Tit for Tat
The semiconductor battle between the United States and China is escalating. The U.S. has imposed sanctions on semiconductor exports to China, citing threats to national security, to which China responded by blocking exports of key semiconductor minerals. The U.S. is now considering restricting even older-generation semiconductors.
Semiconductors are key components in virtually all advanced equipment including computers, mobile phones, weapons, energy, environmental technology, artificial intelligence, ships, aviation, and space tech. Consequently, they are recognized as national strategic assets. Being pushed out of the global semiconductor supply chain could cloud a nation’s future.
The Biden administration has restricted exports to China by domestic companies like Nvidia and has made it possible for the U.S. Department of Commerce to control semiconductors produced with American technology and equipment, even if made overseas.
To counter China in the semiconductor field and build a U.S.-centric supply chain, the U.S. formed a “Chip 4 Alliance” with South Korea, Japan, and Taiwan. Through semiconductor laws, the U.S. has provided subsidies to semiconductor companies investing in the U.S., limiting the export of semiconductor chips or production facilities to China. Although the U.S. presented this as a “proposal,” virtually no one has accepted it at face value given U.S. influence.
China, a major producer of key minerals, commenced retaliation, warning of a resource war. By the end of last year, China included rare earth refining, processing, and utilization technology in the “List of Technologies Prohibited from Export and Restricted from Export,” completing public opinion gathering for a revised order in just over a month.
The revised order includes a prohibition on the export of samarium cobalt, an alloy of the rare earth element samarium and the valuable strategic resource cobalt. China is known as the only country capable of extracting these rare earth metals. Samarium cobalt magnets are the most expensive type of magnets due to using rare earth as a raw material, and China produces over 70% of them.
Fully 85% of neodymium, a major component of the most widely used rare earth magnets, is produced in China. Permanent magnets are used in electric cars, solar and wind power, consumer electronics, industrial motors, robots, and a host of other areas. Cerium is also a rare earth element.
With China controlling over 90% of the world’s rare earth refining capacity, its leaders regard the refining technology itself as a powerful weapon, seen as a countermeasure to the U.S. prohibition of exports of advanced technologies like semiconductors. Only the implementation date remains to be decided.
However, the U.S. has not ceased its strategy of isolating China in the semiconductor supply chain. The Dutch government has required government approval for the semiconductor companies based in the country, like ASML, to export related equipment to China. Japan has also moved to block Chinese companies’ access to semiconductors and semiconductor manufacturing equipment.
China began export controls on gallium and germanium a few days after the Netherlands’ new regulations and just before U.S. Treasury Secretary Janet Yellen’s visit to China. It was an action that didn’t align with the renewed atmosphere of U.S.-China communication, following successive high-level visitors like Secretary of State Tony Blinken.
Major foreign media like the Wall Street Journal (WSJ) quoted experts analyzing this as “a clear retaliation against U.S. and European semiconductor export controls against China” and “stronger than the counterattack of sanctioning U.S. semiconductor company Micron.” The Chinese Ministry of Commerce also clearly stated that it was “approved by the State Council to protect the country’s security and interests.”
Gallium and germanium are strategic resources in China. Gallium is a rare silvery-white metal, difficult to extract due to its low content in the soil and that it is commonly found alloyed with minerals like aluminum and zinc.
Global gallium production over the past year was only 300 tons, of which 98%, or 290 tons, came from China. The world’s gallium reserves are 279,300 tons, with China’s share being about 68% or 190,000 tons. Most forms of gallium, including gallium oxide, gallium nitride, gallium arsenide, and antimonide gallium, are used in semiconductor materials.
Gallium in particular is touted as a representative material for next-generation semiconductors. Gallium or silicon carbide (SiC) based next-generation power semiconductors have been areas that China has focused on cultivating. This was seen as a new market that could break away from silicon wafer-based semiconductors led by the U.S., South Korea, and Taiwan.
This parallels China’s rise as the world’s No. 1 electric car market. Breaking into the internal combustion engine market centered in North America, Europe, and Japan wasn’t easy for China. This is why China turned its attention to electric cars early, with the government fully supporting the eco-friendly car market. As a result, Chinese electric car company BYD overtook Tesla last year to achieve the No. 1 position in global electric vehicle sales, including plug-in hybrid sales.
China is likely to broaden export control lines while nurturing next-generation semiconductors. China’s production of SiC material, another next-generation semiconductor material, accounts for about 50% of the global total.
Cho Eun-kyo, associate research fellow at the Industrial Research Institute, pointed out, “A comprehensive trade strategy is needed to respond to sanctions on advanced industries in the long term,” and warned that “the possibility that China may gain market dominance in the next-generation technology fields based on new materials should not be overlooked.”
Germanium is also a semiconductor material used for high-frequency current detection and AC rectification. It is also utilized in aviation, aerospace control, nuclear physics detection, optical fiber communication, infrared optics, solar batteries, chemical catalysts, biomedicine, and more.
China is the world’s largest producer and exporter of germanium, supplying 71% of the world’s germanium products.
Exporting these resources requires documents such as proof of the final user and final use, an introduction to the importer, and approval from the Chinese Ministry of Commerce. If these requirements are not met, criminal liability will be pursued. It is interpreted as a move to effectively control how and where Chinese semiconductor materials are used. Gallium and germanium are on the European Union’s core mineral list.
The problem is that the semiconductor war is unfolding independently of U.S.-China reconciliation and is gradually intensifying. It has been reported that the U.S. is preparing further sanctions following those of gallium and germanium.
Major foreign media reported, “The U.S. and EU are discussing new regulations on legacy semiconductors produced in China,” and expressed concerns about China’s expansion of legacy semiconductor production, which generally refers to chips made with a 28-nanometer or larger processes. These cover a wide range of applications, including smartphones, automobiles, and military weapons, and account for 75% of the total semiconductor market.
Meanwhile, predictions are emerging that China may take additional mineral export control measures if there is no change in U.S. attitudes. Experts from the U.S. consulting firm Eurasia Group claimed, “China’s export control is a ‘warning shot’” to remind the U.S., Japan, the Netherlands, and others that China has retaliatory options to prevent further mass control of advanced semiconductors.
Wei Jianguo, former vice minister commerce in China, also stated in an interview with China Daily that “additional [Chinese] retaliation is fully possible, and there are more options.”
China’s next control target is likely to be rare earths. Considering the warning with a ban on exporting refined rare earth technology, a full export ban on rare earths themselves cannot be ruled out. In such a case, the inevitable impact on countries relying on China’s rare earths, widely used in industries from smartphones to semiconductors, displays, batteries, and fighter jets, will add to the impact of gallium and germanium.
Corporations are also affected. Both the U.S. and China are employing “shake-up tactics” to torment each other’s companies within the strategies of “technology sanctions” and “mineral control.”
China’s state-owned media Global Times has made it clear that Western companies that explicitly regulate China should urge their governments to cease unfair practices against Chinese companies, hinting at the possibility of targeting companies that have harmed China’s core interests.
Jensen Huang, CEO of Nvidia, a U.S. system semiconductor design company that does not supply advanced AI semiconductors to China due to government demands, reportedly requested a temporary halt to regulations during a meeting with Biden administration officials last month, warning of the risk of “enormous losses” to the tech industry.
The damage to China is greater. The Wall Street Journal reported that, as the U.S. controls the export of advanced semiconductors and equipment to China that can be used in AI and supercomputers, Chinese companies are struggling to obtain core components and equipment. Citing figures from China’s General Administration of Customs, China’s semiconductor imports in the first half decreased by about 22% and semiconductor manufacturing equipment imports fell by about 23% compared to the same period last year.