Strengthening Economic, Critical Mineral, and Semiconductor Security: Bridging goals and means between Europe and Japan

The strategic importance of critical raw materials and semiconductors

Critical raw materials and semiconductors form the foundation of modern economies and defense capabilities. Without these inputs, essential technologies from MRI scanners and pacemakers to fighter jets, drones, and renewable energy systems cannot be produced. Critical raw materials represent the "skeleton" of the global economy, while semiconductors function as its "central nervous system." The CRM value chain and the lower-profit segments of semiconductors (Assembly Test and Packaging and front-end manufacturing of legacy chips) share a critical vulnerability: they are characterized by low economic value added but remain strategically indispensable. It is not something from which companies will make substantial profits, but if these products are unavailable, enormous problems arise throughout both critical sectors, such as medical and defense industries, and commercially important sectors, for example the automotive industry. China has leveraged this dynamic throughout 2025, systematically restricting access to critical raw materials while simultaneously expanding its market share in foundational chips and back-end semiconductor manufacturing.

The case of Nexperia exemplifies this challenge in concrete terms. When the Dutch government froze the Chinese management action of transferring sensitive intellectual property to a Chinese competitor, China retaliated by restricting semiconductor supplies through an export ban, exploiting the fact that 70% of Nexperia's back-end manufacturing occurs in China. The importance of low value-added but strategically indispensable items is becoming clearer, and this incident demonstrates the vulnerability that arises when critical manufacturing capabilities are concentrated in a single country that is willing to use them for geopolitical leverage. This is precisely the problem set that 2025 has presented to policymakers and industry leaders alike.

China's strategic intent and the "assassin's mace"

China's approach to critical materials reflects deliberate strategic planning rooted in President Xi Jinping's vision of manufacturing as the backbone of national strength. Since the "Made in China 2025" initiative presented in 2015, which opened with the assertion that “without a strong (and advanced) manufacturing industry, there will be no country and no nation,” Beijing has pursued dual objectives: building a self-reliant industrial fortress and tightening other countries' dependence on Chinese supply chains. The introduction to this policy document explicitly notes that the need to built a strong manufacturing base is derived from observing the rise and fall of great powers since the Industrial Revolution, including China's own historical experience. Xi explicitly stated in 2020 the intention to "tighten international production chain dependence on China" as a powerful deterrent and countermeasure against countries that would otherwise cut off supply to China. This dual strategy is evident in concrete measures, including either official or informal bans on exports of critical machines needed to produce rare earths, and clauses in the October 9 controls, which were postponed for 12 months, stating that Chinese nationals cannot work on rare earths projects abroad that might create capabilities outside of China.

This strategy intensified amid growing perceptions of external threat and increasing concerns about technological containment. In 2022, Xi warned of what he saw as increasing potential of escalating foreign attempts to contain, blackmail, and coerce China, insisting that China must build a situation in which even under extreme circumstances, the normal operation of the economy can be maintained, and critical functions can continue. Chinese academics have clarified that these "extreme circumstances" relate to tensions over the South China Sea issue, the Taiwan issue, and the idea that tensions with the United States and its allies were coming to a climax. In preparations for the 15th Five-Year Plan, overcoming technological bottlenecks has become central, essentially signaling China's intention to replace Japanese and European companies in critical sectors. As one interpretation suggests, the Chinese state is essentially signaling to foreign companies that it intends to replace them with Chinese companies.

Overall, China's response has been to develop what Chinese academics call shashoujian, "the assassin's mace," drawn from a Chinese allegory about a magical weapon that one can use to overcome a more powerful rival at crucial moments in strategic competition. Through its enormous success in the use of export controls on critical raw materials, China has found its mythical weapon, as they allow China to extract concessions, disrupt rival industries, and undermine rearmament efforts with remarkable effectiveness. Importantly, this weapon extends beyond just raw materials. The October 9 controls also involved battery technologies and the batteries themselves, suggesting that even if countries successfully onshore all critical raw materials, dependency issues remain if all batteries are produced in China.

Eight weapons in one: How China weaponizes critical materials

Analysis by the EU Institute for Security Studies reveals eight distinct ways China exploits its critical materials dominance. First, "the spyglass" uses license procedures for intelligence gathering, with 11% of surveyed European companies reporting excessive information demands that risk intellectual property transfer, with military interests even more compromised. Companies are forced to provide detailed images of production sites and precise material quantities, allowing China to calculate product recipes and map defense industrial chains.

Second, "the crowbar" leverages material shortages to extract concessions in unrelated policy areas. Chinese representatives in Brussels explicitly connected rare earths shortages to demands for eliminating EU import duties on electric vehicles. This tactic successfully pressured the Trump administration to reverse semiconductor controls by threatening permanent magnet supplies needed for American automotive reindustrialization.

