China threatens to curb mineral supply to West amid widening tech war

BRUSSELS — Beijing is giving Europe a yellow card in a future-defining trade war.

As soon as the Netherlands announced new restrictions on exports of advanced microchip machines to China on Friday, Chinese trade officials on Monday hit back with an export-control regime tantamount to threatening a ban on exports of two types of critical raw materials to unfriendly countries on national security grounds.

The two minerals on Beijing’s hit list — gallium and germanium — are well-chosen, given their role in making goods like semiconductors, 5G base stations and solar panels, items that are symbolic of the European Union’s highly prioritized digital and green transitions. Both metals are considered “critical” and “strategic” by EU standards, meaning they rely on a single source and they are important to EU industries, as well as European defense needs.

"In order to safeguard national security and interests, with the approval of the State Council, it is decided to implement export controls on items related to gallium and germanium,” the Chinese Ministry of Commerce (MOFCOM) and the General Administration of Customs (GAC) said in a joint statement.

Exporters will be required to report transactions to the local authorities, effective from August 1.

The state-run Global Times tabloid drew a direct link between the new measure and the Dutch decision on microchip machines. "While the notice issued by the MOFCOM and GAC on Monday did not go into detail of what prompted the move ... the move comes as the U.S. and some of its allies are relentlessly stepping up crackdowns on China’s technological development in various fields, including semiconductors," it said.

Beijing’s move came just days after EU leaders agreed on a new de-risking strategy in the face of economic dependency on China, with critical raw materials high on the priority list.

EU Internal Market Commissioner Thierry Breton, on a trip to Tokyo on Tuesday, announced that the EU and Japan would set up an "early warning" mechanism to prevent "disruptions" to chip production, "notably in critical raw materials components."

“[Yesterday’s] decision by China ... [regarding] export of gallium and germanium clearly shows that the Communist Party will put on its economic boxing gloves sooner rather than later,” Nicola Beer, a vice president of the European Parliament and the lawmaker in charge of the Critical Raw Materials Act portfolio, told POLITICO’s China Watcher newsletter.

“It is obvious that a new approach to managing economic and political risks vis-à-vis China is needed. Whether ‘de-risking’ turns into ‘de-coupling’ is in China’s own hands,” she said.

If China follows through on limiting exports of such minerals, Western countries will be forced to accelerate diversifying the supply sources, said Martijn Rasser, managing director of consultancy firm Datenna.

“This is a lot of bark and no bite,” said Rasser. “Ultimately, silicon is by far the predominant material for semiconductors. Yes, gallium and germanium can be important for certain types of chips. But if Beijing were to seriously constrict these critical minerals, they’re just going to accelerate the diversification of the global supply chain, just like we’re seeing with rare earths.”

Simone Tagliapietra, a researcher specializing in industrial decarbonization at the Bruegel think tank, echoes this view. “China’s move is likely to strengthen Europe’s quest for de-risking in the clean tech and critical minerals space, as it turns what has been for now a theoretical risk into a tangible one.”

However, he’s less optimistic about the EU’s capacity to diversify in the short term. “Reducing exposure to China in this space is likely to take at least a decade,” Tagliapietra said.

For now, the European Commission said it was working on a "detailed analysis" to assess the impact, according to spokesperson Sonya Gospodinova. She added that the Commission is "concerned that these export restrictions are unrelated to the need to protect ... global peace [and] stability and the implementation of China’s non-proliferation obligations arising from international treaties."

On Monday, chips manufacturers across Europe were still assessing the impact of the new Chinese measures on their manufacturing capacity. German-based chipmaker Infineon said the company was following a “multi-sourcing strategy” for its raw materials, with suppliers in different regions of the world.

“Currently, we do not see any major impact on material supplies which would disrupt our manufacturing capabilities,” Infineon spokesperson Diana Kaaserer said in a statement shared with POLITICO. Other companies, like Intel and STMicroelectronics (which are both planning new factories or factory expansions in Europe), didn’t respond to a request for comment.