Chip war escalates further: China restricts rare commodity exports

Beijing is clearly not content to sit back. This while the west desperately tries to maintain its own technological lead. In the US Nvidia are concerned about beckoning export restrictions. In the Netherlands, the government has looked into the export of ASML’s chip machines. It seems easy enough. Those machines are made here, so keeping them out of the hands of the Chinese is easy enough.

However, the world is more closely connected than ever before. In Veldhoven they may make machines that cannot be built anywhere else, without gallium and germanium, no chip machine will leave the factory at all. And three guesses where 98% of the world’s production of gallium and 68% of the processing of germanium takes place.

The chips have to flow, don’t they?

Of course it is mainly sensationalism that has given birth to the term ‘chip war’. The term is popular with the American media, which should surprise no one. Now of course you should never shout too loudly that it will not end in actual fighting, the current problem makes it clear once again how no developed country will still be truly self-reliant in 2023.

China and the US are often at odds in the economic field. The current troubles date from October of last year. Then the Biden administration introduced export restrictions on advanced chips and the means to produce them against China. As the recent acts of desperation by Russian arms manufacturers show, chips are in absolutely everything these days. Smartphones, cars, of course computers as well as weaponry.

Mutual distrust ensures that the current technological race is one that neither side dares to lose. In the past year, the US has put considerable pressure on, for example, the Dutch and Japanese governments to close ranks. So with success. It was to be expected that China would strike back. In April, Beijing began an investigation that led to the exclusion of US company Micron from certain domestic projects. Now there are the aforementioned limitations.

What are we talking about?

Galium and germanium are so-called ‘rare earth elements’. They are raw materials that can be fairly common in terms of mass percentage. But the amount of usable ores is limited, and excavation often involves excavating bizarre amounts of earth to find enough of the stuff. Galium is mainly used in the production of semiconductors such as light-emitting diodes (LED lamps). Germanium is used in making optical cables.

Because these elements require intensive mining, they are relatively little mined in the Western world. Galium and germanium are often extracted as a by-product of mining aluminum, zinc and copper. The only Western countries where rare earth elements are extracted in really significant quantities are therefore also countries with a large mining industry: Australia and the US.

Beijing trump card

So even the US is dependent on China for gallium and germanium. The US is a major importer of rare earth elements from China anyway. Between 2018 and 2021, the US imported 74 percent of all imported rare earth elements from that country. The Western world may be far ahead of China in the field of chip production, but if China decides to severely restrict the export of these elements, it will have major consequences.

Still, it is unlikely that China is out for full-blown escalation. In the end, Beijing, like any club of capitalists, wants the machines to start running again. According to political risk consultancy Eurasia Group, this is just a shot across the bow. Xi is fed up with the political turmoil at home and will now be unable to focus on the trade war if it threatens to spiral out of control.

Export restrictions on these elements will eventually also mean that China receives fewer chips. Xi will miss the instability that will result from this like a toothache. Rather, it seems to be an attempt to level the playing field. Very handy for you to join the negotiating table.

No end in sight for trade war

Although the current lines of gallium and germanium mainly run through China, this does not mean that this is an insurmountable obstacle. Countries with a smaller mining industry produce rare earth elements. Significantly smaller amounts of both elements are imported by the US from the UK and Germany. Importing a comparable amount from a majority of countries with a smaller production is possible. China, on the other hand, is simply unable to ignore ASML and the US.

China Daily (link in Mandarin) recently reported through a former minister of the country that more export restrictions are on the way. While any further restriction, no matter which side it comes from, will hit both countries, neither will simply bury the hatchet. Ultimately, both countries will probably reach a compromise, but it is not yet possible to predict what this will look like.