China bans export of Korean goods containing its rare earth metals to US

The Chinese government has warned South Korean companies of retributions for exporting any product containing its critical metals to US military contractors, a move expected to take a toll on the export-reliant Korean economy.

According to sources in the Korean transformer industry on Tuesday, at least two of its transformer manufacturers have received official notices from the Chinese government, demanding they cease exports of any power equipment containing Chinese-origin heavy rare earth metals to US military contractors or the US military.

The letter, which also warns that violations may trigger sanctions or other regulatory action, did not specify the nature of potential penalties.

However, the companies fear Beijing could completely block sales of the metals altogether.

This marks the first time that China has formally taken export control measures on non-US companies with ties to the world’s No. 1 economy, and Korea has become the first target.  

If China continues targeting Korean firms with such export control measures, the fallout could significantly disrupt the growth of Asia’s fourth-largest economy, which is heavily reliant on exports, particularly in advanced manufacturing sectors such as semiconductors, batteries and electric vehicles.

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The letter comes on the heels of a broader retaliation by Beijing after Washington imposed sweeping tariffs on Chinese goods.

Earlier this month, China issued an order to allow the export of six heavy rare earth metals and rare earth magnets from the country only with special export licenses.

Considering that it takes about 45 days to obtain such licenses, it is an effective ban on the export of such precious minerals.

In direct retaliation against the US tariffs, the Chinese government has also barred Chinese companies from dealing with 27 US military contractors.

The so-called heavy rare earth metals are used in magnets, essential for assembling everything from cars and drones to robots and missiles.

The metals are also vital in manufacturing jet engines, lasers, car headlights and the computer chips that power artificial intelligence servers and smartphones.

But those six critical minerals are refined entirely in China, while 90% of rare earth magnets are produced in China.

A Korean government official said that the Chinese government has sent the same letter to other local companies in the battery, display, electric vehicle, aerospace and medical device sectors that solely rely on Chinese-origin rare earth metals imports.

Economists said an escalation in the US-China trade war is increasingly putting Korea in a bind, forcing it to make difficult choices between its two largest trading partners.

China has been tightening its grip on sensitive exports since passing its Export Control Law in 2020, noted Han Ah-reum, a senior researcher at the Korea International Trade Association’s trade policy division.

“In October last year, Beijing added more detailed rules and began drawing up lists specifically targeting defense-related firms after benchmarking Washington’s export control policy,” said Han.

“As China is expanding its list of US companies that will face Beijing’s export bans on top of its retaliatory tariffs in response to Washington’s duties, major Korean conglomerates leading the country’s exports could take a bigger hit,” she warned.

Write to Ri-Ahn Kim and Dae-Hun Kim at knra@hankyung.com

Sookyung Seo edited this article.