China Fires a Fresh Salvo in the Chip War

U.S. Treasury Secretary Janet Yellen began a key diplomatic trip to Beijing on Thursday, just days after China unveiled new metal export restrictions and warned of stronger countermeasures—escalatory moves designed to showcase its geopolitical leverage and willingness to hit back at Western measures.

For months, the Biden administration has intensified efforts to strangle China’s tech sector, unleashing extensive export controls and measures that would restrict its access to the powerful semiconductor chips underpinning advanced technology and weapons systems. Beijing struck back this week with export restrictions aimed at the United States and Western markets more generally on gallium and germanium, two chipmaking inputs that are also crucial to missile systems and military technology. China accounts for some 94 percent of the world’s gallium and 83 percent of germanium and currently provides around half of U.S. supplies.

Gallium and germanium are “chess pieces in a geopolitical game of enormous proportions,” said Christopher Ecclestone, a mining strategist at the financial advisory firm Hallgarten & Company. “They’re pretty key playing pieces.” 

Beijing’s latest move comes just days after the Netherlands unveiled new export controls on certain types of chipmaking equipment that could hobble Beijing’s sector, citing “national security” concerns. It also follows a slew of Biden administration moves, ranging from sweeping export controls to the CHIPS and Science Act, all of which are designed to hit Beijing where it hurts and boost domestic industry. Washington is still ramping up its efforts, including by developing a National Semiconductor Technology Center and mulling new export controls. 

China has fired back against U.S. measures before, with its most overt move coming in late May when it barred some chips made by Idaho-based Micron—one of America’s biggest semiconductor firms—from being used in Chinese infrastructure projects. Micron said the restrictions could result in a potential multibillion-dollar hit to its business, and the move provoked a strong reaction from U.S. officials.

This is “plain and simple, economic coercion,” Commerce Secretary Gina Raimondo said at the time. “We won’t tolerate it, nor do we think it will be successful.”

Like the Micron curbs, which came close on the heels of the G-7 summit in Hiroshima, Japan, China’s metal curbs are thus far being seen as more of a warning shot than a crippling blow. “They’re trying to send a strategic message, without any doubt,” said Vijay Raghunathan, a professor and director of semiconductor education at Purdue University. “They are looking at the levers that are available in their control, and something at the right level where it’s not a dramatic escalation but at the same time it sends a very clear message.”

Gallium and germanium aren’t as critical to the core chip-making process as materials like silicon, which is difficult to restrict in any case because of how abundantly available it is globally. But both metals are key components of certain technologies such as high-powered device chargers, LED lights, lasers, and military communications technologies such as radar that require a high frequency. 

“They don’t compete directly with silicon for most mainstream commercial applications like digital processing or microprocessors, but they have other niche applications and they’re really good at those,” Raghunathan said, adding that while China does account for a significant chunk of the global supply for both metals, its move is “not anywhere close to being catastrophic” to the semiconductor industry. 

The impact won’t be completely insignificant, however. Some of the metals’ compounds, such as silicon germanium, are used as an important performance enhancer in high-performance microprocessors, and gallium arsenide is a key component in some wireless communication and power electronics.

“It’s the big thick piece of semiconductor that holds the whole circuit together, and there, obviously, you’re using a lot more material for those applications,” said Steven Koester, a professor of nanotechnology at the University of Minnesota. Alternatives to some of those compounds such as silicon carbide do exist, Koester added, but in some applications such as lighting there are no easy substitutes.

And more damaging measures could follow. On Wednesday, a top Chinese trade policy advisor warned that Beijing’s latest export restrictions were “just a start” if Beijing continued to face Western pressure. “If restrictions targeting China’s high-technology sector continue then countermeasures will escalate,” Wei Jianguo, a former vice commerce minister, told Chinese state media. 

These technology and trade rifts will likely be at the forefront of Yellen’s four-day trip to Beijing, which began Thursday and is meant to enhance communication channels between both powers, although officials have downplayed expectations. In the past, Yellen has stressed the importance of continued economic engagement with China and warned about the dangers of completely decoupling. 

“China’s economic growth need not be incompatible with U.S. economic leadership,” she said in a speech in April, later adding: “We do not seek to ‘decouple’ our economy from China’s. A full separation of our economies would be disastrous for both countries.”

Still, the latest Chinese salvo may cast a shadow over any diplomatic efforts. “We see some positive signs of diplomacy, but they don’t appear to be influencing this sort of downward, tit-for-tat spiral,” said Morgan Bazilian, the director of the Payne Institute at the Colorado School of Mines. “I think we should be worried about future escalations if we follow this trend.”

It remains unclear what kind of impact the metal curbs will have on markets, although several prominent chip firms including TSMC and Intel have indicated the impact to their business would be minimal. Under this week’s measures, China will require companies to apply for a license in order to export the two metals and related compounds, which includes sharing details of the prospective overseas buyers with the Chinese government. 

But these measures could backfire on Beijing if they drive up gallium and germanium prices, thereby incentivizing more firms to vie for market power. Both metals are sourced from the mining and processing of other minerals: gallium is largely a byproduct of aluminum smelting, while germanium comes from zinc production. China has largely maintained its grip by keeping prices down; it could lose that advantage if they now surge.

“These two metals have been at pretty low prices for a long, long time, that have made it easy for the Chinese to dominate the market and not interesting for anybody else to get into that market,” Ecclestone said. “That dynamic may change now.” 

Just as Russia’s weaponization of Europe’s natural gas supply catalyzed a race to secure alternative suppliers, Beijing’s latest restrictions could have a similar impact. When China briefly weaponized its rare-earth exports against Japan in 2010, the sudden move alarmed the world and sparked a scramble to diversify away from its supply—prompting Beijing to reverse course. 

“The Chinese then sort of said, ‘Oops, we made a mistake here,’” said Ecclestone. “They dumped the price much lower, and then the whole of the rare-earth sector really collapsed … and it was back to the good old days of China selling cheap rare earths.” 

But as the U.S.-China tech competition continues to escalate, rattled governments are now bracing for future disruptions. On Tuesday, South Korea vowed to find new sources, while Japan said it was evaluating the effects of the recent measures. The United States also said it would consult with partners and allies to address the curbs. Just as with Russia’s overuse of its energy cudgel, the long-term victim might not be captive companies—but the reputation of the supplier itself.

“You can’t use [these measures] repeatedly and still be able to have this global market confidence in China as a reliable supplier,” said Jane Nakano, a senior fellow at the Center for Strategic and International Studies.