China loosens rare earth limits to support auto sector

China has extended what many in the West are calling an economic olive branch, announcing a significant shift in its rare earth export policy aimed at easing mounting pressure on U.S. and European auto manufacturers.

Over the weekend, China’s Ministry of Commerce confirmed plans to establish a “green channel” for rare earth export licenses, expediting approvals for eligible applications from European Union firms. The move follows weeks of growing concern from global automakers over production risks tied to China’s rare earth export restrictions introduced in April.

China imposed curbs on several rare earth elements and magnetic components widely used in the automotive, defense, and clean energy sectors, as part of its response to increased U.S. tariffs on Chinese goods under the Trump administration. The restrictions quickly choked international supply chains, with inventories dwindling and manufacturers raising alarms over potential factory shutdowns.

The latest development emerged after high-level trade discussions last week in Paris between China’s Commerce Minister Wang Wentao and EU Trade Commissioner Maroš Šefčovič. In a statement, the Chinese ministry said it hoped the European Union would take reciprocal steps to encourage the compliant trade of high-tech products with China.

Germany’s automotive sector welcomed the announcement cautiously. Maximilian Butek, executive director and board member of the German Chamber of Commerce in China, said the move is certainly good news for European industry but emphasized that implementation will be the real test.

“This is a complex system, and while the promise is positive, it remains unclear how quickly or broadly the green channel will be applied—whether it’s for large-scale firms or the wider sector,” he noted.

Volkswagen, which experienced a global sales slump last year but posted a rebound in 2024 at its Wolfsburg plant, and other automakers like Stellantis, Renault, and Volvo are among those watching the situation closely. Many are already adjusting production timelines and exploring alternative supply chains amid the ongoing uncertainty.

The European Automobile Manufacturers’ Association (ACEA) warned that some member companies were just weeks away from forced production stoppages. According to ACEA’s international trade director, Jonathan O’Riordan, global stocks of rare earth magnets have been depleting since the Chinese restrictions took effect, with no viable short-term alternative supply.

In a parallel development, China has reportedly granted rare earth export licenses to suppliers serving U.S. automakers including General Motors, Ford, and Stellantis. Though China’s Ministry of Commerce declined to confirm these reports directly, the move is being interpreted as a cautious diplomatic signal amidst broader trade tensions.

The ripple effect of China’s rare earth policy has already been felt. The European Association of Automotive Suppliers recently reported that several manufacturing plants and supplier lines have shut down due to material shortages. Japanese automaker Suzuki Motor has also suspended production of its Swift model, citing rare earth constraints, according to Reuters.

Analysts warn the situation resembles the global semiconductor shortage that crippled the automotive industry during the COVID-19 pandemic. With demand for rare earths and critical minerals expected to soar due to the accelerating transition to electric vehicles and clean energy technologies, China’s dominant position—accounting for 60% of global rare earth output—remains a strategic challenge.

While the green channel offers a short-term lifeline to Western automakers, experts like Butek caution that Europe must now fast-track its efforts to diversify supply chains and reduce dependency on China for critical materials.

“This is a diplomatic pause, not a resolution. The auto industry needs certainty, not just gestures,” Butek said.