Once upon a time, Joe Biden ran for the presidency on, in part, promises to end the Trump administration's trade war with China. Instead, once in the White House, the Biden administration doubled down on its predecessor's tariffs and picked new fights in an effort to isolate the Chinese economy. China's political leadership contributes to this conflict, and its latest move is to restrict the export of two minerals critical to the production of computer chips.
Chokehold on Critical Minerals
"China will impose export restrictions on industrial products and materials containing gallium and germanium from August 1 to ensure its national security and interests," China Daily, a mouthpiece for the Chinese Communist Party, announced this week. "According to the relevant provisions of China's Export Control Law, Foreign Trade Law and Customs Law, gallium, which is used in the production of semiconductors and optoelectronic devices, and germanium, an important raw material for the semiconductor industry, as well as their related products, cannot be exported without permission after July. Export of other industrial materials such as gallium nitride, gallium oxide and zone-refined germanium ingot have also been prohibited."
That's a big deal because, according to the Observatory of Economic Complexity, "in 2021 the top exporters of Gallium, germanium, hafnium, indium, niobium (columbium), rhenium and vanadium: articles thereof, unwrought, including waste and scrap, powders were China ($170M), Chinese Taipei ($53.2M), Germany ($52.4M), Brazil ($43.1M), and South Korea ($32.4M)." China alone is responsible for 29.4 percent of the total (the U.S. is also an exporter, with a 5.47 percent share.)
Specifically breaking out the two restricted minerals, Reuters adds that China produces roughly 60 percent of the world's germanium and 80 percent of gallium. So, there's a lot at stake here for computer chip producers and for governments trying to promote domestic producers at the expense of Chinese competitors.
The Latest Trade-War Escalation
China's export restrictions come against a backdrop of growing political and economic tensions between the United States government and its counterpart in Beijing. On the campaign trail in 2020, Joe Biden correctly criticized the Trump administration's tariffs on Chinese goods as harmful to Americans. Economists pointed out that high tariffs cost jobs, distorted the economy, and made people poorer; Biden promised to repeal them. But once in office, the new administration maintained trade barriers and set out to cut China off from high-tech computer chips and advanced cloud computing. Ham-handed industrial policy was crafted to expand U.S. government control of the economy while squeezing China out of tech, especially the manufacture of computer chips.
But it's hard to push competitors to the sidelines of an industry if those competitors control major sources of materials that the industry needs. Restricting the flow of gallium and germanium won't increase the use of Chinese-made semiconductors around the world, but it could ensure that nobody else's semiconductors get manufactured and shipped either—at least until new sources are developed.
As the new export restrictions suggest, China's government hasn't confined itself to the role of innocent victim in its dispute with the U.S. As the National Bureau of Economic Research Digest noted last year, "China and the United States began mutually escalating tariffs on $450 billion in trade flows in 2018 and 2019." Additionally, China's often government-linked firms have a reputation for stealing technology, counterfeiting, and economic espionage.
"One in three North American corporations allege that Chinese-based companies have stolen their intellectual property in the past decade, while one in five allege that it has happened in the past year," according to a 2019 analysis by Michigan State University's Center for Anti-Counterfeiting and Product Protection.
Beijing has also flirted with turning the trade war into actual war, threatening "confrontation and conflict" with the United States. The country's regime clearly wants to absorb Taiwan (though U.S. officials are not without fault in building these tensions).
Fortunately, tensions have largely remained in the realm of saber–rattling and trade barriers. With its latest move, China may even be turning a necessity into an advantage. This week, the South China Morning Post reported that China is running out of gallium and "could be forced to recycle gallium from Japan and the US instead of producing it domestically." If they were ever going to use trade in the metal as a bargaining chip, the country's ruling officials may be running out of time to do so.
Mutually Assured Economic Destruction
Economic warfare is damaging enough. "Since it began in earnest just over a year ago, the trade war with China has cost an estimated 0.3 percentage point in U.S. real GDP and almost 300,000 jobs," Moody's Analytics reported in 2019. A United States International Trade Commission report issued in May of this year found that tariff costs "passed through fully into U.S. importer prices." That is, they are ultimately picked up by American consumers.
China's people have also suffered from the trade war between the two governments.
"US consumers of imported goods have borne the brunt of the tariffs through higher prices," found a 2021 paper published by the National Bureau of Economic Research. "The trade war has lowered aggregate real income in both the US and China."
"The verdict is unremittingly negative for both countries—with one important exception," The Economist noted last year. That exception has been the diversification of trade beyond China-based manufacturers. Those new sources tend to be less efficient and more expensive but adding them to the mix reduces exposure to the sort of supply chain disruption we've seen since the start of the pandemic.
Diversifying supply chains is a good thing, but that process was already happening in response to production and shipping snags; it didn't need a trade war that hiked prices and made people poorer to give it a goose. But all of the results, few positive and mostly negative, of trade war are likely to get a boost in the months and years to come.
Expect More Conflict in the Future
"This is just the beginning of China's countermeasures, and China's tool box has many more types of measures available," Wei Jianguo, China's former vice-minister of commerce, told China Daily after the announcement of restrictions on the export of gallium and germanium. "If the high-tech restrictions on China become tougher in the future, China's countermeasures will also escalate."
With U.S. officials also committed to using commerce as a battlefield for governments rather than as a means for individuals and businesses to build prosperity, expect escalating economic warfare and the sacrifice of wealth and opportunity to continue.
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