China’s Strategic Leverage in the Tech-Based Trade War: A Focus on Rare Metals

As tensions between the United States and China escalate, a new front in the ongoing trade war has emerged, centered on China’s monopoly over strategic metals crucial for various technological applications. This shift sees China wielding its dominance in the production of rare metals, such as gallium and germanium, as a potent weapon in trade negotiations, with ramifications likely to unfold in the coming years.

The Latest Trade War Flashpoints

China’s recent decision to impose export bans on gallium, germanium, and antimony—elements integral to modern technologies and military applications—stands as a clear warning to the U.S. This move aligns with the backdrop of U.S. restrictions on semiconductor-related exports and sets the stage for increased volatility in global markets. As noted by Mark Williams, a risk-management expert and finance professor at Boston University’s Questrom School of Business, “Global markets are unprepared for the impact of China’s recent export restrictions on the semiconductor, battery, and defense-equipment industries.”

Gallium and germanium are essential in the fabrication of semiconductor chips, and their restricted supply threatens to inflate prices, ultimately affecting profitability within the chip manufacturing sector and leading to higher consumer electronics costs, warns Luisa Moreno, president of Defense Metals Corp.

Implications for Global Supply Chains

Moreno highlights how the scope of China’s export bans reaches beyond mere rare earth elements—often confused with rare metals—to strategic materials critical for sectors such as automotive and mobile computing. This could lead to a tangible decrease in the supply of semiconductors, impacting industries relying on these technologies.

New Dynamics in Trade Relations

The restrictions mark a significant turning point in the trade war, being the first instance of Chinese critical mineral export limitations directed specifically at the U.S. This goes hand-in-hand with the fact that the countermeasures arose directly in response to the U.S.’s prior restrictions on advanced technologies. A joint analysis by Gracelin Baskaran and Meredith Schwartz from the Center for Strategic & International Studies notes that critical mineral security is now fundamentally tied to the tech trade war’s trajectory.

As nations navigate this complex arena, Baskaran and Schwartz argue that China’s rapid military advancements—outpacing U.S. efforts five to six times—exemplify their wartime posture. Williams points out that the Biden administration has not adopted a harmonious stance toward China, and it is likely that under a potential Trump presidency, relations may further deteriorate.

Strategic Vulnerabilities for the U.S.

China’s position as a dominant supplier of strategic metals leaves the U.S. vulnerable, particularly given its reliance on imports of materials like lithium and graphite, where China holds the lion’s share of production and processing capabilities. The tit-for-tat nature of tariffs and other retaliatory actions can have far-reaching implications, especially as demand for these metals is forecasted to surge as industries become more tech-centric.

Experts suggest that to mitigate risks, countries must enhance domestic production capabilities. However, as Moreno observes, the challenge lies in the market dynamics that make it difficult for other regions, such as Australia, to quickly ramp up production to fill potential supply gaps.

China’s Strategic Investments and Monopolistic Control

Through a combination of early strategic investments and favorable conditions—such as lower labor and environmental costs—China has solidified its control over the market for strategic metals. The U.S. once dominated this space, but regulatory challenges and decreased mining activities have allowed China to take the lead.

This dependency on Chinese supply poses critical national security risks, driving calls for the U.S. to focus on domestic mining and refining initiatives. Yet, as Williams states, “Unless other countries such as Australia can fill this supply gap, prices will rise, particularly for the most in-demand elements.” The insufficient infrastructure to bolster these industries raises alarms about future market volatility and the potential for increased pricing across the board.

Opportunities for Investment

The current landscape within the rare-earth and strategic metals markets offers ripe opportunities for investor speculation, fueled by significant price volatility. While established trading instruments exist for oil markets, the same cannot be said for strategic metals. However, Teck Resources Ltd., a germanium producer, and exchange-traded funds like the VanEck Rare Earth & Strategic Metals ETF illustrate potential investment routes, even as the fund faces challenges amid sector weakness.

Future Outlook

As the dynamics of the trade relationship between the U.S. and China evolve, the need for prudent strategy is emphasized. “In the short term, it is crucial for the U.S. to maintain open trade with China as a key partner and exercise caution in blindly escalating tariffs,” Williams emphasizes, pointing to the long-term necessity of investing in mining for national security. The challenges presented by China’s monopolistic hold over vital raw materials are potent reminders of the intricacies of global trade and the modern technological landscape.