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China implements export restrictions on key minerals

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2023-07-04

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In a display of power ahead of economic talks between China and the US, Beijing has imposed export restrictions on two minerals that are crucial for the production of semiconductors, missile systems, and solar cells.

The minerals in question, gallium and germanium, along with several related materials, will be subject to unspecified export controls starting from August 1, according to China's Ministry of Commerce. The move is aimed at safeguarding national security and interests, and certain export applications will require review by the State Council.

The rivalry between China and the US increasingly involves export restrictions targeting each other's high-technology industries.

Both sides claim that these controls are necessary for national security purposes. The issue has become a focal point in the ongoing high-level talks between the two countries.

Treasury Secretary Janet Yellen is expected to visit Beijing later this week, while Commerce Secretary Gina Raimondo is anticipated to make a trip in the coming months.

The US Commerce Department did not provide an immediate comment on China's recent move. In October, the US halted exports of equipment used to produce advanced semiconductors to China and encouraged its allies, including South Korea and the Netherlands, to do the same.

In response, Beijing warned its companies to consider the national-security implications of exporting to the US.

It also imposed a ban on the use of products made by Micron, the largest US memory-chip maker, in its critical information infrastructure, while cautioning American allies against what it calls Cold War-style protectionism advocated by Washington.

The complexity of the interdependent production processes involving semiconductors makes it challenging for either side to take hasty actions, resembling a technology-sector version of mutually assured destruction.

The Biden administration is attempting to attract producers like Samsung and Taiwan Semiconductor Manufacturing Co. to expand their operations in the US. However, persuading them to sever ties with China seems unlikely.

The newly imposed restrictions on gallium and germanium mainly affect specialty metals primarily produced and refined in China, granting Beijing leverage in cutting-edge sectors.

Although neither mineral is traded in large quantities, they play important roles in specific industries, particularly in the production of semiconductors designed for use in the US, even if manufactured in Taiwan and South Korea.

Alastair Neill, a board member of the Critical Mineral Institute with extensive experience in China's metals industry, stated, "This measure will have an immediate ripple effect on the semiconductor industry, especially with regards to high-performance chips."

Gallium, a soft silvery metal, is a crucial component in a rapidly growing class of semiconductors used in applications such as phone chargers and electric vehicles. Between 2018 and 2021, around 53% of the US's gallium was imported from China, although imports significantly decreased in 2019 due to higher tariffs imposed by the US. Unrefined gallium is not produced in the US.

Germanium, a lustrous greyish-white metal, is known for its ability to enhance the conductivity of silicon, making it valuable for fibre-optic systems and solar cells used in space applications.

The newly imposed export controls by China serve as a reminder of its previous export-quota system for rare earths, another group of metals predominantly produced in China and highly valued by high-technology manufacturers.

In 2014, the US won a case at the World Trade Organization, arguing that China's export limits on rare earths, tungsten, and molybdenum violated international trade rules. In response, Chinese President Xi Jinping visited a key rare-earth production zone, seen by analysts as a warning that China could disrupt the trade in these minerals.

Export controls provide Beijing with the ability to target specific companies and sectors, making decisions based on geopolitical considerations.

Paul Triolo, Senior Vice President for China and Technology Policy Lead at Albright Stonebridge Group, a Washington-based advisory firm, stated, "The controls announced Monday follow a pattern of quieter restrictions on American access to other commodities produced in China, such as materials known as super-abrasives that are also used in high-technology industries."

The latest move by China could give Beijing more leverage in future discussions with the US, particularly as China has expressed interest in establishing a new bilateral dialogue on export controls.

The US should be mindful of China's actions and utilise its own tools, such as closing loopholes on current export restrictions and applying economic sanctions, to maintain its position in the trade dispute. 

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