Analysis-The world's auto supply chain is in the hands of a few Chinese bureaucrats

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By Laurie Chen and Lewis Jackson

BEIJING (Reuters) - In a hulking grey building just east of Tiananmen square in Beijing, a small team in China's Ministry of Commerce is deciding the fate of the global auto industry, one rare earth magnet export permit at a time.

China holds a near-monopoly on rare earth magnets - a crucial component in electric vehicle motors - and it added them to an export control list in April as part of its trade war with the United States, forcing all exporters to apply to Beijing for licenses.

It falls to the Bureau of Industrial Security and Import and Export Control - which is part of China's Ministry of Commerce - to review export permits for the rare earth magnets, which are vital for car motors, wind turbines and even U.S. F-35 fighter jets.

While dozens of licences have been issued since late April, executives, lobbyists and diplomats say they are only a small fraction of the applications that have flooded in from automakers, semiconductor companies and aerospace firms around the world since the tougher export controls were introduced.

Washington says delays in issuing export licences show China is reneging on commitments made during trade talks in Geneva last month and it has retaliated with export curbs on plane engine parts and other equipment.

U.S. President Donald Trump and Chinese President Xi Jinping held talks by phone on Thursday as the escalating dispute over China's rare earth stranglehold threatened to derail the fragile trade truce agreed between the two superpowers.

When the new rare earth magnet measures came in, the export control bureau had a total of just 30 staff, though this has since been doubled to around 60, according to two sources who were briefed on a meeting between the ministry and Chinese and European semiconductor firms last week.

"We appreciate that MOFCOM has increased its resources to address demand and they're working hard and long hours on these issues," said Adam Dunnett, Secretary General of the European Chamber of Commerce in China, referring to the ministry.

"But the reality is this is having a huge impact on a wide variety of sectors. It's something that could have been better planned and rolled out," he said.

According to personnel records posted to the Ministry of Commerce's website in June 2024, there are only three senior officials within the bureau who can approve the export permits.

The ministry's website lists the export licence bureau's office hours as: Weekdays, 8:30-11:30 a.m., 14:00-17:00 p.m.

Reuters was unable to determine current staffing levels or whether more officials are now able to approve applications.

The Ministry of Commerce did not respond to questions from Reuters on this subject.

CHOKEPOINT

The global alarm over shortages underscores the enormous leverage China has acquired through its near-monopoly on rare earth production. It also reveals a complex bureaucratic process that has gone from checkpoint to chokepoint.

"The process for our suppliers to apply for export licences for various rare earths ... since April, is complex and time-consuming, partly due to the need to collect and provide a lot of information," a spokesperson for Bosch, the German engineering and technology multinational, said last month.

A Chinese-language guide to the process published by the Ministry in late March runs to almost 14,000 Mandarin characters.

European auto suppliers alone have filed hundreds of requests since early April, with only about a quarter granted. These applications can range from dozens to hundreds of pages, according to sources who have either filed requests or been briefed about them.

Public Ministry of Commerce guidelines require information including technical product descriptions, signed contracts. Descriptions of production facilities and photos of products are also encouraged.

China's stated aim is to ensure dual-use items don't end up in military equipment, but officials are often overly cautious even though many applications clearly state commercial use, Dunnett said.

"Another concern we have heard from some companies is that they are being asked for sensitive and excessive information that is part of their intellectual property which has led to delays in their applications," Dunnett added.

While applications are meant to be processed in 45 working days, the ministry says applications related to national security will take longer, without defining how long.

'STRATEGIC EXCUSE'

Cory Combs, head of critical mineral and supply chain research at Trivium China, a policy research group, said it was not clear whether the delays were due to bureaucratic inertia or intentional weaponisation.

"We do expect these applications to U.S. end-users to be reviewed on par with other countries and approved whenever they're not for military use," he said. "The issue here is that, is it quick enough for the Trump administration to believe that Beijing has not reneged on the Geneva agreement?"

Some U.S. industry figures believe that the bureaucratic backlog is a "strategic excuse".

"China can staff up as fast as they want, if they wanted to," said a source from the U.S. rare earths industry who declined to be named for sensitivity reasons.

In public, Chinese officials have said the export controls apply to all countries, the implication being that they do not count as a U.S.-specific countermeasure under the Geneva agreement.

Foreign ministry spokesperson Lin Jian said on May 30 that the rare earth export controls are "non-discriminatory and not targeted at any specific country".

During the Geneva talks, however, China privately admitted that the rare earth export controls qualified as non-tariff countermeasures, according to a source briefed on the talks.

Rare earths remain a core part of ongoing U.S.-China discussions, the person said.

China's foreign ministry did not immediately respond to a request for clarification.

Chinese scholars openly admit that the rare earth export controls are retaliation for U.S. chip curbs.

"It's a short-term form of leverage which doesn't hurt China, as the rare earths in question have relatively low monetary value," said Zhu Junwei, an international relations scholar at the Grandview Institution, a Chinese think-tank.

(Reporting by Laurie Chen and Lewis Jackson in Beijing; Additional reporting by Beijing newsroom; Editing by David Clarke)