Opinion
China is on a collision course with Trump. It just fired a warning shot
Stephen Bartholomeusz
Senior business columnistIt didn’t take China long to respond to the latest United States attempt to frustrate its ability to develop an advanced semiconductor industry. The nature of that response may be a taste of what lies ahead.
On Monday, the US Commerce Department announced new export controls on semiconductor manufacturing tools and advanced high-bandwidth memory that are critical to AI. The controls, directed squarely at China, will also apply to foreign companies that use US technology in their chip-making equipment.
Chinese President Xi Jinping. Beijing has responded immediately to the latest move by Washington. Credit: Bloomberg
Within 24 hours, China responded. Its commerce ministry said on Tuesday that it would prohibit exports to the US of dual-use items (those with both military and civilian applications), including exports of gallium, germanium, antimony and super-hard materials like tungsten. It would also impose stricter controls on graphite exports.
The speed at which China unveiled its tit-for-tat response is unusual. It has, in the past, taken its time – sometimes waiting months – before reacting to US export controls on advanced technologies.
It may have been able to respond more decisively because last year it created a legal framework and processes for controlling and approving exports of critical minerals. To better target its retaliations, it also directed rare earths exporters to identify and report every step in the usage of the minerals within Western supply chains.
The new US controls, which the US Commerce Secretary, Gina Raimondo, described as “groundbreaking and sweeping”, are the fourth action taken by the US in the past three years to try to stymie China’s development of an advanced chip-making industry.
The new rules restrict the export of 24 types of chip-making tools that hadn’t previously been targeted and – because most non-US companies that make the tools use US components – ought to be very effective in crimping China’s ability to develop the advanced chips needed for artificial intelligence.
China, whose commerce ministry said the US was “weaponising trade and technology” using national security as an excuse, has deployed its most powerful trade weapon in response, attacking the most vulnerable part of the US supply chain for its own advanced semiconductors and military hardware.
China dominates the global supply chain for rare earths and other critical minerals. It has about a third of the world’s reserves of rare earth elements and 85 per cent of the world’s processing capacity.
The US, even as it has tried to reduce its dependence on China for critical minerals, still relies on it for about 54 per cent of its germanium and more than 20 per cent of its gallium. Much of the semi-processed materials it acquires from other sources, such as Japan and South Korea, originate from China.
China’s dominance of critical minerals has been an obvious point of vulnerability for the US and its allies ever since the first Trump administration started the trade war with China in 2018.Credit: Getty Images
The minerals targeted by China are used in everything from semiconductors to satellites, smartphones, solar cells, camera lenses and even bullets and shells. Further tightening of the controls on graphite exports will impact electric vehicle batteries (China supplies about two-thirds of global demand for graphite and 90 per cent of the graphite used for EV batteries), steelmaking and nuclear reactors, among other applications.
China’s response will have an impact. The US Geological Survey said last month that a total ban on Chinese exports of gallium and germanium would wipe $US3.4 billion ($5.24 billion) off US GDP, with most of the impact (about 40 per cent) centred on the semiconductor device sector.
If there were a total ban, gallium prices could rise more than 150 per cent and germanium prices by 26 per cent, it said.
China has weaponised its rare earths dominance before. In 2010, after a collision between Japanese coast guard vessels and a Chinese fishing trawler in the disputed waters of the East China Sea led to the arrest of the trawler’s captain, who Japan said had rammed its boats, China banned exports of rare earths to Japan, alarming the Japanese, whose industrial base was heavily dependent on access to China’s production.
Not long after, with funding from the Japanese government, a Japanese trading house entered an alliance with Australia’s Lynas Corp to accelerate the expansion of its rare earths project at Mount Weld in Western Australia.
China’s dominance of critical minerals has been an obvious point of vulnerability for the US and its allies ever since the first Trump administration started the trade war with China in 2018.
The Biden administration and US allies like Japan, South Korea, the European Union and Australia have all been developing plans to reduce their dependence on China. There are massive incentives within Biden’s flagship Inflation Reduction Act for increased supply from domestic sources and “friend-shoring” from its allies.
China’s big trade surplus with the US – for the first 10 months of this year it was $US785.3 billion – and the fact its semiconductor technologies lag those of the US means it can’t respond conventionally to US trade sanctions by simply matching them.
Donald Trump, the “Tariff Man”, will be back in the White House in January, surrounded by China hawks. If he makes good on his promise to impose a 60 per cent tariff on imports from China, slapping similar tariffs on the $US145 billion a year or so of US exports to China would be a relatively feeble response.
That’s why China’s response to the latest US restrictions is a glimpse into a future where China pursues asymmetrical warfare, surgically targeting America’s most obvious vulnerabilities by deploying its most strategic assets.
The lead author of the US Geological Survey analysis, Nedal Nassar, framed China’s strategy quite neatly.
“Losing access to critical minerals that make up a fraction of the value of products like semiconductors can add up to billions of dollars in losses across the [US] economy,” he said.
The speed at which China unveiled its tit-for-tat response is unusual.
There would be a lot of bang for not that many bucks if China broadened its ban on exports of critical minerals to the full range that it dominates and, as the US has done with its export controls, used the threat of bans to coerce US allies from supplying semi-processed material of Chinese origin to the US.
As a bonus, while throttling US access to the minerals vital to advanced technologies, it would, of course, retain its own access to them.
While it left Trump’s first-term tariffs in place, the Biden administration has focused almost entirely on limiting China’s access to the building blocks for the most advanced technologies, mainly advanced chips and the tools for making them.
China would be hit hard if Trump were to carry out his threat to impose punitive tariffs on all its exports but, between the likely Chinese retaliation and the impact of those tariffs on the US companies and consumers who would pay for them, either through increased prices and/or lost access to some critical raw materials, products or components, the US wouldn’t escape the fallout from a full-scale trade war.
Trump’s conviction that trade wars are good and easy to win may well be tested more severely in his second term than it was in his first if China’s actions this week – which could be interpreted as a warning shot of what it could do in response to a full-scale assault on its exports – prove effective.
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