The Chinese Ministry of Commerce recently announced its plans to put strict regulations on the export of two critical raw materials, namely gallium and germanium. As of 1 August 2023, companies must apply for permission from the Chinese Ministry of Commerce and obtain a license to export gallium and germanium – or gallium- and germanium-related products – out of China. Exporters will have to “provide detailed information about the consignee of the product”. Beyond this, what will concretely be required to obtain a license and what could lead to an export prohibition is not yet known.
🌱 How does this impact Western economies?
China produces the largest global share of gallium and germanium. As gallium and germanium are used in the production of semiconductors, solar cells, and electric vehicles, the export restrictions have led to concerns in the West and “nervousness in the market”. Companies that need Chinese raw materials “are wondering whether their supply chains for the raw materials will remain resilient”, after the licensing requirements come into effect in August. The Chinese Ministry of Commerce previously “regulated the export of metals such as rare earths in 2010” and this caused prices to fluctuate considerably at the time. Given the current export restrictions, there are also concerns that export bans on rare earths could be coming next. According to estimates from Goldman Sachs, “the West may need more than $25 billion in investments to match China's supply of rare earths”.
🌱 What does this mean for U.S.-China relations?
China “occupies an almost dominant position in the raw materials sector”. China has, however, “not yet been able to catch up technically with the chip industry of South Korea or Taiwan”. The U.S., the Netherlands, and several other Western countries have recently taken measures to limit the export of chip technology to China. To some industry observers, China’s “new regulation [is] a reaction to the U.S.’ efforts to cut China off from the supply of modern semiconductor chips”. Notably, a day after the announcement of the export restrictions on gallium and germanium, U.S. government plans “to prohibit Chinese companies from accessing cloud computing services” – such as those from Amazon and Microsoft – leaked. This prohibition has been explained through the fact that the access to these cloud computing services makes “powerful computing capacity […] possible without physically owning the necessary chips”.
🌱 What impact do the export restrictions have on the EU?
Through the Critical Raw Materials Act, the EU has tried “to ease financing and permitting for new mining and refining projects and [to] strike trade alliances to reduce the bloc’s dependence on Chinese suppliers”. Yet, the EU currently still receives 71% of its gallium and 45% of its germanium from China. The EU also “largely depends on China for a set of clean technologies and critical components, so an escalation of [trade] tensions might make Europe’s green transition more bumpy”. As “China’s $6.8 trillion consumer marketplace is a critical destination for European exports of cars, pharmaceuticals and machinery”, the EU is continuously trying to find a midway in its approach to China.
🌱 Could there be a WTO complaint?
It is possible to bring a complaint at the dispute settlement body of the World Trade Organization (WTO) over export restrictions of the sort that China is deploying. In line with this, the European Commission “could confront China’s new export restrictions via dispute settlement proceedings”. A dispute of this sort would, however, likely take years. Moreover, under the WTO rules, a government is permitted to take “any action which it considers necessary for the protection of its essential security interests”. As China claims that its measures are necessary to ensure national security, it could make use of this exception.
🌱 What critical raw materials does China currently supply?
China currently provides 80% of the metal supply needed for high-end tech, including renewable energy technologies. China is the largest manufacturer of rare earths. Notably, China also produces 97% of solar wafers and up to 95% of anode materials globally.
🌱 What steps are planned to further reduce EU and U.S. mineral dependencies?
The EU and U.S. have recently been working to establish a “buyers’ club” for critical raw materials, by setting up strategic deals and investment partnerships. In line with this, the EU and U.S. plan to negotiate a Critical Minerals Agreement. Through the agreement, the EU particularly hopes “to foster EU-US supply chains in critical raw materials needed in the production of electric vehicle batteries”.