China Restricts Export of Rare Metals Used in High-Performance Chips; Expert Says Move Mainly for Propaganda

(Nicolas Asfouri /AFP via Getty Images)

The Chinese Communist Party’s announcement of new state controls that restrict exports of gallium and germanium on July 3 is retaliation for the West’s chip sanctions on the regime, according to a Taiwan-based defense expert.

Su Tzu-yun, director of the Institute for National Defense Security Research in Taiwan, said that the move by China’s Ministry of Commerce and Customs related to the key rare earth metals used in making semiconductors is only symbolic in nature, as it will have a limited effect on the global chip industry. He said that the Chinese Communist Party’s (CCP) retaliation, effective on Aug. 1, will only accelerate the “de-risking” priorities of the United States and Europe, which may see China lose its current dominant position in the rare metal industry.

According to public data, germanium is a key material in the manufacture of fiber optic cables and also used in high-speed computer chips, infrared radiation, military applications such as night vision equipment and satellite image sensors.

Semiconductor wafers made of gallium arsenide are heat-resistant and can operate at higher frequencies with less noise and are used in radar and radio communications equipment, satellites, and LEDs.

An employee makes chips at a factory of Jiejie Semiconductor Co. in Nantong, Jiangsu Province, China on March 17, 2021. (STR/AFP via Getty Images)

China’s leading finance media outlet Caixin cited Chinese customs data from 2022, which showed that the largest importers of Chinese gallium products were Japan, Germany, and the Netherlands; and the largest importers of germanium products were Japan, France, Germany, and the United States.

A Political Gesture

Just a few days earlier, the Dutch government announced new regulations on the export of chip manufacturing equipment. From Sept. 1, the export of equipment used to manufacture high-end chips for “advanced military applications” without a permit will be prohibited by the Netherlands.

Mr. Su told The Epoch Times that the CCP’s new export controls are clearly retaliation against the Dutch move, part of an alliance led by the United States to ensure that authoritarian regimes do not have access to advanced chips.

“In the past, only export of the advanced EUV (extreme ultraviolet lithography) equipment to China was banned. Now, even the DUV (deep ultraviolet lithography) has been prohibited to be provided to the regime,” he said of the restrictions, which he said he believes were made more for their domestic propaganda value.

An employee walks past an ASML logo, a Dutch company, which is currently the largest supplier in the world of semiconductor manufacturing machines, at the company's headquarters in Veldhoven on April 17, 2018. (EMMANUEL DUNAND/AFP/Getty Images)

“The CCP has no other way to retaliate. So on the one hand, it expresses Beijing’s dissatisfaction [with the West’s chip sanctions]. On the other hand, it’s used as a tool for internal propaganda,” he said.

Gallium and germanium are by-products of coal and bauxite processing, and they are available in other parts of the world. China has the advantage of cheap pricing. Analysts believe that this move will only accelerate the United States and Europe reducing their dependence on a China-based supply chain, making production of the rare metals elsewhere more profitable.

Not a Seller’s Market

Mr. Su pointed out that the two rare earth metals aren’t in a monopolized seller’s market.

“First, because the chip itself is relatively small, the amount of rare metal used is relatively limited,” he said. “Second, there are alternative origins of the rare metals, although the reserves of them are far less than in China, but still enough for contingencies; third, the recycling technology further reduces demand from China. What’s more, gallium itself is a byproduct of aluminum smelting, and gallium will be produced when aluminum is refined. Therefore, the CCP does not even dare to raise prices, as it is not a unique business.”

Mr. Su said that while the CCP may try to use its control over these rare metals as a weapon against West, the United States and Europe can reduce the effectiveness of that weapon in three ways: “Namely, opening new mines, redesigning electronic equipment and developing new technologies to reduce demand, and thirdly, improving recycling technologies.”

Accelerating Decoupling

Feng Chongyi, an associate professor at the University of Technology Sydney in Australia, told The Epoch Times: “The CCP is generally worried about decoupling from the outside world because it’s an export-oriented economy that is very much dependent on foreign trade. This move [the rare metal export restriction] is for the CCP’s political needs, and they would rather suffer economic losses for it. [The semiconductor war] is a conflict of systems; an ideological conflict which is structural.

“The United States already has an established policy which is to decouple from China on the most critical product of chips. The CCP’s retaliation will not affect it, because it’s based on strategic security consideration. So this decoupling and the fight will continue.

People visit Semicon China, a trade fair for semiconductor technology, in Shanghai on March 17, 2021. (Aly Song/Reuters)

“Because cutting-edge chips and lithography machines are irreplaceable, the ban on the export of them to China causes great harm to the CCP and will be fatal, because it will never have the opportunity to manufacture high-precision chips. But if China doesn’t export these rare metals or minerals, the United States and other countries will buy them from other places, and the damage will not be great.”

The United States and the Netherlands are expected to further restrict the sale of chip-making equipment to China this summer to prevent its use by the Chinese military.

Song Tang and Yi Ru contributed to this report.