China’s New Rare Earth and Magnet Restrictions Threaten U.S. Defense Supply Chains

China has significantly escalated its control over rare earth and permanent magnet exports with Announcement No. 61 of 2025, implementing the strictest measures to date, including the first-time application of the foreign direct product rule. This mandates Chinese government approval for exports of magnets containing Chinese rare earths or produced with Chinese technology, even if foreign-made, and explicitly denies licenses for foreign military use starting December 2025. Given China's near-monopoly in rare earth mining and processing, this move severely threatens U.S. defense supply chains and advanced semiconductor production, deepening vulnerabilities despite ongoing U.S. efforts to onshore rare earth processing and magnet manufacturing, and is viewed as a strategic geopolitical and economic leverage play.

Analysis

China has significantly escalated rare earth and permanent magnet export controls with Announcement No. 61 of 2025, implementing the strictest measures to date. This introduces the foreign direct product rule (FDPR) to rare earths, mandating Chinese government approval for foreign-made magnets using even trace Chinese materials or technology. This leverages China's near-monopoly, controlling over 70% of global rare earth mining and 90% of processing.

Effective December 1, 2025, new rules deny export licenses for rare earths used by foreign militaries, including the U.S., and subject advanced semiconductor materials to discretionary review. This directly threatens U.S. defense supply chains for critical systems like F-35s and Tomahawk missiles, exacerbating existing vulnerabilities. The policy also aims to prevent the outflow of Chinese rare earth expertise.

The U.S. is bolstering domestic capabilities via Noveon Magnetics' partnership with Lynas Rare Earths and significant Department of Defense investments in MP Materials. The DoD's $400 million equity stake makes it MP Materials' largest shareholder, supported by a 10-year price floor and a $150 million loan for expansion. MP Materials (MP, sentiment 0.9) plans a second magnet facility with a 10-year DoD offtake. However, domestic ramp-up will take time, leaving China with short-term leverage.

Key Decisions for Investors

• Investors should evaluate portfolio companies' direct and indirect exposure to Chinese rare earths and permanent magnets, especially those in defense and advanced technology, given the new export restrictions and potential supply chain disruptions.
• Consider long-term positions in domestic rare earth producers like MP Materials (MP), which benefits from significant Department of Defense investment, a guaranteed price floor, and long-term offtake agreements, signaling strong government support for U.S. supply chain resilience.
• Closely monitor U.S.-China geopolitical developments and trade negotiations, as the current restrictions are partly a negotiation tactic, and any policy shifts could significantly impact rare earth market dynamics and related industries.