Washington: In December 2024, the US Bureau of Industry and Security announced a new package of strategic export controls targeting 140 Chinese companies. This initiative stems from concerns that the Chinese military could utilize artificial intelligence (AI) for automated identification and targeting of human subjects. The regulatory measures cover high-bandwidth AI memory chips, software for chip design and development, and semiconductor manufacturing equipment. The Biden administration’s objective is to hinder China’s progress in developing advanced AI weapons, akin to those used recently by Ukraine and Israel.
China‘s Response: Rare Earth Metal Export Ban
In retaliation, China has imposed a ban on the export of rare earth metals and other critical high-tech materials, including gallium, germanium, and antimony. These materials are essential for US military projects, such as the production of F-35 fighter jets. Notably, gallium is crucial for high-performance memory chips that the US aimed to restrict from China. Analysts predict that the absence of gallium and germanium could potentially disrupt US supply chains, costing up to $3 billion.
Interestingly, data from Chinese customs reveals that no shipments of gallium or germanium were exported to the US this year, even before the ban was officially announced. Historically, China has maintained a dominant position in the global supply of rare earth metals, accounting for over 90% of production. This monopoly has been leveraged as a strategic tool during trade conflicts.
US Measures to Counter China’s Dominance
Since Beijing imposed quotas on rare earth exports to the US in 2009, Washington has been proactive in building a “Minerals Security Partnership” with several countries, including Australia, Japan, and the European Union. Although the US has significant rare earth deposits, domestic mining has been limited due to environmental concerns. However, the strategic importance of these minerals has prompted a renewed focus on domestic production in states like Alaska, Montana, Nevada, and Minnesota.
The US Department of Defense is also taking steps to recycle rare earth materials, inspired by Japan’s gallium recovery methods from scrap. This includes efforts to recover germanium from outdated military technology, such as night vision devices.
Semiconductor Export Controls
In August 2024, the Biden administration revised the Foreign Direct Product Rule to prevent the export of semiconductor manufacturing equipment from foreign countries to Chinese fabs. Under this rule, if a chip incorporates American technology, the US government can halt its sale, even if it’s produced overseas. This policy has pressured countries like Singapore and Taiwan to refrain from supplying Chinese manufacturers.
Additionally, the US has entered agreements with Japan and the Netherlands to synchronize their export control measures regarding semiconductor technology, reinforcing restrictions on China. The recent sanctions also apply to Chinese-owned firms based in other countries, such as Japan and South Korea.
China’s Countermeasures and Antitrust Actions
In line with its previous restrictions, China has broadened its ban on rare earth exports to the US, now applying to all countries, corporations, and individuals. This shift requires exporters to obtain licenses for sending gallium and germanium, reflecting China’s growing assertiveness in trade policy. Furthermore, Beijing has launched antitrust investigations against US companies, including chipmaker Nvidia, for alleged violations of Chinese competition laws.
Nvidia has been adapting its products for the Chinese market to comply with US export restrictions imposed in 2022 and 2023, illustrating the complexities of operating in this increasingly contentious environment.
Impact on Global Supply Chains
The ongoing trade tensions have significantly affected global supply chains, particularly in the electric vehicle (EV) sector. China’s tightened controls on graphite exports have disrupted EV manufacturing schedules and raised production costs. While China’s EV industry is expanding rapidly, the 100% tariff on Chinese EVs imposed by the US prevents American consumers from benefiting from lower-priced vehicles.
A notable exception to the ongoing trade turmoil is Tesla’s distinctive standing in the Chinese market. As the first foreign company to establish a wholly-owned factory in Shanghai without a joint venture, Tesla has received substantial incentives from the Chinese government. These benefits include favorable financing from state banks, a reduced tax rate of 15%, and advantageous lease terms.
Conclusion: Navigating a Complex Landscape
Elon Musk’s Tesla may hold a pivotal role in alleviating trade tensions between the US and China. The company’s investment model demonstrates that it is possible to engage in collaboration on emerging technologies without significant technology transfer—an area of concern for the US administration. However, reversing trade restrictions to pre-2008 levels remains a challenging prospect, highlighting the intricate dynamics of this ongoing geopolitical struggle.
As the trade war evolves, the implications for global supply chains and the tech industry are profound, emphasizing the need for companies and governments to adapt to this new reality.