium (NdPr) and completely halted its sales to China. In early 2026, the company reportedly achieved the milestone of operating the first commercial-scale permanent magnet plant in the United States in over two decades. Its FY2025 production of NdPr oxide reportedly doubled year-on-year to approximately 2,600 tons, and backed by prepayments from Apple, it is also pushing forward with expanding magnet production capacity and breaking ground on a second plant in Texas.
Australia's Lynas successfully shipped its first contracted lot of separated dysprosium and terbium early this year. This is evaluated as practically the first time that commercial-scale separation and supply of heavy rare earths has taken place outside of China. Lynas is also known to have signed a downstream cooperation memorandum of understanding with South Korean magnet manufacturer JSLink. However, the scale of these Western supply chains is still far too small to fill the void left by China. According to the International Energy Agency (IEA), as of 2024, China accounted for approximately 61% of global rare earth mining and about 91% of refining and processing. Industry estimates even suggest that for the refining of heavy rare earths such as dysprosium and terbium, China's share reaches 98% to 99%.
Analysis: Price Bifurcation and Industrial Impact
The most prominent result of the export controls is the "bifurcation" of prices. According to industry analyses citing data compiled by Shanghai Metals Market (SMM), NdPr prices in China's domestic market surged past approximately $126 per kilogram in early April 2026, more than doubling from the beginning of the year. Market data aggregators also reported that neodymium prices in early July recorded an 80% surge compared to the same period last year. Materials procured outside of China incur an additional premium on top of this. Sprott Asset Management and other entities analyzed that rare earths processed outside of China are traded in some cases at 4 to 6 times the domestic prices inside China. Effectively, "two markets" have formed where the same element is traded at entirely different prices depending on geopolitical boundaries. There is a prevailing outlook that this premium will not be resolved in the short term, given that it represents a cost for supply assurance rather than a mere supply-demand distortion.
The industrial impact is extensive. In the electric vehicle sector, permanent magnets used in drive motors take a direct hit. According to industry outlooks, global EV sales in 2026 are expected to comfortably exceed 20 million units, with analyses indicating that the share of electrification in magnet demand will surpass 50% within the next decade. The defense industry is vulnerable because, although volumes are small, alternatives do not exist. Dysprosium and terbium specifications used in fighter jet actuators and precision-guided weapons cannot be replaced with light rare earths, leading Western defense procurement authorities to officially cite them as supply chain vulnerabilities. Semiconductors fall within the sphere of influence of gallium and germanium controls. Germanium prices have shown structural consolidation at higher levels since the introduction of controls in 2023, with compilations indicating that prices surpassed the $2,000 per kilogram mark in 2026. Actual damage cases have also emerged. According to analysis by a Japanese private research institute, Japan's imports of yttrium oxide used in semiconductor processes plummeted to their lowest level since 2008 as import volumes from China plunged this year, while import unit prices surged. In the renewable energy sector, market research firm Adamas Intelligence estimates that direct-drive offshore wind turbines require approximately 600 kg of neodymium magnets per megawatt, fueling analyses that this could act as a cost-increasing factor for wind power generation.
Battery Materials: Graphite Controls and South Korea's "Time-Limited Suspension"
The most direct variable for South Korean industry is battery materials. Dependence on China for graphite, the raw material for anode materials, is absolute. According to Ministry of Trade, Industry and Energy data submitted to the National Assembly, in 2024, more than 97% of natural graphite and the mid-to-upper 90% range of synthetic graphite for secondary battery anodes were Chinese-made. According to market research firm SNE Research, the market share of Chinese companies in anode materials loaded into global EVs in the first quarter of 2026 reached 94.8%, while South Korea accounted for a mere 2.4%.
Two deadlines overlap here. One is China. New export controls on lithium-ion batteries, cathode materials, and synthetic graphite anodes are merely suspended until November 10, 2026, leaving the constant possibility of reactivation. The other is the United States. The U.S. Department of Treasury temporarily suspended the application of Foreign Entity of Concern (FEOC) regulations to graphite until the end of 2026, which simultaneously means the South Korean battery industry must build the framework of non-Chinese alternative supply chains within this year. In essence, a "sandwich" structure trapped between China's controls and America's demands for exclusion is solidifying on a time-limited basis.
The South Korean government has also stepped up to respond. On February 5, 2026, the Ministry of Trade, Industry and Energy announced the "Comprehensive Rare Earth Supply Chain Measures" as the first policy of its Industrial Security Office. The initiatives include designating all 17 rare earths as critical minerals, expanding the stockpiling period from 6 months to 1 year, increasing the overseas resource development loan budget by 67.5 billion won, and establishing a supply chain fund worth 250 billion won. While the direction is correct, the prevailing assessment is that it will be difficult to resolve the 2026 bottleneck itself, considering that developing mines and building refining facilities takes several years.
Outlook: November 10 and Beyond
Future checkpoints are clear. First is China's choice around November 10, 2026. Whether it is an extension of the suspension, conditional reactivation, or full implementation, it will immediately be reflected in global material prices and inventory strategies. The industry is keeping a close eye on the possibility that China's export control review around November may impose additional licensing requirements for heavy rare earths. Second is the trajectory of the Sino-Japanese conflict. If Japan retaliates with semiconductor materials such as photoresists, the entire East Asian supply chain intertwined among South Korea, China, and Japan could be shaken. Third is the expansion speed of Western alternative supply chains. Whether MP Materials' heavy rare earth separation facilities and Lynas's capacity expansions proceed as scheduled will be the key to reducing premiums.
What enterprises need is not crisis discourse, but practical inspections. Tasks for the second half of the year include: conducting component and process due diligence to determine whether their products contain 0.1% or more of Chinese rare earths or if Chinese technology is used in the processes; securing inventory buffers ahead of the expiration of suspensions; re-examining supply disruption clauses in contracts; and early initiation of certification and qualification tests for non-China supply lines. Rare earths are a quiet weapon. There are no gunshots, but they are the first to dismantle the cost structures and delivery schedules of unprepared companies.