Overview

In April 2025, China introduced new export licensing requirements on certain rare earth elements, significantly impacting European companies across critical sectors – including defence. These developments are not just part of the ongoing U.S.-China trade conflict. They now also serve as a negotiation tool with the EU, catching many European stakeholders off guard. As nearly 90% of global rare earth refining capacity is located in China, and alternatives are limited and often inferior in cost and quality, affected companies face a challenging compliance and strategic landscape; one that is also beginning to impact M&A activity and asset valuations.

This Insight outlines which rare earths are covered by the new regulations, how European defence businesses are affected, what the new licensing regime entails, how M&A transactions are being disrupted, and how our team can support your business in navigating the new regulatory reality.

Rare Earth Elements Covered by the New Regulations

The new Chinese export control regulations target seven out of the seventeen rare earth elements – specifically samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium. These are mostly medium and heavy rare earths known for specialised uses in advanced technologies. The rules cover not only the pure elements but also their oxides, alloys, compounds, and mixtures.

All exports of these listed materials now require a license from the Chinese Ministry of Commerce (MOFCOM), obtained under China’s Export Control Law. Shipments lacking the proper license or documentation may be held up or denied at customs. Beijing’s rationale is that these particular rare earths have strategic importance and “dual-use” potential in sensitive industries (from defence systems to high-tech manufacturing). As a result, any company sourcing these materials from China must navigate the new restrictions or risk supply disruptions.

Importantly, the license application must be submitted by the Chinese exporter or supplier. However, Chinese suppliers rely heavily on the cooperation of their European customers to provide accurate and detailed information on end use and end user. Completing the licensing forms as precisely as possible is critical to avoid delays in processing.

Implications for Defence Companies

Rare earths are foundational to modern defence technologies. The materials targeted by the new Chinese export control regulations are essential for producing advanced weapons systems, guidance and radar technologies, secure communications, and electronic warfare capabilities. Consequently, the export controls could impact a wide range of defence sector actors, including:

Precision-Guided Munitions and Missiles

Elements like samarium, terbium, and dysprosium are used in the production of high-performance permanent magnets for guidance systems, actuators, and targeting systems. A disrupted supply threatens the development and maintenance of precision-guided weapons that rely on compact and heat-resistant magnetic components.

Military Aircraft, UAVs, and Naval Systems

Scandium and yttrium are critical in lightweight structural alloys used in aircraft and unmanned aerial systems. Dysprosium and terbium, meanwhile, are used in high-temperature magnets for jet engines and electric propulsion systems in naval vessels. A shortage could affect the availability and readiness of essential hardware platforms.

Advanced Radar, Sensor, and Communication Equipment

Gadolinium is vital in sonar systems and radar signal amplification due to its paramagnetic properties. Lutetium-based scintillators are used in next-generation radar and detection systems for both airborne and ground-based defence platforms. Restricted access to these materials may delay or degrade sensor development and battlefield integration capabilities.

The European defence sector is particularly exposed, as most of the downstream system integrators depend on globalised supply chains that often lead back to Chinese refining capacity. Substitutes are either economically prohibitive or technically inferior, which makes the dependency difficult to overcome in the short to medium term.

Impact on M&A Transactions: Valuation, Timing, and Deal Certainty

China’s rare earth export controls are disrupting M&A transactions in defence-related sectors. Ongoing and planned deals are being paused or delayed due to supply uncertainty, with buyers scrutinising rare earth exposure in due diligence. Valuations are becoming more conservative, and deal structures are adjusting to reflect contingent risks. Affected companies may also face claims for delivery delays—whether such claims can be rejected depends on force majeure provisions, making contract review essential.

Export Licensing Procedure: What European Companies Need to Know

All exports of the affected rare earths from China require a MOFCOM license—either individual or general. While the Chinese supplier formally submits the application, the European customer must provide critical end-use and technical documentation. Incomplete or inaccurate forms are a major cause of delay. Given the complexity and scrutiny of the process, expert guidance is essential to avoid disruptions.

Expected Processing Time

Licensing applications may take up to 45 working days, with longer timelines possible for sensitive or incomplete submissions. Although a “green channel” for EU-related exports has been discussed by MOFCOM, it remains conceptual — businesses should plan based on standard processing timelines.

How We Can Support You

Taylor Wessing provides integrated legal support across export control, M&A, and defence regulation—with teams in China and Europe. We help clients assess rare earth supply risk, prepare MOFCOM license documentation, manage regulatory strategy with local counsel, adjust deal structures, and mitigate liability under force majeure clauses. Whether you're procuring components or navigating a transaction, we ensure compliance and operational continuity.