The US-China chip war is intensifying. Beijing has demonstrated that it has control over critical materials.

China announced earlier this month that it would impose export controls on gallium and germanium starting in August. Commentators say this is Beijing’s most serious move yet in the chip war with Washington. Restrictions on little-known elements important to the production of semiconductors, solar panels and electric cars are apparently intended to serve as a warning to the United States. Gallium prices have soared, and electric car makers are worried. The reactions indicate the trouble the West would be in if the Asian power cut it off from other critical materials.

China is an important exporter of both raw materials, in the case of gallium, according to an EU study, it accounts for 94 percent of world production, and for germanium, it accounts for 83 percent. Exporters will have to apply to China’s Ministry of Commerce for a permit starting in August. Beijing justifies this as national security. However, it is widely believed to be a response to US restrictions on China’s access to advanced semiconductors.

The extraction of gallium and germanium will probably become more expensive for the West

“China is apparently not happy with news that the Biden administration is considering a broader ban on semiconductor chips, and has decided to freeze exports of gallium and germanium, which are used in semiconductors, 5G base stations and solar panels,” Oil Price website quoted Louis Navellier of investment firm Navellier as saying & Associates.

“Gallium and germanium are chess pieces in a geopolitical game of enormous proportions,” mining expert Christopher Ecclestone of the consulting firm Hallgarten & Company told Foreign Policy.

Both elements are not extra rare, they are a by-product of the mining and processing of other raw materials. However, China has kept their prices low, production elsewhere may become more expensive and it will take some time to even start. The market for gallium and germanium is very small compared to, for example, aluminum or copper. In the days following the announcement, gallium prices rose 27 percent, and gallium traders began stockpiling. However, they last a few months at most.

Car companies are afraid of a war for critical raw materials

According to Western experts, China wants to demonstrate with its move that it practically controls the market for strategic raw materials, such as rare earth elements, graphite and magnesium. The production of lithium, for example, also depends to a large extent on it, as it controls not only some mines, but also a significant part of its processing capacities.

“This is far from the most drastic response she could have chosen. Gallium and germanium export controls appear to be the first warning shot. China is controlling other metals through which it can cause more serious consequences,” said Bernard Dahdah, an analyst at Natixis investment bank, according to Fortune.

Beijing’s threat has already caused a stir among electric car manufacturers. Renault boss Jean-Dominique Senard said it should be a warning sign for EU leaders and a clear demonstration that work needs to be done to reduce dependence on China and build alternative supply chains.

A current report from the International Energy Agency (IEA) states that the shift to green energies is dramatically driving demand for critical materials such as lithium, cobalt, nickel and copper. From 2017 to 2022, the energy sector was the main factor driving lithium demand to triple, for example. The market for mineral raw materials needed for the energy transition reached a value of $320 billion last year, according to the agency, and is expected to continue growing rapidly.

The spiral of retaliation is spinning

Although the West has recently been trying hard to limit Chinese dominance in the field of key raw materials, it also perceives the limits of this effort, especially the unpopularity of domestic mining. It is therefore a question of what impact the Chinese move with gallium and germanium will have on the American-Chinese technological war.

The United States introduced export controls last October to limit China’s access to US-origin semiconductors. They managed to get Japan and the Netherlands to take a similar step, which in practice applies, for example, to the company ASML, which is a key supplier of equipment for chip manufacturers.

In addition, the media recently reported that the White House is planning to restrict Chinese companies’ access to cloud services. Indeed, American national security analysts have warned that Chinese firms focused on artificial intelligence are actually circumventing the restrictions by using them.

Limiting the export of gallium and germanium is the second retaliatory step by China. In late May, it banned some important domestic industries from buying from US memory chip maker Micron. At the same time, Beijing warned last week that if the US pressure on China’s technology sector does not stop, further reactions will come.

A few days ago, US Treasury Secretary Janet Yellen tried to calm the tension between the countries during her visit to Beijing. She pointed out that precisely such Chinese measures are leading the US to try to reduce its dependence on China. “I made it clear that the United States does not seek the complete separation of our economies. We’re trying to diversify, not separate,” she emphasized, however, according to The New York Times.