Has China started a new trade war it didn't intend by curbing export on chipmaking metals?
Beijing said it will ban the export of gallium and germanium, which are crucial for the semiconductor industry, in response to the U.S. prohibiting the export of advanced chips
Prior to last week, the metals gallium and germanium didn't mean much to the general public. But, access to these two minerals, essential components in computer chips and other electronic products such as LCD screens, has broad implications for the global economy and has recently sparked international tensions. What could be seen as China's first strike in the global chip war, could push the world into a severe recession.
Since October 2022, China has been the target of an essentially one-sided attack, with the United States prohibiting the export of advanced chips and devices that make it possible to produce such chips to China. With its allies in the European Union obediently following suit, the U.S. also implemented an expansion of the embargo to other types of chips and services.
China has now presented its counter-response: a ban on the export of two minerals, the metal gallium and semimetal germanium starting in August. The mining of these minerals is not a massive industry like other minerals that are essential for the global economy, such as lithium. In fact, they are rare and traded in very small quantities. However, they are essential materials for the semiconductor industry and, without them, the industry could come to a halt in a matter of months, dramatically impacting the global economy.
"If these restrictions come into effect, even for a few months, the damage to the global economy will be significant and it will take a long time to recover from it," said Yuval Weinreb, co-founder of Krystal Eight and host of the podcast ‘Understanding China.’ "The impact could be very dramatic in all sectors and across the world. When the materials necessary for the production of certain chips are unavailable, there won't be enough supply for almost every electronic product in the world - iPhones, computers, televisions, cars. The impact could be very broad on the supply of many products worldwide, and when supply is reduced, prices rise, and it certainly won't help inflation."
Related articles:
The modern economy is built on semiconductors. Almost every electronic product, from calculators and microwaves to smart TVs and smartphones, and even cars and airplanes, utilize some form of a chip. Without a continuous supply of new chips, especially advanced ones, the most critical products for modern life cannot be manufactured. Without chips, there is no global economy. As a result, whoever controls the chips controls the economy, and whoever controls advanced chips has a significant influence on the future of our society.
U.S. is expanding chip production capabilities
The American government has been leading a concentrated effort to diversify the global chip supply and reduce China's influence on the industry. This effort includes two main steps, the first being the diversification of chip production capabilities, especially advanced chips. Most of these capabilities are concentrated in South Korea and Taiwan, both geographically close to China, and, in the case of Taiwan, China doesn't even recognize its sovereignty. In order to prevent a situation where China can suppress or even take over chip production in these countries through military means, the Biden administration has passed legislation that provides subsidies of up to $50 billion for the establishment of advanced chip factories in the United States - a move that has been successful with significant investments from Intel and the Taiwanese TSMC.
At the same time, the American government is working to prevent China from accessing advanced chips, which are necessary for the development of the hottest technologies on the market, such as AI and, in particular, generative AI, as well as advanced weapon systems. In October, the U.S. government implemented a boycott that prohibits the export of these chips to China, and successfully pressured European countries to promote a similar boycott, which also includes a ban on the export of machines used to manufacture these chips. In doing so, the United States denied China access to advanced chips and made it significantly more difficult for them to build their own independent manufacturing base. China does have an extensive chip industry, but it mainly focuses on simpler chips, which are also necessary for the global economy but do not provide the same capabilities as advanced chips.
In recent weeks, President Biden has been working to expand the embargo and close loopholes discovered in recent months. Among other things, he is considering a ban on exporting simpler chips for the AI industry (Nvidia has produced a special AI chip for China that falls below the threshold of the existing embargo) or limiting China's access to cloud computing services provided by American companies, which indirectly allow it access to advanced chips.
It was clear that China would not remain silent about this, and in parallel to its efforts to find solutions to bypass the embargo, it revealed its counter strike this week. While American actions thus far have primarily affected the Chinese economy alone, the Chinese response could impact the entire global economy.
On Tuesday, the Chinese Ministry of Commerce announced that restrictions would be imposed on the export of gallium and germanium starting August 1st, but the full details were not disclosed. According to China, this is a measure intended to protect national security interests, and as a result of these restrictions, certain export requests will require approval from China’s State Council.
"This move will have a cascading and immediate impact on the semiconductor industry, especially regarding high-performance chips," Alastair Neill, a board member of the Critical Minerals Institute and an expert on the Chinese metals industry, told The Wall Street Journal.
The two minerals are included in the list of 50 minerals that the United States defines as "critical" for its economy and national security, and they have a supply chain that is vulnerable to disruptions. Germanium is used to turn silicone into a faster conductor, making it a critical component in industries seeking to improve performance. It is also used in the production of optical fiber systems and solar panels. Gallium is a critical component in chips found in mobile phones and electric vehicles.
A compound called gallium arsenide is widely used in high-performance chips due to its superior heat, moisture resistance and conductivity compared to silicon. Gallium nitride is a necessary component in advanced radar systems and missile systems. According to research firm Precedence Research, chips that used gallium nitride or gallium arsenide recorded sales of $3.9 billion in 2022, with sales projected to reach $22.7 billion by 2030.
Chinese control over mining is nearly complete
In the past three decades, China has established almost complete control over the mining and supply of metals and minerals, especially those crucial to the global tech and electronics industry. According to the United States Geological Survey, in 2021, China produced 67.9% of the global germanium supply and 97.7% of the global gallium supply. The United States, in both cases, accounted for 0% of the supply. Chinese restrictions may not completely halt global access to these critical components, but it is expected to make it very difficult, if not nearly impossible.
"These metals are important in the production of many electronic products, not just chips," added Weinreb. "They are abundant but difficult to process, and that's what makes China's dominance so significant. It's not an insurmountable technological challenge, but it requires time and investment, and it is also a highly polluting industry, so many Western countries are very comfortable with it being done in China. But if we can't produce chips in the quantities we need because China has the majority of the supply, that is significant."
However, Weinreb estimates that in the long term, other countries will not have difficulty filling the potential gap left by China. Therefore, it is possible that this move is primarily a diplomatic tool intended to exert pressure on the U.S. to halt or roll back its chip embargo. This comes ahead of an anticipated diplomatic visit by U.S. Treasury Secretary Janet Yellen to Beijing, which is scheduled to take place today. According to an official source cited by NPR, the purpose of the visit is to deepen and upgrade the communication channels between the two countries as part of ongoing efforts by the Biden administration to improve relations.
"China is positioning itself better regarding the U.S.," Weinreb explained. "It’s showing that it can hit back. China has avoided doing so until now, because if the world economy falls, China will suffer just as much, and it will also create a loop that could hurt it even more.
"As long as the U.S. doesn’t change course, China wants to put these things on the table. Unlike the U.S., it has no internal political pressure, and if it does not get the desired results, it can always reverse course. In the short term, China has something to gain, but in the long run it will hurt everyone. There is no guarantee that things will turn out the way China wants, and it could end up starting a trade war that it didn’t intend," he concluded.
