Filenews 27 August 2023 - by Ioannis Telonis
China's Ministry of Commerce recently announced a ban on exports of gallium and germanium and their chemical composites from China. From August 1, all exports of the two metals will need the permission of the ministry regarding the exporting country and the final recipient. This decision raised alarm in America, Europe and Japan.
On July 4, China's President Xi Jinping, in his speech to the regular session of the Shanghai Cooperation Agreement, called on the international community to resist the trend of breaking supply lines and restricting international trade. A position that visually at least differs from the decision to control the exports of the two metals. What lies behind these apparently contradictory moves by China? Why has the export of two rare metals caused so much upheaval in the West? How will it affect Western economies and how can the West react?
GALLIUM AND GERMANIUM – THE UNKNOWN METALS
Gallium and germanium are two metals that very few of us know about. And yet they have a daily effect on the way we live without us realizing it. Gallium and germanium together with their chemical composites are vital components for the manufacture of semiconductors which in turn are used in almost all devices of everyday life, in transport and communications, in medical science as well as in new technologies aimed at the transition to a green economy (electromobility, energy saving through heat pumps, etc.). The restriction on their uninterrupted supply threatens countries that will be subject to the restriction by suspending the production of electric cars as well as devices that need an electronic chip to operate. But why is China's announcement of a restriction on the free supply of the two metals causing great concern in the West? What allows China to make its threat from this move so real?
DOMINANT POSITION
China is the undisputed leader in mining and trading the so-called 50 "critical" metals that are vital to the green economy (batteries for electric cars, photovoltaic panels and magnets for wind farm rotors). These include, among others, lithium, graphite, cobalt, nickel, magnesium, copper and, of course, gallium and germanium. Gallium is produced in a number of countries such as Japan, Russia, South Korea and Ukraine. Germanium is produced in Canada, Belgium, the USA and Russia.
China, however, has managed to control the mining and trading of both of these metals. According to the English Rare Metals Information Centre, its dominance is in the order of 94% of world production!
China has achieved this dominance by working steadily for decades and with a three-pronged plan. The first axis concerned the development of the necessary technology for the extraction of these metals. The process of extracting and converting them into marketable material is expensive, time-consuming, technologically difficult, energy-intensive and environmentally difficult. China has managed over time to create the necessary infrastructure for cost-effective exploitation of metals.
The second axis concerned the maintenance of a relatively low disposal price for these products, in order to discourage the development of production and necessary mining technology in other countries with reserves of the two metals. The third axis moved on the foundation of its leading position. As demand for these metals began to skyrocket from their use in the green economy, China realized that its reserves would not be enough to meet future demand.
It has therefore acted preventively, proceeding with huge investments in countries that have reserves of these metals, creating infrastructure for their extraction and processing, ensuring control of production. At the same time, it invested in other sectors in these countries to develop other sectors of their economies in exchange for control of their reserves of critical metals.
EUROPE'S DEPENDENCY
The West, with its myopic policy focused on the lure of opening up China's vast market – rather than the strategic threat of China's planning – has chosen to remain apathetic to Chinese moves. And while the U.S. has gradually begun to see China as a strategic threat, EU countries see China as a partner in a win-win scenario — and that's been true to some extent to this day.
Indicatively, the European Union (EU) covers from China 71% of its needs in gallium and 45% in germanium. And unfortunately in several other rare metals, the EU depends on China. Thus, at a pivotal point in the West's planning for the transition to a green economy, China found itself holding one of the important keys in its hands.
WHAT HAS CHANGED IN THE LANDSCAPE
As mentioned above, America was the first to begin to see the threat of China as a rising world power. The sticking point was and remains the future of Taiwan, which in principle the US recognizes as Chinese territory but supports Taiwan's right to choose how it governs. And while for many decades the solution to Taiwan's problem seemed to be the sounding "one country, two systems" that allowed Hong Kong to return to Chinese rule, the development of things in the former British colony shattered any illusions.
China is not only demanding Taiwan's return but is preparing for it – politically, economically and militarily. China's steady evolution and transformation into the world's export lung favoured the U.S. for several decades. Globalization brought cheap Chinese goods to America, Europe and the rest of the world, while at the same time giving the prospect of penetrating the emerging huge market of China. China's penetration into the strategic telecommunications infrastructure sector and the realization that infrastructure in the US (and Europe) for the upcoming 5G would be built with technologies from Chinese companies – which the US considered to be controlled by the Chinese government – provoked a US reaction. China has gone from being a trading partner to a strategic threat.
The pandemic period and the focus on trying to suppress the virus also had as a side effect the significant disruption to supply lines – primarily the transit of goods between China and the US and secondarily between China and Europe.
The end of the pandemic coincided with Russia's invasion of Ukraine. The immediate consequence of this invasion was the great energy crisis we experienced.
At the same time, both in America and Europe, it began to be understood that strategic dependence on "third" countries or coalitions should now go through an assessment of the strategic risk involved in any dependence. The West's response to the energy crisis brought about by Russia's invasion has been to accelerate the transition to green energy, which as an environmental policy, is widely accepted. But what about China, the West's hitherto trading partner and now its economic – and not only – rival?
TREATING CHINA AS AN ECONOMIC RIVAL
In the US, President Biden's program for America's transition to a green economy was passed by Congress in 1922 under the name Inflation Reduction Act. The program aims to support the effort of the US to fulfil its obligations regarding the environment through investments in RES and electric mobility, to reduce the prices of raw materials needed for the transition to the green economy and what is particularly important for it analysis, reduction of dependence on unreliable or hostile suppliers. And there is no need for much study of who Americans now consider in this category – China and Russia.
In turn, the EU adopted the Critical Raw Materials Act last March. The EU aims to reduce its dependence on Chinese suppliers through financing and easing restrictions in conjunction with new trade relations with third countries.
Both blocs have also begun to coordinate their actions in this area after realizing that certain measures included in their programmes created obstacles and unfair competition between them. They have also begun to coordinate their moves to create groups of country buyers (the so-called Byers Club) to secure the supply of critical raw materials.
Some initiatives have already manifested themselves in the agreement reached last April between the G7 to create an initial fund of USD 13 billion to finance mining projects in third countries. Action has also been taken at national level. For example, the US has recently concluded an agreement with the Republic of Congo to supply it with technology for manufacturing
electric cars in exchange for critical minerals. France is very close to an agreement with a Latin American country to supply it with electric buses.
CHINA'S REACTION
In light of the above analysis, China's reaction was the expected and apparent discrepancy between the announcement of the export restriction and the Chinese leader's call for a constructive trade relationship with the West having its explanation. China is seeking recognition as the world's potentially largest economic power. By announcing the ban, he warns that it will make the cost of the West's dependence on Chinese goods even greater, while at the same time sending the message that it is open to cooperation on an equal footing.
EPILOGUE
It is now clear that the next few decades of the global arena will be consumed by China's intensified effort to succeed the US and the Western camp as the leading power. Control of the raw materials of the green economy is a vital field for both camps. And while China is starting from a position of strength in this field, I think we are only at the beginning of a very long road.
