The U.S. and other Western nations have begun adopting more interventionist policies in their business relations with China, imposing tariffs and implementing measures to curb the transfer of technology that could bolster China's economic and military capabilities. However, China, with its well-developed economy and strong position in several global industries, is countering these actions with its own measures, particularly in the semiconductor sector.
China's recent export controls on critical materials for semiconductor production, such as germanium and gallium, are significantly impacting global supply chains. These materials are essential for the manufacture of advanced chips and military equipment, and the restrictions are causing disruptions for European and other Western manufacturers. The move has led to a sharp increase in mineral prices, with the cost of germanium, for instance, rising by 52% since June to $2,280 per kilogram in China.
The restrictions, introduced in July 2023, were framed by Beijing as necessary to protect "national security and interests," and are seen as a direct response to U.S.-led efforts to limit China's access to advanced semiconductor technology. Germanium and gallium are vital not only for semiconductors but also for other high-tech applications, including solar panels and electric vehicles.
Germanium is used in the production of optical fibers, high-speed chips, and infrared technology, including military applications like night vision goggles. Gallium, often in the form of gallium nitride or gallium arsenide, is crucial for creating integrated circuit chips and optoelectronic devices, such as laser diodes and LEDs. These materials are also important in the electric vehicle industry, where they improve efficiency and thermal management in semiconductors, leading to more cost-effective cooling systems and lighter vehicles.
China's dominance in the production of these materials is stark. The country produces about 60% of the world's gallium and 90% of its germanium. This has left Western nations heavily dependent on Chinese supplies. Between 2018 and 2021, China accounted for over half of the U.S. imports of these materials, and in 2022, U.S. import dependence for gallium and germanium exceeded 50% and 100%, respectively.
China's export restrictions have led to a scramble among Western-aligned countries, such as South Korea and Japan, to secure these critical materials. This surge in demand, coupled with constrained supply, is driving prices up further. As a result, higher costs may eventually prompt other countries, including Japan, Canada, and the U.S., to invest in new processing facilities, which could reduce China's dominance in these markets over time. However, building such infrastructure will take time, and in the interim, the global supply chain remains vulnerable to China's policy decisions.
The situation underscores the broader geopolitical and economic tensions between China and the West, as both sides seek to secure their interests in a rapidly evolving global landscape. While Western nations work to reduce their reliance on Chinese materials and technology, China continues to leverage its dominant position in key industries to influence global markets.
