China’s Decision to Control Export of Key Metals Risks Backfiring in Trade War With G7

China has unveiled a new export licensing system for gallium and germanium, two key metals used in the production of chips, electric cars, and telecommunications equipment. The move highlights China’s dominant position in the global production of these metals, but it also carries the risk of backfiring on China’s efforts to maintain its technological development.

The timing of the announcement, just before US Treasury Secretary Janet Yellen’s visit to Beijing, suggests that China aims to leverage its position in negotiations with the United States.

While China’s control over these metals gives it some power to retaliate against export controls imposed by the US, Japan, and Europe, it also opens the door for these countries to reduce their dependence on China. If China restricts shipments and cuts supply to other nations, prices are likely to rise, making it more economical for countries like Japan, Canada, and the US to boost their own output.

Ja Ian Chong, an associate professor of political science at the National University of Singapore, notes that there may be some “initial shock” but they will adjust to these restrictions.

“It’s part of the tit-for-tat the [People’s Republic of China] is playing with the US and its allies,” said Chong. “There may be some initial shock to the markets and firms but over time, should these restrictions persist, markets and firms adjust.”

The export controls on gallium and germanium underscore the dilemma faced by Chinese President Xi Jinping as he seeks to counter US efforts to hinder China’s access to crucial chips for technologies like artificial intelligence and quantum computing.

However, reciprocal actions by China only provide the US and Europe with more reasons to push for derisking and diversification of supply chains away from China.

Beijing’s previous efforts to restrict the sale of rare earths have actually diminished its market share as other countries seek alternative supplies. In 2010, China temporarily halted rare earth exports to Japan, leading to a race among countries to find alternative sources. As a result, Australia and the US increased their output, reducing China’s share of global mining output from 98% in 2010 to 70% in 2022.

China currently accounts for about 94% of the world’s gallium production, but the metal is not particularly rare or difficult to find. China has kept gallium and germanium cheap, although their extraction can be relatively high-cost.

The eastern superpower justifies the new export licensing system for gallium and germanium by citing national security concerns, similar to the justifications given by the US and its allies for their own export controls. Starting from August 1, exporters of gallium and germanium will need to apply for licenses from China’s Ministry of Commerce and report details of overseas buyers and their applications.

Gallium and germanium are both silvery-white metals classified as “minor metals.” They are not typically found on their own in nature but are produced as byproducts from refineries focused on other raw materials like zinc or alumina. While the markets for these metals are relatively small compared to commodities like copper or oil, their use in strategic industries gives the export controls significant implications.

Gallium is used in compound semiconductors, improving transmission speed and efficiency in devices such as TV and mobile phone screens, solar panels, and radars. Germanium finds application in fiber-optic communication, night-vision goggles, and space exploration, with most satellites powered by germanium-based solar cells.

Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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