China has fired back in the ongoing semiconductor exports war by announcing export restrictions on gallium and germanium, two crucial elements used in semiconductor manufacturing, solar panels, and fiber optics.
The move is seen as a retaliatory response to long-standing export restrictions imposed by the United States and its Western allies on advanced technologies. As tensions escalate, concerns arise about the impact on global supply chains and the potential for a further escalation in trade conflicts.
China Strikes Back with Export Controls
On July 3, the Chinese Ministry of Commerce announced plans to implement a license system for the export of gallium and germanium due to national security concerns. This retaliatory move signifies an escalation in the ongoing technology war, according to Kevin Klyman, a technology researcher at the Harvard Kennedy School’s Belfer Center for Science and International Affairs.
While the price of gallium and germanium immediately surged following the announcement, the new export curbs are not expected to hit the US as hard as American export restrictions have affected China. These two materials have relatively niche applications in the semiconductor industry, and other countries have the potential to increase their own production to substitute for China’s supply.
Nevertheless, the license system grants China more leverage in trade negotiations, particularly with countries like Japan and South Korea that heavily rely on these imports for their semiconductor industries.
Gallium and Germanium’s Significance and Immediate Impact
Gallium and germanium play vital roles in semiconductor manufacturing, with germanium prized for its high electrical conductivity and gallium offering valuable alloying effects. These elements are crucial in various technologies, including radio communication equipment, LED displays, fiber optics, and solar cells. China currently dominates global production, accounting for about 60% of germanium and 90% of gallium.
However, China’s limited capacity to transform these materials into later-stage semiconductor products results in significant exports to Japan and Europe. The new export license regime, effective from August 1, has already triggered a surge in purchase orders and an increase in prices for gallium and germanium. Chinese producers of these materials have experienced a boost in stock prices.
While the license system does not impose a ban, the ease of securing export licenses remains uncertain. China’s control over permit issuance grants it leverage in trade negotiations and potentially disrupts the operations of Chinese companies restricted from working with foreign partners.
Environmental Concerns, Diversification, and Future Controls
In response to the increased uncertainty surrounding the licensing regime, importers of gallium and germanium from abroad may actively explore alternative and more dependable suppliers. Mining companies in countries like Congo and Russia have already indicated their plans to boost germanium production, while Western nations including the US, Canada, Germany, and Japan possess the capability to scale up their own production capacities.
However, expanding production poses challenges due to the environmental impact of mining processes, which led to the initial offshoring of production to China. This situation may prompt the West to accelerate innovation in separating and purifying rare-earth metals or consider relaxing environmental regulations to utilize traditional techniques.
China’s export controls on gallium and germanium may have limited impact compared to American export restrictions due to the availability of alternative suppliers and the advantages enjoyed by the US, such as the international importance of the dollar. Furthermore, China’s own economy heavily relies on export trade, and restricting Chinese companies’ access to global markets could negatively affect their businesses.
However, China’s toolbox of export control measures extends beyond these materials, potentially leading to future clampdowns on rare-earth elements or materials used in electric-vehicle batteries. Given the larger quantities involved, these substances are harder to substitute, providing China with potential leverage in future negotiations.
Adapting to a Shifting Semiconductor Landscape
China’s retaliatory move to impose export controls on gallium and germanium highlights the intensifying technology war and escalating trade tensions. The restrictions raise concerns about global supply chains, the impact on Western companies, and the potential for further trade conflicts. As China’s export controls expand, the long-term implications and the ability of other nations to adapt and diversify their supply chains will be crucial in navigating the changing dynamics of the global semiconductor industry.
