China rare-earth arrests raise supply risks for South Korea
· UPIJune 30 (Asia Today) -- China's detention of two Japanese corporate employees over alleged rare-earth smuggling is turning an intensifying dispute with Japan into a criminal and supply-chain risk that could also affect South Korean manufacturers.
The Yomiuri Shimbun reported Tuesday that Chinese authorities suspect the two employees of Fuji Electric of placing controlled rare-earth magnets inside finished products for shipment to Japan, where the magnets were allegedly intended to be removed and reused.
The case is believed to be the first known criminal investigation in China involving employees of a Japanese company over alleged rare-earth smuggling.
Japanese and Chinese officials have confirmed the detentions but have not publicly disclosed the products involved or the full details of the allegations. The two men were detained separately in Dalian, Liaoning province, on May 18 and May 25 as part of the same case.
Chinese authorities are reportedly examining whether the suspects attempted to avoid an export license by incorporating rare-earth magnets into other products.
Fuji Electric's Chinese subsidiary manufactures electrical control equipment, including electromagnetic contactors used in motors. The investigation appears to be focused on whether finished-product exports were used to conceal the transfer of controlled components.
Fuji Electric has said the information was not announced by the company and declined to comment on the case.
Under China's criminal law, a person convicted of smuggling goods prohibited from import or export may face up to five years in prison. A serious offense may carry a sentence of more than five years. A company found responsible may also be fined, while directly responsible employees can face criminal penalties.
Rare-earth permanent magnets are critical components in electric vehicle motors, industrial robots, wind turbines, electronics and defense equipment.
China holds a dominant position in rare-earth mining, refining and magnet production, giving Beijing substantial influence over global supplies of materials used in civilian manufacturing and military technology.
Chinese customs data showed that rare-earth magnet exports to Japan totaled 123 metric tons in May, down 34.6% from April. Japanese companies have reported delays in export approvals and growing concern about disruptions to civilian production.
Relations between China and Japan deteriorated after Japanese Prime Minister Sanae Takaichi discussed a potential Japanese response to a Taiwan contingency during parliamentary remarks in November.
Beijing subsequently tightened controls on dual-use exports to Japan, saying the restrictions were intended to prevent Japanese "remilitarization." Japan has rejected China's allegations and demanded the withdrawal of the restrictions.
China expands economic pressure
The arrests come as China expands formal restrictions on Japanese companies and research organizations.
China's Commerce Ministry added 20 Japanese entities to an export-control list Monday, prohibiting Chinese exporters from supplying them with dual-use goods without special government approval.
The listed entities include Japan's National Institute for Defense Studies and units of Mitsubishi Electric, Mitsubishi Heavy Industries and Kawasaki Heavy Industries. Foreign organizations and individuals are also prohibited from transferring Chinese-origin dual-use items to the listed entities.
Another 20 Japanese entities were placed on a watch list because Chinese authorities said they could not verify the intended users or uses of exported items.
Exporters seeking individual licenses for those organizations must submit risk assessments and written assurances that the products will not contribute to Japan's military capabilities. The review process may take longer than ordinary licensing procedures.
China said the measures target only a limited number of entities and would not affect normal trade between the two countries.
Japan's government described the restrictions as unacceptable and filed a formal protest with Beijing.
China will also implement a new reporting system Wednesday for suspected violations involving strategic mineral exports.
The system specifically covers efforts to evade licensing requirements by modifying products, separating controlled materials into parts or components or routing shipments through third countries.
It also allows reports against logistics companies, customs agents, financial institutions and online platforms that knowingly assist illegal exports. Companies that discover possible violations in their own operations are encouraged to report them voluntarily.
The timing has raised the possibility that the detention of the Fuji Electric employees could serve as an early warning of stricter enforcement against indirect procurement methods.
South Korean companies face indirect exposure
The widening controls also carry risks for South Korea.
South Korean manufacturers depend on Chinese rare-earth materials and processing networks for electric vehicles, high-efficiency motors, robotics, electronics and defense equipment.
Companies that purchase Japanese components or work with Japanese suppliers operating in China could face customs delays, stricter licensing reviews or difficulty meeting contractual delivery schedules even when they are not directly targeted by Chinese restrictions.
China has also expanded the reach of some rare-earth controls to products manufactured outside China when they contain Chinese-origin materials or use Chinese processing technology. Legal specialists have warned that the measures could affect Korean companies engaged in cross-border manufacturing and technology transactions.
Seoul has sought to improve cooperation with Beijing on critical-mineral supplies while also diversifying imports through partnerships with the United States and other countries.
The South Korean government announced plans this year to establish communication channels with China to address supply disruptions and to support companies investing in overseas mineral projects.
The Fuji Electric case indicates that rare-earth disputes are moving beyond prices, export volumes and licensing delays.
Corporate executives and employees may now face personal criminal exposure if Chinese authorities conclude that products, third-country routes or component integration were used to evade export restrictions.
For South Korean companies, the development increases the importance of tracing the origin and final use of rare-earth materials throughout their supply chains.
-- Reported by Asia Today; translated by UPI
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Original Korean report: https://www.asiatoday.co.kr/kn/view.php?key=20260630010010505