New Delhi: China’s export restrictions on germanium and gallium, two critical minerals for semiconductors, came into force this month, highlighting its willingness to weaponise its dominant position as a supplier. This, experts believe, is ushering in a new wave of government-driven industrial policy, as countries seek to de-risk themselves from China.
Currently, China supplies 95 per cent of the world’s raw gallium and 60 per cent of refined germanium, both of which are vital for semiconductors or chips used in electric vehicles, 5G technology for telecommunications, defence applications, and other renewable technologies.
Both gallium and germanium are among the 30 minerals identified as “critical” by the government of India.
China’s export restrictions, which came into effect on 1 August, materialised just about nine months after the United States instituted sweeping export controls on advanced semiconductors, as well as the tools and technologies used in their production. This move had been strategically designed to “stymie” China’s advancement in this area, according to a brief published by the French Institute of International Relations (IFRI), a Paris-based think tank.
Various experts speaking to ThePrint highlighted that the latest export restrictions by China are primarily a signal to the US, and more broadly the West at large and Japan, that it is willing to escalate the ongoing trade war and will use any means at its disposal to ensure its position in global supply chains.
“I see China’s export control measures primarily as a signal to Washington and the West more broadly… that China won’t back down from escalation and is willing to use the levers at its disposal— in this case, critical raw material dependencies,” explained John Seaman, a research fellow at the Center for Asian Studies, IFRI, in a written communication to ThePrint.
Aravind Yelery, an associate professor at Jawaharlal Nehru University, explained to ThePrint that China wants to politically signal its intention that it is willing to escalate against the US and the West in the hope of gaining concessions on trade from them.
“These export restrictions are targeted at specific critical minerals that China knows has alternative substitutes. There is not enough domestic demand for these two commodities. It is trying to weigh in the global conversation and create reciprocal adjustments,” Yelery added.
Gallium and germanium occur in low concentration in nature, but they can be produced in conjunction with associated base metals and minerals like zinc, bauxite, or coal, explains IFRI brief. While the base materials are found across the world, they can also be produced through recycling, which accounts for roughly 30 per cent of the global supply chain.
All of this suggests that China’s intentions are more a signal to the global powers, rather than a strategy of disrupting the markets.
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Testing the waters
The export restrictions on the two minerals are likely an attempt from Beijing to test how far it can push boundaries without jeopardising global supply chain stability, according to experts.
Ritika Passi, a geo-economics analyst and a Network for Advanced Study of China (NASC) fellow at the Takshashila Institution explained to ThePrint that the export restrictions are a case of China testing the waters to see which tools it can bring to bear, just like its ban in May of certain products by US chipmaker Micron.
“While the recent export measures largely inconvenience, rather than threaten, global supply chains, the real concern is what next, especially as the US and China engage in a tit-for-tat trade and tech war,” Passi added.
Despite its manoeuvres, China is aware that as a part of the larger manufacturing ecosystem, it requires advanced technologies from the rest of the world to truly develop its own semiconductor industry, Yelery pointed out.
Seaman further explained to ThePrint that it is not in China’s interest to wield a heavy hand at this point in time because their capacity to produce compound power semiconductors using gallium nitride (GaN) for example is very limited.
“Chinese firms are investing quickly and heavily in the capacity to produce power semiconductors, but this capacity won’t come online overnight, and it will likely be 5 years or more for this activity to develop in China to a significant degree. In the interim period, Chinese firms remain vulnerable to their government’s own export restrictions,” Seaman added in a written communication to ThePrint.
Immediate impact & blowback on China
Even as the trade war between China and the US intensifies, the immediate impact of the restrictions on the supply of the two minerals seems minimal for now.
There has already been an increase in prices temporarily for both gallium and germanium, but experts explained to ThePrint that this could be due to the markets bracing for China’s export restrictions.
“While Chinese actions introduce risk in critical mineral supply chains, there is currently no shortage of these two metals in the global marketplace. The immediate impact has been on prices,” explained Passi.
Seaman in his written communication to ThePrint expressed similar observations. Acknowledging the spike in prices, he noted that the “immediate impact on semiconductor production in this specific sector would be moderated to some degree by the fact that firms have their own commercial stocks of the materials they need”.
It remains to be seen how deep these stockpiles are overall, but the US maintains a strategic reserve of about 88,000 kilograms of germanium, according to the IFRI brief.
However, if the issue is not resolved, it could have an impact on clean energy transition goals and also have ripple effects on prices of electronic goods, warned Avinash Godbole, an associate professor at the Jindal School of Liberal Arts and Humanities, O.P Jindal Global University.
“We can expect another wave of slowdown, a couple of months down the line. It will affect supplies in diverse sectors like automobile components. It may also affect the clean energy transition timeline if the issue is not settled within a short frame,” Godbole told ThePrint via e-mail.
“Other electronic goods may also see a price rise. India depends on China for 8 out of the 30 of the critical minerals identified as priorities. India being part of the US-led supply chain initiative, should brace for the impact of this episode of the trade war,” he added.
Notably, China too faces a predicament as its export restrictions affect its own firms due to inadequate internal capacity and demand to produce goods from these two minerals.
Passi said that the main importers of Chinese gallium and germanium products are the US, Japan, and Netherlands.
Godbole also noted that China lacks alternative export markets for these minerals and that such a ban could accelerate exploration projects to diversify supply sources in countries like Australia, South Africa, Mongolia, and Canada.
Diversification of supply chains
China weaponising economic interdependence in the supply of critical minerals is not new.
For example, China had in 2010 blocked the export of rare earth elements (REEs) to Japan in retaliation for the detention of a Chinese fishing trawler. The detention came after the trawler collided with two Japanese coast guard vessels in waters under Japan’s jurisdiction but claimed by China.
In this instance, China’s tactics triggered Japan’s initiative to diversify its supply chains, as REEs, a subset of critical minerals, are crucial for emerging technologies.
“Japan has long been active in diversifying its supplies, particularly since the rare earths crisis of 2010, when its dependence on China was made crystal clear, and the Japanese government has played a vital role in accompanying Japanese firms in their efforts to secure the resources they need,” Seaman explained.
Today, China’s export restrictions impact the geopolitics of global supply chains more than the markets themselves.
“In the longer run, this market signal by China will only strengthen diversification away from China,” Passi said.
Nevertheless, experts warn that the trade war may escalate going forward, with both sides attempting to “de-risk” economic interdependencies.
Seaman explained that both Beijing and Washington prioritise this aspect in their economic strategies. Washington’s next move, he added, will likely be measures to monitor and ultimately restrict outbound investments in areas the US deems sensitive or problematic, such as quantum computing and sciences.
“We’re clearly beyond the realm of broad political statements and have entered the stage wherein a logic of economic security is ushering in a new wave of industrial policy,” Seaman said.
(Edited by Asavari Singh)
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