US-China Tech Cold War Heats Up as Beijing Strikes Back Over Chip Sanctions

Key Takeaways

• Beijing has responded to American export restrictions by banning the sale of certain minerals to the U.S.
• Gallium, germanium, antimony, and so-called superhard materials are subject to the new controls.
• The tit-for-tat export restrictions represent a new chapter of escalation in the U.S.-China trade war.

Beijing has followed through on its threat to retaliate against expanded U.S. semiconductor export restrictions, targeting raw materials used in chips to choke supply chains.

With Donald Trump expected to ramp up trade tensions between the two countries next year, China’s measure may represent the beginning of a new tit-for-tat trade war.

China Bans Exports of Chip Materials

Coming a day after Washington announced a fresh round of trade restrictions targeting China’s ability to make advanced chips, on Tuesday, Dec. 4, China banned the export of gallium, germanium, antimony, and so-called superhard materials like tungsten to the U.S.

Such minerals are used in the manufacturing of semiconductors and other technologies that are considered critical to national security.

For example, antimony is used to make night vision goggles and liquid metal batteries, while tungsten is critical for making armor-piercing bullets and shells.

Alongside an immediate ban on sales of those minerals to the U.S., graphite exports will also be subject to stricter review.

China’s Ministry of Commerce said the move was intended to “safeguard national security interests and fulfill international obligations such as non-proliferation.”

Supply Chain Warfare

While China initially accepted U.S. semiconductor sanctions without making too much noise, the latest retaliatory measures signal a new, tougher stance on the issue.

In the nascent era of supply chain warfare, rare earth minerals are one of China’s most potent levers.

For example, the supply chain intelligence company Benchmark Minerals estimates that Chinese refineries produce 99.9% of the world’s dysprosium—a vital component of chip capacitors.

Impact on Chipmakers

For American semiconductor foundries like Intel and Texas Instruments, the latest trade restrictions will increase their reliance on semi-processed materials from countries other than China.

However, if Beijing opts to restrict an element like dysprosium, it could significantly disrupt manufacturing and upend Washington’s efforts to boost the domestic chip sector.

For now, only companies and factories located in the U.S. are impacted, leaving the largest semiconductor operations in Taiwan and South Korea unaffected.

However, if the Chinese government really wanted to exert pressure on the U.S., it could extend the scope of export controls to third countries.

The nuclear option would be to extend the scope of export controls to third countries.

Avenues for Escalation

Even before the latest escalation, batteries had already emerged as a key battle line in the U.S.-China trade war, with Beijing prohibiting sales to certain American companies.

If the government wanted to escalate things further, the nuclear option would be to impose restrictions on foreign suppliers that ship to the U.S.

This approach is already used by the U.S. Through the Commerce Department’s foreign-produced direct product rule (FDPR), export restrictions apply to any foreign manufacturer if it uses American technology, including components and software.

The rule allows Washington to limit China’s access to chips, even if they are not made in the U.S. or by an American company.

By reciprocating, Beijing could use China’s near total control of rare earth mineral production to cut off U.S. firms entirely.

To do so, all it would have to do is cease shipments to foreign firms that export to the U.S.

Such a move could spell disaster for companies like Samsung, which would be forced to choose between cutting ties with one or the other superpower.

It would also likely prompt an aggressive response from the U.S. government and escalate the ongoing supply chain war to a new degree of severity.