Between Interdependence and Diversification: Southeast Asia’s Room for Manoeuvre in Critical Minerals

Critical minerals have become a recurring source of friction in international diplomacy, with China’s dominance in this sector and US efforts to build alternative supply chains raising concerns that Southeast Asian countries may be forced to choose between the two powers. But this is a false choice. As important exporters of rare earth elements, Southeast Asian countries have leverage of their own and can use intensifying competition to diversify partnerships and capture more of the value chain at home.

The recent G20 Finance Ministers and Central Bank Governors meeting in the US ended with a chairman’s declaration rather than a joint statement, thus underscoring the lack of unanimity. China objected, among other things, to calls to eliminate “non‑market policies” and ensure smooth global supply chains for vital goods, including critical minerals.

The disagreement comes amid China’s tightening controls over rare earth elements (REEs) in April 2025 in retaliation for US tariffs and export controls. The October 2025 measures went further, extending licensing requirements to certain foreign-made products containing at least 0.1 per cent Chinese-origin controlled REEs or using specified Chinese rare-earth technologies. These measures were subsequently suspended until November 2026, while the April 2025 controls remain. Although Beijing has sought to reassure non-US importers that normal commercial trade will continue, such controls inevitably increase costs and uncertainty for firms dependent on Chinese rare earths, processing and magnets.

At the same time, a number of East Asian economies have joined Pax Silica and other US-supported efforts to build more resilient critical-mineral and technology supply chains. Has this increased pressure on them to choose between China-centred and US-backed supply chains? Given the region’s economic geography and dense webs of trade, few can afford such a binary choice.

In the case of critical minerals, however, such concerns about being forced to choose, need to be put into context.

First of all, China’s present dominance of REEs stems from a long process of industrial development, not a strategy originally conceived to give Beijing a geopolitical weapon. The industry dates to the late 1950s. As applications expanded across metallurgy, petrochemicals, glass and ceramics, agriculture and equipment manufacturing, REEs were incorporated into national research and development programmes in 1986. In January 1991, the State Council issued a circular to curb rampant illegal mining under a national licensing regime, strengthen regulation and consolidate a fragmented industry.

REEs were thus initially treated as industrial resources for domestic use and export; they were not designed to be used as geopolitical instruments. Yet, decades of investment and capability-building have given China considerable leverage within global REE supply chains. Amid intensifying Sino-US competition, these accumulated advantages have acquired strategic significance — hence the observation that, over REEs and other minerals deemed critical by the US, “Beijing is now mirroring Washington’s own semiconductor export control regime almost to the letter”.

For Beijing and Washington, the legitimacy of their export controls rests in part on application to the military dimensions of dual‑use materials and technologies. But the effectiveness is also limited: curbing supply incentivises investment in alternatives, eroding the restricting country’s credibility and long‑term competitiveness as a supplier. Neither side can fully control an interdependent chain — midstream producers rely on downstream consumers abroad, while end users can reduce dependence through alternative sourcing, substitution and recycling.

This interdependence is particularly relevant to Southeast Asia. Despite its dominance of REE extraction and processing, China is a net importer of raw REE materials, including substantial supplies from the region. In 2024, Myanmar supplied 34.3 per cent of China’s REE imports, Malaysia contributed 10.6 per cent and Laos 8.3 per cent. Together, they accounted for over half of China’s total imports.

Seen in this context, the emerging competition is not just over who secures Southeast Asia’s minerals, but over who offers a more credible pathway from resource supplier to higher-value producer.

But Southeast Asia will not remain as mere raw-material suppliers. Malaysia hosts the most commercially significant rare-earth separation facility outside China, with much of the feedstock supplied from Lynas’s Mount Weld mine in Western Australia. The resultant REE carbonates feed products from lamps to semiconductors, a sector where Malaysia has decades of experience in global manufacturing and supply chains. It is only a matter of time before other regional ore exporters move into separation and other downstream applications.

Indonesia is another case in point. In recent years, it has banned exports of unprocessed minerals like nickel and required producers to invest in processing facilities to add greater value before export. This continues earlier practices, but its character aligns with industrial policies adopted by China, the US and others at comparable stages of technological capabilities. 

As such, for Southeast Asian countries, the proverbial choice between aligning with China or joining the US‑led Pax Silica is largely rhetorical. Both China and the US are interested in accessing Southeast Asian supplies of raw REE materials on the basis of cost, and not for the lack of material availability elsewhere, including within their own countries.

The more consequential question for Southeast Asian mineral exporters is how competition over critical minerals can help them diversify into more higher-value activities. The real measure of competing partnerships should therefore be what China, the US and other partners contribute to Southeast Asian efforts to move up the value chain. This includes investments in processing and refining, technology and skills transfer, and stronger linkages to downstream manufacturing.

Seen in this context, the emerging competition is not just over who secures Southeast Asia’s minerals, but over who offers a more credible pathway from resource supplier to higher-value producer. To address societal concerns that REE refining is “dirty” (detrimental to the environment), the challenge is to commit to importing the most environmentally-friendly processing technologies and to enforce standards rigorously on foreign corporate practices. 

In the final analysis, access to critical minerals will likely remain high on the regional agenda. But this is also the area in which Southeast Asian REE exporters can exercise a certain level of agency. China’s dominance of REE processing gives it considerable leverage, but this should also not be overstated. Excessive restrictions incentivise alternative sourcing, substitution and recycling. Between China and the US, the likely outcome is a shifting balance between interdependence and diversification, not a full decoupling. For Southeast Asia, the perceived binary choice between the two powers is false one: all countries face the same task of adjusting their policies within a shared set of mineral‑industry dynamics among producers, processors and consumers.

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