The Promethean War Series: China's Retaliation

The US-China tech-for-tat battle continues as Washington and Beijing leverage their strategic positions in the semiconductor supply chain to pressure their rival.

In retaliation for US restrictions on certain types of semiconductors, China recently announced export restrictions on two rare earth metals: gallium and germanium. These metals are vital components in the production of various industrial products, including but not limited to: electric vehicles (EVs), cell phones, satellites, and most importantly:

Semiconductors: the forefront of the US-China Promethean War.

China's dominance in the production and processing of rare earth metals gives it extraordinary geo-economic leverage: according to the Critical Raw Materials Alliance, China currently produces 60% of the world's germanium and 80% of gallium. With the new regulations in place, Chinese exporters will now be required to obtain a license before exporting these metals.

China accounts for roughly 70% of global mine production of rare earths in 2022, and is home to at least 85% of the world's capacity to process rare earth ores into material manufacturers can use.

China's rise to prominence in the rare earth metals industry is in large part due to lax environmental standards that allowed the country to outcompete Western producers. But Washington, Europe, and Indo-Pacific allies alike are taking note and not standing by idly.

Japan and South Korea, strategic regional US-allies and key nodes in the global semiconductor supply chain, are the largest importers of gallium and germanium. Tokyo has threatened to take the matter up to the World Trade Organization.

This is but one consequence of China’s restrictive measures.

The imposition of export restrictions on these rare earth metals will expedite China’s trade partners to accelerate diversification of their supply chains. Europe’s recent experience with Russia leveraging its petroleum-based, geo-economic advantage has left a sour taste in Brussels, and they are not keen to repeat it with China.

Consequently, policies of de-risking - which are a euphemism for decoupling but without the negative connotations - are being becoming a central framework for the new phase of EU-China relations. The political backlash against China's control over critical raw materials is likely to accelerate the reshuffling of supply chains in the multi-trillion-dollar industry that serves as the nerve center of the global economy.

So why did China do it?

Beijing’s justification for the new rules is centered around national security concerns, similar to the rationale the United States employed when limiting its semiconductor equipment exports to China. These policies should not be viewed in isolation, but rather as symptoms of a broader and secular geopolitical shift.

As mentioned in my previous article on unilateral sanctions, these policies reflect a prioritization of domestic security over global economic efficiency and integration. In short, it is the newest phase of globalization. As a result, countries will need to adapt to this new reality, and secure their critical raw material requirements from diverse sources to mitigate risks associated with concentrated supply.