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China Responds to US Chip Ban by Restricting Export of Critical Materials

Tim Fries

Published: July 4, 2023 10:26 pm

Last Updated: July 5, 2023 11:42 am

As of August 1st, China will impose licensing requirements on exporting gallium and germanium. Although not as popularized as lithium, these are the key materials needed in semiconductor manufacturing.

Due to its electron mobility, germanium is highly sought after for high-frequency devices like microwaves and radios. Rarer than gold, germanium (Ge) also has valuable properties for optical applications, essential for lenses, solar panels, fiber-optic cables, and infrared devices.

Equally valid for electronics, gallium (Ga) is widely spread in semiconductor manufacturing, from commercial to military applications. In its gallium arsenide (GaAs) form, this material is often a superior alternative to silicon.

On Monday, the Chinese Ministry of Commerce stated that these new measures aim to “safeguard national security and interests.” China is the world’s global supplier of germanium and gallium, accounting for over half of their extraction.

The US Opened Another Economic Warfare Doors

Just as the US opened the doors to de-dollarization by imposing unprecedented sanctions against Russia, the same is happening in the high-tech arena. In particular, in the AI race, as a potential force multiplier in financial and military spaces.

Last August, Nvidia disclosed in its SEC filing that the U.S. government (USG) established a new license requirement “for any future export to China (including Hong Kong) and Russia of the Company’s A100 and forthcoming H100 integrated circuits.”

Last week, the Wall Street Journal reported that another set of AI chip restrictions is coming. This was after Nvidia released the A800 chip series in November as a cutdown version of the A100 to circumvent export control to China.

Geopolitical Block Hardening: Where Do the Chips Fall?

By restricting the free flow of microchip technology, the USG has furthered geopolitical block hardening. On one side are the BRICS nations, led by China and Russia, with the West as the opposing block.

Last Friday, the Netherlands acted accordingly. The country’s leading microchip manufacturer, ASML, imposed export licenses on critical advanced microchip printing machines. These rare companies make layer one of chip manufacturing. Conversely, other chipmakers, like Nvidia, Intel, or AMD, are considered layer 2 in the semiconductor manufacturing ecosystem.

The Dutch restriction follows the export limits deal in January, joining Japan as another critical cog in the U.S. strategy to curtail microchip supplies to China. Alongside Nvidia’s AI chips, this includes “advanced Deep Ultra Violet (DUV) immersion lithography and deposition.”

Visualized, the microchip cold war is quite simple. On one side, China is the world’s factory, accounting for nearly a third of global manufacturing output in 2019, with the U.S. at only 16.8%. In 2022, China’s semiconductor market size reached $180.4 billion, out of a total $574.1 billion.

On the other side are the US, Taiwan, and Japan, with Europe as the close second.

Given China’s gallium and germanium mining dominance, the microchip cold war just intensified.

Yellen to Soften Block Hardening?

The US Treasury Secretary Janet Yellen is scheduled to make a four-day visit to China on Thursday. Yellen is not in favor of further geopolitical block hardening. At last month’s appearance before Congress, she described it as “disastrous for us to attempt to decouple from China.”

Undoubtedly, China’s announced gallium and germanium restrictions will serve as heavy negotiation ammo on that trip. Interestingly, not only is the US reliant on China for manufacturing and precious metals, but China still holds $859.4 billion in US Treasuries.

This makes China the second largest USG debt holder, behind Japan, after hitting a 12-year low in February.

This article originally appeared on The Tokenist