Europe’s Pursuit of Industrial Independence
In April 2025, China imposed export controls on seven rare earth elements, causing shipments of permanent magnets to fall sharply and forcing some European car manufacturers to pause production. The disruption came as Europe was already attempting to reduce the strategic dependencies created by increasingly concentrated global supply chains. Its Economic Security Strategy captures the difficulty of this: reducing exposure to economic coercion while preserving the openness from which European firms benefit themselves. The question is not whether Europe should become more independent, but what independence can realistically mean in an economy built on international production and cooperation.
The problem is illustrated by the automotive industry. The EU has imposed tariffs on subsidised Chinese electric vehicles while supporting European battery and semiconductor production, partly to preserve industries considered strategically important. Yet all rare earths used in permanent magnets in the EU are currently refined in China. A European EV can therefore contain more European value and support more European employment without becoming significantly less vulnerable to disruptions elsewhere. Increasing domestic production and reducing external dependence are related objectives, but they are not necessarily the same one.
Europe’s most valuable industries are also not necessarily where its greatest vulnerabilities lie. Permanent magnets account for only a small fraction of the value of an electric vehicle yet a lack of them can stop production entirely. More than 80% of large European firms are within three supplier links of a Chinese rare-earth producer, despite relatively few buying from one directly. The significance of a dependency therefore depends less on its share of a product’s value than on how easily that input can be replaced.
Reducing these dependencies is more difficult than simply expanding European manufacturing. China’s advantage in rare earths extends beyond access to deposits: decades of investment have created processing and refining capacity that is costly, technically difficult and environmentally damaging to replicate. Europe has benefited from importing these materials while many of the environmental costs associated with processing them have been borne elsewhere. Expanding European processing would reduce one form of dependence, but reintroduce costs that outsourcing had previously allowed Europe to avoid. This is also why independence does not need to mean self-sufficiency. Additional refining capacity in Australia or Japan could reduce European exposure to China without being located in Europe. This is already reflected in the Critical Raw Materials Act, which combines targets for greater EU capacity with a requirement that no single third country provide more than 65% of any strategic raw material at a relevant processing stage. The objective is not complete European ownership, but credible alternatives. For inputs that are difficult to substitute, even a more expensive second supplier can be valuable because it reduces the economic cost of losing the first.
This distinction however becomes blurred when economic security is combined with industrial competitiveness. Tariffs on Chinese EVs may help preserve European employment, expertise and manufacturing capacity where Chinese subsidies distort competition, but protecting European carmakers does not necessarily secure the supply chains on which they depend. Conversely, supporting rare-earth processing elsewhere could improve European resilience without creating European manufacturing jobs. Treating both as measures of industrial independence risks favouring politically visible industries over less visible dependencies with greater capacity to disrupt production.
China also faces a limit to how far this dependence can be exploited. Its leverage depends partly on alternatives remaining too expensive to justify; restricting supply changes that. Following China’s rare-earth restrictions in 2010, Japan supported alternative suppliers, recycling and technologies requiring fewer rare earths. The IEA estimates that Japanese rare-earth demand is now around 30% below its 2010 level. Export controls can therefore weaken the conditions that make them effective.
Europe’s pursuit of industrial independence consequently combines three objectives that should be distinguished: retaining domestic production, maintaining competitive European firms and limiting foreign leverage over critical supply chains. They can reinforce one another, but they do not always require the same policies. In some cases, financing an alternative supplier abroad may do more for Europe’s independence than subsidising additional production within Europe.
By Navika Mehta
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52023JC0020
https://ec.europa.eu/commission/presscorner/api/files/document/print/en/ip_24_5589/IP_24_5589_EN.pdf
https://www.bbc.co.uk/news/articles/cm2zp6m4gy7o
https://eur-lex.europa.eu/eli/reg/2024/1252/oj
https://www.iea.org/reports/rare-earth-elements/executive-summary
