Brussels – The European Union and its Member States must be vigilant and act swiftly to find solutions, as “Chinese export restrictions on rare earth elements (REE ed) would lead to
supply-driven output losses and higher inflation in importing economies.” This is the warning from the European Central Bank in a special thematic bulletin drafted to draw attention to the challenges the European competitiveness agenda faces. At stake are the digital transition and the White Paper on Defence. As the ECB points out, “the low
substitutability of REE-based inputs – most notably permanent magnets – combined
with China’s dominance over the REE supply chain creates vulnerabilities in
production networks, particularly in high-tech and security-sensitive industries.“
supply-driven output losses and higher inflation in importing economies such
as the United States and the euro area.” The eurozone, therefore, risks paying dearly for Beijing’s decisions, a foretaste of which the EU-27 already experienced at the end of last year, when China chose to stop selling what the EU desperately needs.
Rare earths are essential materials for the production of key components such as permanent magnets used in electric vehicles, renewable energy technologies, medical equipment, and defence systems. Ursula von der Leyen’s entire programme has been built around them since she took office as President of the European Commission. The Green Deal was the programme of her first term (2019–2024), while the defence agenda is the priority of the current European legislative term.
The EU finds itself caught in the middle of a Sino-American dispute from which it risks being crushed. As ECB experts point out, should China opt to impose restrictions on rare earth exports, “the US could retaliate by tightening export controls on semiconductors,” which are indispensable for the production of chips, microchips, and transistors – all essential components for the technology sector, which is used in virtually every industry, from healthcare and manufacturing to defence. While China dominates the upstream supply of rare earth elements in the high-tech value chain, the United States retains some influence downstream through restrictions on advanced chips and key manufacturing equipment, the ECB document continues. A trade clash between the two powers, therefore, risks spilling over into the EU and the euro area, with the European Central Bank reminding member states to diversify their sources and reduce the dependencies that threaten to leave Europe squeezed.
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