Xi’s metals restrictions could backfire as the G-7 looks for an alternative to China

(Bloomberg) – China's decision to control exports of two key metals showed it has some power to resist attempts by the US, Japan and Europe to cut off advanced technology from Beijing. But there is also a risk that it will backfire.

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The new export license scheme, unveiled late Monday, demonstrated China's dominance in the world's production of gallium and germanium, which are used to make chips, electric cars and telecommunications equipment. The announcement – just days before US Treasury Secretary Janet Yellen's visit to Beijing – seems timely to put pressure on China and urge the White House to lift export controls that could hamper the country's development.

But the measure is a double-edged sword and could only speed up those countries' efforts to reduce dependence on the world's second-largest economy. If Beijing were to eventually use these new rules to limit supplies and curb shipments to other countries, prices would likely rise, making it more economical to ramp up production in Japan, Canada, the US, or elsewhere.

“It's part of the competition that the People's Republic of China has with the US and its allies,” said Ja Ian Chong, associate professor of political science at the National University of Singapore. He was referring to the country's official name, People's Republic of China. “Initially there may be a shock to markets and businesses, but over time if these restrictions persist, markets and businesses will adjust.”

The move underscores the dilemma President Xi Jinping faces in trying to counter US efforts to block China from accessing the chips needed for dominance in technologies like artificial intelligence and quantum computing. Any countermeasures only give the US and Europe more ammunition to push for de-risking, which the Xi government has been trying to counter.

“China always takes a reciprocal approach,” Roy Lee, Taiwan's deputy foreign minister, said of the new measures, which he described as retaliation for export controls by the US and other democratic nations. These “will become an accelerator for countries like Taiwan, South Korea and Japan to reduce our dependence on China's supply of these critical minerals and materials.”

rare earth weapon

China's past efforts to curb rare earth sales have only eaten away at its market share as other countries work to secure supplies of metals not controlled by China.

China first introduced a rare earth export license system in the 1990s while gradually raising taxes, putting pressure on companies in Japan and elsewhere that depended on Chinese supplies. The big shift came in 2010, however, when Beijing temporarily halted exports to Japan in response to a collision between a Chinese fishing boat and the Japan Coast Guard near islands claimed by both countries.

This incident sparked a race to find alternative supplies from China. Production then surged in Australia and the US, causing China's share of mining production to fall to 70% of global supply in 2022 from a peak of 98% in 2010, according to the US Geological Survey.

China currently accounts for around 94% of global gallium production, according to the UK's Critical Minerals Intelligence Centre. Still, the metals aren't particularly rare or difficult to find, although China has kept them cheap and can be relatively expensive to extract.

“Imposing export restrictions risks reducing market dominance,” researchers at the Eurasia Group, including Anna Ashton, wrote in a note. “If China's new restrictions on mineral exports are implemented in this way, they could give new impetus to foreign manufacturers to shift their production out of China, which would accelerate the trend towards supply chain diversification.”

China said the new licensing system for the export of gallium and germanium and their chemical compounds aims to protect national security – the same justification the US and its allies use for export controls.

Still, the announcement sparked concerns in Europe about a possible short-term disruption to supply chains and is likely to stimulate discussion on how to reduce the bloc's reliance on China.

The European Union last month announced a new strategy for economic security, launching a Critical Raw Materials Act to make it easier to finance and permit new mining and refining projects, and also forge trade alliances to reduce the Union's dependence on Chinese suppliers to reduce. If the new rules were used to limit exports, this escalation of tensions could jeopardize the Union's ability to green its economy.

The immediate impact of the changes appears to be limited, according to a statement from Korea's Industry Ministry on Tuesday, which indicated that there were further stocks of the two metals.

But even if China doesn't use this new rule to restrict exports at some point in the future, it arguably has more to lose than the US, especially as its mounting economic challenges raise questions about whether it will ever take the lead as the world's largest country becomes economy.

Beijing's most effective means of sanctioning others is to cut off access to its vast market or restrict exports of strategically important goods. However, this further fuels the decoupling from China that Beijing wants to avoid as it would undermine its stated goals of ensuring the country is dominant in emerging technologies and vital in global supply chains.

For now, however, the growing ideological battle between the U.S. and China is taking precedence over globalization, Morris Chang, founder of chip giant Taiwan Semiconductor Manufacturing Co., said at an industry event in Taipei on Tuesday.

“Right now, national security, as well as technology and economic leadership, take precedence over globalization,” he said. “US-China relations are more about competition than cooperation.”

– Featuring Rebecca Choong Wilkins, Betty Hou and Jennifer Creery.

(Updates with details on response in Taiwan, Europe and South Korea from paragraph 6.)

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