Third, "the sledgehammer" removes essential building blocks from production. According to recent EU Chamber of Commerce surveys, 40% of companies complain that delivery takes an additional two months due to Chinese export controls, while 38% expect significant supply disruptions. One company reported additional costs up to 20% of its global revenue because it could no longer obtain essential inputs from China. But due to corporate secrecy incentives, there is good reason to assume that the situation is significantly worse.

Fourth, the "fish trap" effect creates a perverse outcome where China's weaponization actually deepens dependencies. Because companies cannot obtain inputs outside China, 11% indicated they would produce more in China using existing capacity, while 4% might actually build new production capacity there. This is particularly concerning as China already manufactures over 30% of all goods worldwide, potentially reaching 45% by 2030.

Fifth, "the rug" specifically targets defense sectors by categorically denying exports for military end-use. Problems have emerged with germanium for night vision goggles and permanent magnets for fighter jets and drones, coming precisely when European rearmament and defense industrial base expansion are most urgent.

Sixth, critical materials function as "an innovation decelerator." Without gallium in radar system chips, performance falls back to the level of several decades ago. Without heavy rare earths, fighter jet magnets cannot sustain operational temperatures.

Seventh, scarcity creates "a transatlantic wedge" between allies. Reports emerged of President Trump personally calling fellow leaders requesting magnets before a contentious NATO summit. Japanese and U.S. diversification efforts, while necessary, risk going hand in hand with new trade conflicts between allies rather than a unified response to China’s push for global manufacturing dominance. After all, at early stages of diversified production states will prioritize the needs of their own midstream industries over third party ones.

Finally, China's resource control serves as both "a deterrent and a shield," allowing Beijing to intensify pressure on Taiwan knowing that protests can be met with further material restrictions, while also protecting Chinese economic practices from meaningful consequences.

Pathways to allied autonomy: Financial support and demand-side solutions

A workshop held with European stakeholders concluded that financial support is the most effective immediate measure to achieve independence from Chinese rare earth supplies by 2030. Europe now has significant resources through NATO defense spending, with 3.5% eligible for dual-use research and an additional 1.5% for strengthening the defense industrial base, so these resources should be used to produce know-how and production capacity related to these critical materials. However, European efforts should not pursue complete autonomy. Japan's JOGMEC demonstrates a more advanced model, combining expertise to overcome knowledge gaps with financial resources to make projects bankable. In particular, the projects concerning gallium supply stand out. Europe should become a co-investor and off-taker in JOGMEC projects, recognizing that immediate threats of CRM shortages take priority over longer-term autonomy goals.

Equally critical is addressing the demand side to ensure sustainability of newly developed supply chains. EU public procurement reform planned for 2026 offers significant opportunities, particularly as approximately 23% of global permanent magnets go into publicly procured wind turbines. Current standards prioritizing lowest cost inadvertently deepen Chinese dependence. Implementing "Buy European" plus partners requirements across public procurement can create demand, sustaining non-Chinese production. This partnership framework can extend beyond the G7 to include countries like Congo for cobalt. Crucially, promotion must precede protection: supply must first come online outside China before procurement preferences can work effectively.

The same logic applies to semiconductors and other horizontal economic layers. A zero-for-zero sectoral tariff agreement with the United States on critical raw materials represents an important opportunity, potentially extending to semiconductors subsequently. Even North America alone is too small to build self-sufficient supply chains in these sectors, therefore success requires a bigger group with sufficient scale to take supply bottlenecks out of China. Additionally, private sector engagement is essential. The example of Apple's commitment to spend 400 million dollars on the MP Materials mine demonstrates how end users who capture significant margins can be mobilized to help bring alternative supply online.

Establishing economic deterrence through mutual indispensability

Beyond building alternative supply chains, Europe and its partners must establish credible economic deterrence to create a more balanced relationship with China. Despite mutual dependencies existing across multiple sectors, China successfully coerces because it can make credible threats based on what it controls, while Europe cannot. The current European industry logic that mutual dependence prevents coercion has proven incorrect. 2025 demonstrated that mutual China-EU dependence enables coercion when only one party -China- can credibly threaten denial of critical inputs.

Europe, Japan, and partners possess critical leverage points that China cannot easily replace: lithography equipment China cannot produce domestically, including complete reliance on servicing and spare parts; Japanese photoresists essential for advanced chip production; Korean and Japanese memory chips; American software; and European aerospace components from Airbus. These pressure points exist, but there has been a fundamental failure to establish credible deterrence based on these capabilities. What is needed is "a doctrine of mutually assured destruction" in the economic realm, making clear that if critical economic inputs, including medicines from China, are denied, there will be meaningful consequences for what allied countries supply to China. Finding an equilibrium in this relationship is essential to prevent the one-sided coercion currently being experienced.

