Out of the Dependency Trap

Germany and the European Union (EU) rely heavily on imports of critical raw materials (CRMs), which are indispensable for defense systems, core industries, the green transition, as well as digital technologies and the AI revolution. Their dependency on China is particularly pronounced; Chinese companies dominate the global processing industry, as well as key downstream segments such as magnets and batteries. Recent instances of China tightening its export controls of CRMs have underscored the scale and immediacy of the vulnerability this economic dependency poses. The risk of supply disruptions exposes Berlin and Brussels to economic and political blackmail. What was long considered a technical supply chain issue has now evolved into a systemic strategic challenge.

Concerns over CRM dependencies are not new and have resulted in several past attempts to foster resilience in the face of such dependency. Given this legacy, it is striking that Germany and Europe find themselves in such a tight spot today. Where did these past efforts fall short? And do Berlin and Brussels’s most recent measures finally address these key shortcomings? We seek to answer these questions, also building on learnings from other countries such as Japan and the US.

We find that Germany and Europe’s policy approaches are still too strongly based on the false assumption that improving framework conditions for private-sector projects in Europe and elsewhere in the world will suffice to drive supply diversification. This assumption is misaligned with the reality of China’s state-backed, vertically integrated dominance that allows Beijing to shape prices and supply conditions. As a result, policies focused primarily on stimulating supply through permitting reform, financial derisking and project support in partner countries are insufficient. Other players such as Japan and the United States (US) have responded with greater resolve, deploying tools such as coordinated offtake agreements and price-support mechanisms to actively shape market dynamics. Europe’s failure to take similar steps reflects persistent misconceptions about global CRM markets, alongside fragmented and insufficient capacity in public institutions and a weak CRM ecosystem. 

Past efforts along four policy levers – (1) stockpiling, (2) expansion of primary supply, (3) expansion of recycling, and (4) demand reduction – exhibit a range of shortcomings, among which one stands out: the absence of stable, long-term demand at price levels that make investment in diversified supply chains in Europe and partner countries commercially viable. Without addressing this demand-side gap, even well-designed supply-side measures will fail to unlock the investment required.

Germany and Europe must therefore pursue a more determined, market-shaping strategy. 

Three strands of action are key:

1. Adopt targeted demand and price interventions along each critical value chain: Berlin and Brussels should deploy policy packages along CRM value chains, calibrated to material characteristics, market structure and strategic relevance. While demand aggregation can play a supporting role, these packages should also include direct interventions in demand and price dynamics such as revenue guarantees in low-volume markets and sourcing rules, especially for large buyers. These instruments are essential to make investment in mining, processing, recycling, and substitution projects more ​‘bankable.’ Their costs are moderate in relation to state budgets and total product costs, let alone compared to the economic damage threatened by disruptions and the political damage associated with a vulnerability to blackmail and coercion.
2. Pursue coordinated stockpiling in cooperation with the private sector: Rather than treating stockpiles as a measure of last resort, Germany and the EU should use them as a baseline protection against immediate disruptions. A public-private scheme in which the government sets minimum stock requirements and, where necessary, financially supports purchasing and operating costs while private actors manage the stockpiles offers one of the fastest deployable tools to strengthen resilience. Given Beijing’s efforts to restrict the build-up of foreign inventories, Berlin and Brussels should push back against these measures, which clearly serve no other purpose than to keep dependencies as acute as possible.
3. Put more emphasis on CRM recycling, substitution and efficiency: The potential of recycling, substitution and efficiency has long been recognized from a sustainability perspective, but they remain underutilized as tools to strengthen resilience. Beyond fostering stronger demand for secondary materials, accelerating progress requires additional measures: specific collection and recovery obligations to keep materials in dedicated value chains, incentives for product design for recyclability, tighter control of scrap exports alongside better functioning intra-EU waste flows, and targeted support for technologies that can most effectively reduce dependencies.

Delivering on this ambitious agenda will require significant changes in governance and implementation: 

1. Lead by example in driving EU action: As a key EU member state, Germany should support a strong mandate for the proposed EU CRM Centre and decision-making processes that grant the European Commission sufficient leeway to drive implementation. It should also lead an initiative to pool national CRM-related funds to enable joint demand and price interventions at the European level. At the same time, Berlin should bring together flexible member state coalitions to build momentum and demonstrate feasibility, as well as move ahead with determination on initiatives that can be realized at the national level.
2. Actively pursue and shape plurilateral CRM cooperation: Germany and Europe need to deepen cooperation with like-minded partners to help reshape global market dynamics and break the dependence on China. Just reacting to US-led initiatives is not enough. Berlin and Brussels need to actively drive plurilateral action toward market-shaping interventions, stockpiling and financing, while ensuring a fair allocation of costs and benefits and secure access to the resulting supply.
3. Strengthen implementation capacity and Europe’s CRM ecosystem: Effective CRM policy requires not only financial resources but also an upgrade and better pooling of fragmented technical expertise, a much-improved knowledge base on supply chains, as well as better political coordination across member states. At the same time, Germany and Europe must address structural gaps in their industrial base, combining short-term measures leveraging international partnerships with longer-term investments in the domestic talent pool.

Europe’s CRM challenge is not primarily one of geological scarcity, but rather marked by captured market structures. Overcoming it will require a shift toward an integrated strategy that actively shapes markets – particularly by creating stable demand and viable price signals for non-China supply – and aligns public and private actors. The costs of such an approach are significant, but they pale in comparison to the economic and political costs of continued dependence on China. This urgent and overdue investment in European resilience will pay outsized dividends.

This study was funded by Otto Wolff Stiftung. We thank the foundation for its support and especially Markus Baumanns for excellent cooperation throughout the project. The views expressed are solely those of the authors.