After months of relative quiet, the U.S. and China have recently announced plans to impose substantially tighter restrictions on trade in the coming weeks. The moves come just ahead of a planned meeting between the leaders of the two countries as well as a potential snapback of “reciprocal” U.S. tariffs on Chinese goods to prohibitive amounts.
China’s Ministry of Commerce issued Oct. 9 a notice implementing a historic expansion of China’s export control regime. Previously deep-processed components manufactured abroad using Chinese rare earths were not subject to Chinese export controls. However, the new notice formally applies the foreign direct product rule to rare earths and introduces a Chinese version of the “50 percent rule,” extending MOFCOM’s jurisdiction to foreign-made products and foreign entities using Chinese-origin rare earths or technologies.
(In response, President Trump threatened on social media to impose a tariff of 100 percent on imports from China as of Nov. 1. Trump said this amount would be “over and above” any other tariff already being paid on imports from China; currently, those include a 10 percent “reciprocal” tariff, a 20 percent tariff related to concerns about fentanyl trafficking, and Section 301 tariffs of varying amounts.)
FDPR
China has introduced a three-pronged control framework.
De minimis rule – If a foreign-made product contains ≥0.1 percent of any China-origin rare earth item listed in Annex 1 to the notice it is subject to Chinese export controls and will require a license from MOFCOM when exported to third countries.
Technology-based control – Even if no physical Chinese materials are used, products manufactured abroad using Chinese-origin technologies—such as rare earth mining, refining, smelting, magnet production, or recycling—are now controlled. This expands the FDPR to cover upstream know-how, not just physical inputs.
Origin-based control – Any item listed in Annex 1 that originates from China is controlled, regardless of its value ratio or downstream use.
The origin-based control is effective as of Oct. 9. Under this control any rare earth metals that come from China—such as samarium, dysprosium, gadolinium, terbium, lutetium, scandium, and yttrium, as well as alloys and oxides made from these metals—are subject to export restrictions. In addition, permanent magnet materials and any target materials containing these rare elements are controlled, regardless of how they are used or the percentage they constitute in a product.
The de minimis rule and technology-based control will be effective Dec. 1. As of that date exporters of affected goods, whether located in China or in another country, will have to prepare a compliance notification letter prior to export that clearly states whether there are any Chinese rare earth elements in the product and what percentage they make up. If the amount is 0.1 percent or higher, the letter also needs to confirm that a license is required before exporting.
It is important to remember that sending this notification letter does not relieve anyone of their responsibility to thoroughly check that they are following all Chinese laws. Compliance is still required, even if this letter has been provided.
50 Percent Rule
China has also introduced its own 50 percent rule, under which export licensing restrictions imposed on entities on China’s Controlled Entities List and Watch List will automatically apply to subsidiaries, branches, and affiliates in which the listed entity holds a 50 percent or greater controlling stake, regardless of location.
As a result, companies must not only consider directly-listed entities but also examine ownership structures of any potential partners or suppliers to identify connections that may be subject to these restrictions.
Conclusion
Companies engaged in exporting or manufacturing components that contain controlled rare earth materials should quickly assess their exposure under China’s expanded export control regime. This includes reevaluating their product and technology dependencies as well as preparing for license applications.
ST&R professionals can help you determine whether your products or technologies trigger licensing obligations, prepare and submit required license applications to MOFCOM, implement robust export compliance procedures tailored to China’s new rules, and navigate the complexities of these new rules.
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