Beijing Counters Washington

Beijing Counters Washington
Various rare earths piled to be loaded onto a ship at a port in Lianyungang, east China's Jiangsu Province, on Sept. 5, 2010 (STR/AFP via Getty Images)
Milton Ezrati

Beijing and Washington seem to have entered a tit-for-tat competition on trade. Late last year, the Biden administration placed restrictions on the export to China of equipment for the manufacture of advanced semiconductors and at the same time announced subsidies for the domestic manufacture of semiconductors. Washington even got Japan and the Netherlands to join the export ban. Now, just before the beginnings of high-level China–U.S. talks on trade, Beijing has parried these moves by imposing restrictions on the export two metals—gallium and germanium—both of which are essential to many commercial and military applications. So far, Washington has not responded to Beijing’s move.

No doubt with an eye to these trade talks, Beijing has delayed the start of this ban to Aug. 1. That perhaps constitutes an invitation for Washington to disarm matters by softening what in recent months has become an increasingly hostile approach to China. Still, Beijing clearly is preparing to use this trade weapon. Recalling America’s 2014 victory at the World Trade Organization (WTO) when China banned the export of rare earth elements, this latest ban has a very different administrative structure. To make it harder to bring a WTO case much less win it, Beijing would not simply ban exports but rather would insist that producers obtain a special license to export the metals. Officials could then grant the licenses on a case-by-case basis according to what Beijing would claim as protection for “national security and interests.”

For the period immediately ahead, this is no small matter for the United States. China at present is the world’s largest supplier of these critical metals. Volumes of production and trade are small, but the metals are nonetheless essential to the production and maintenance of semiconductors, phone chargers, missile technologies, electric vehicles, fiber optic systems, solar cells, and the like. At present, some 94 percent of the world’s gallium and a comparable portion of the world’s supply of germanium come from China. To be sure, neither metal is especially rare. Indeed, the United States is home to the world’s largest germanium mine. Large deposits also exist in Russia, Belgium, and Canada. Gallium deposits are found in Russia, Ukraine, Japan, and South Korea. But over the years, China has undercut prices in the sometimes-expensive extraction and refinement process so that many of these sources have fallen into disuse, including the huge gallium mine in the United States.

Treasury Secretary Janet Yellen recently traveled to China for talks on trade. She has criticized the export controls and made conciliatory noises to the effect that the relationship should take on the character of “a winner-take-all fight.” Although Beijing has given a month before its counterattack goes into effect, Yellen has little room to offer Beijing any concessions in return for a change in this proposed gallium and germanium arrangement. Given Washington’s past anti-Chinese rhetoric and other actions from the Biden administration, almost any softening could be viewed as weakness in Washington.

Even if Secretary Yellen finds some way to disarm the present impasse, China’s threat on gallium and germanium, as well as earlier threats to cut off supplies of rare earth elements, should serve as a wake-up call for the United States and the rest of the developed world. There is a crying need for America, as well as Europe and Japan, to diversify its sourcing of raw materials and manufactures away from China, to “de-risk,” in the phrase preferred by the European Union over “de-couple.” Japan at the recent G-7 meetings had already warned the world of the dangers of too much dependence on Chinese sources. Tokyo proposed a scheme to find alternatives elsewhere in the world, Africa for instance, on rare earth elements, and if necessary, provide funding for development. So far, no other country, including the United States, has shown much enthusiasm for the Japanese plan, but this latest threat with gallium and germanium might well change attitudes in both Washington and European capitals.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, a New York-based communications firm. Before joining Vested, he served as chief market strategist and economist for Lord, Abbett & Co. He also writes frequently for City Journal and blogs regularly for Forbes. His latest book is "Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live."
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