For semiconductors specifically, the same framework of combining indispensability with allied autonomy applies, though it must be adapted to sector-specific realities. The European Chips Act initially aimed for 20% of global production capacity in Europe to serve security of supply, but this raised fundamental questions about what such a target actually achieves. If Europe remains dependent on back-end production in China and Taiwan, or on photoresists and critical raw materials from China, does 20% of front-end production truly constitute security of supply or genuine autonomy? Following considerable criticism, the 27 EU member states shifted toward strategic indispensability combined with resilience through the Semiconductor Coalition Declaration. A scenario workshop conducted with companies, policymakers, and think tanks revealed overwhelming preference for European indispensability combined with allied autonomy by removing supply chain bottlenecks from China while maintaining competitive advantages in areas where European companies excel.

Achieving European indispensability requires numerous domestic policies working in concert: lower energy prices to reduce production costs, attracting more STEM talent from around the world, increased funding for startups to scale into large companies and eventually unicorns, simplified regulation to make production in Europe more feasible, and enhanced engineering training domestically. This bottom-up approach creates the conditions, networks, and investments for companies like ASML to expand production and for promising firms like SMART Photonics to develop into future photonic AI accelerators, establishing new indispensable positions globally. Building allied autonomy for semiconductors requires applying similar measures as discussed for critical raw materials: joint economic security standards with the G7 plus partners, aligned public procurement preferences for "Buy European" plus partners where applicable, and coordinated tariff policies for later reinforcement. While the application differs somewhat between sectors, as publicly procured sectors like energy transition and defense are more intensive in critical raw materials than semiconductors, the fundamental principles remain consistent. The lessons learned from critical raw materials cooperation can then extend throughout all horizontal sectors, including areas like chemical production which is currently leaving Europe for both the United States and China, that allied economies collectively depend upon for their economic security and long-term prosperity.

Q&A

Q:
Implementing allied autonomy requires sophisticated coordination among like-minded countries to achieve necessary scale beyond just the 27 EU member states, involving Japan, South Korea, and the United States. However, the recently publicized U.S. National Security Strategy contains quite an anti-European tone, with fundamental disagreements even about what democracy means. How can this important project which requires sophisticated coordination work under these circumstances? European politics also shows instability with the emergence of EU-skepticism. How can Japan help solidify political power or raise awareness of the necessity of the European Union's project in this area? Finally, there are obvious limits to what democracies can do given the necessary arm’s length relationship between public and private sectors. How can policy measures drive the private sector in desired directions under the democratic regimes that we are attempting to defend?

Q:
Regarding allied autonomy, China's dominance of global manufacturing is over 30% now and will be 45% in five years. Which areas or countries could be potential partners for this allied autonomy, especially considering the so-called Global South countries?

Q:
What could be challenges in building a cooperative relationship between Japan and the EU, given that each EU country has different geopolitical and economic situations? How can these challenges be overcome when developing bilateral collaboration mechanisms?

Q:
From a policymaker's perspective, there are two objectives: protecting industries and developing the economy. If too many resources are spent on protecting economic security, this could potentially inhibit development. Shouldn’t equal time and energy be spent on developing the economy to increase competitiveness with other countries?

Joris TEER:
First of all, the difference between demand-side measures and supply-side measures for CRM is very important. Without initial onshoring through state investment, competition with China's price manipulation is impossible. However, ideally, state investments should not continue forever, and mid- and downstream companies should commit to purchasing the critical economic inputs that are produced domestically or in partner countries. Competition between Japan and the EU should still exist based on quality rather than unfair competition based on one country restricting supply. In the short term, the EU or the European Investment Bank should become co-investors with European companies becoming off-takers of JOGMEC projects. Demand measures should then be implemented so competition continues on a higher cost base, as critical raw materials produced will be more expensive than subsidized Chinese materials. Companies will have to deal with this reality while maintaining fair competition.

The thorniest issue for Europe is that European autonomy cannot be achieved in critical raw materials and semiconductors. Despite the current U.S. stance towards Europe, proposing G6 cooperation excluding the U.S. is difficult because East Asian partners are very dependent on the U.S. for security and the G6 would still be too small to take supply chain bottlenecks out of China. Also, despite the U.S. making negative statements about Europe and supporting “patriotic parties” in Europe, the cost of doing nothing must be considered. That cost is a world in which 45% of manufacturing is controlled by China which would surely result in much more aggressive export control problems within five to ten years. This will erode European industries and undermine Europe’s rearmament which is needed to maintain deterrence.

Signs exist for potential cooperation: a slowing U.S. economy, reindustrialization not working due to counterproductive tariff policy, and knowledge that critical raw materials are essential and a key priority for Trump are examples. Breaking down the tariff wall for these sectors could achieve internal coherence. Two obstacles must be overcome: Trump's disruptiveness that creates incoherence and European inertia that is characterized by a desire to return to the old WTO system of decades ago without accepting that China and Russia have changed. India is also incredibly important because of its STEM and engineering talent. Also, the coalition of countries cannot be made up solely of high-income countries because manufacturing cannot be rebuilt that way. Awareness is changing rapidly in Europe, with significantly different sentiment in Brussels even over just the past year and a half, though translation into concrete policies remains slow.