From Electronic Chips to Metals: A New Trade War Between China and Europe?

As the United States and its allies escalate their trade war with China over its technology industries, the Netherlands has joined the fray by imposing new limits on its exports of electronic chip equipment to China in late June.

China retaliated by curbing its exports of gallium and germanium, two rare metals that are vital for Europe’s electronics sector and that China is the sole supplier of.

These moves raise the specter of a broader trade conflict between Europe and China, but they also highlight a deeper challenge for Europe as it pursues its ambitious energy transition plan: its dependence on imports of rare metals that are essential for making batteries, including those for electric cars.

These metals, such as lithium and cobalt, are scarce and highly sought after for their electrical properties.

China dominates the global supply chains of these metals, accounting for 70% of them, followed by the United States with 14.33% and Australia with 6%, according to industry data.

Europe, by contrast, imports nearly all of its rare metals from China, which poses serious strategic risks for the bloc’s political leaders.

China’s edge in this field stems from its early investment in mining and refining these metals around the world. It processes about 85% of Australia’s lithium exports, and it has a stake in one of Chile’s largest lithium producers, SQM, through its mining company Tianqi.

 

Dutch Blow

The Dutch government has announced new restrictions on the export of electronic chip equipment, citing national security concerns. The move could affect the global semiconductor industry and further strain relations with China.

The restrictions, which require a license for exporting certain types of chip production equipment, were announced by Liesje Schreinemacher, the Dutch minister for foreign trade and development cooperation.

She said the decision was based on the potential military applications of some of the technologies involved.

“We took this step for reasons related to national security,” Schreinemacher said in a statement.

The new rules apply to two key processes in advanced chip manufacturing: extreme ultraviolet lithography (EUV) and atomic layer deposition (ALD).

EUV is a technique that uses powerful lasers to etch tiny circuits onto silicon wafers, while ALD is a method that deposits thin layers of materials on the chips.

The Netherlands is home to ASML, the world’s largest supplier of lithography machines and a crucial player in the chip industry.

The company said that it was aware of the new regulations and that they would affect a “very limited” number of its products and customers.

ASML has been caught in the crossfire of the U.S.–China trade war, as Washington has pressured its allies to limit the access of Chinese companies to advanced chip technologies.

Last year, the U.S. imposed sweeping export controls on China’s semiconductor sector, banning American firms from supplying equipment and services to Chinese chipmakers without a license. The U.S. also restricted the ability of its citizens to work with Chinese firms in the industry.

China, which relies heavily on foreign suppliers for its chip production, has denounced the U.S. measures as an attempt to stifle its technological development and has invested billions of dollars in building its own domestic capabilities.

However, experts say that China is still years behind the leading edge of chip technology and that it needs access to foreign equipment and know-how to catch up.

China reacted angrily to the Dutch announcement, urging the Netherlands not to abuse export control measures and harm bilateral trade relations.

A spokesperson for the Chinese Ministry of Commerce said that China had communicated with the Dutch side frequently and at different levels on the matter, but that the Netherlands had still included semiconductor equipment in its new rules.

 

Beijing Metals

China announced that it would tighten its grip on the global supply of two rare metals that are vital for high-tech industries, in a move that could escalate trade tensions with Europe and the United States.

The Chinese Ministry of Commerce said that starting from August 1st, it would require exporters of gallium and germanium to obtain licenses and report details of their overseas buyers and their orders. The ministry said the restrictions were necessary to protect national security interests.

Gallium and germanium are used in making computer chips, defense equipment, and renewable energy technologies. They are among the 30 elements that the European Union considers critical and strategic for its industries, meaning they have high economic importance and high supply risk.

China is the world’s dominant producer of both metals, accounting for more than 68 percent of global germanium output and 98 percent of gallium output, according to the U.S. Geological Survey.

The European Union relies on China for about 98 percent of its rare metal imports, raising strategic concerns among its policymakers.

The Chinese move comes after the Netherlands imposed new restrictions on the export of chip-making equipment to China last month, citing national security and human rights concerns.

The Dutch decision was seen as a response to pressure from Washington, which has been waging a trade war against China’s technology sector since the Trump administration.

The Biden administration has continued to pursue a hard-line stance on China, imposing sanctions on Chinese artificial intelligence companies and lobbying allies to exclude Huawei, the Chinese telecom giant, from their 5G networks.

China has previously denounced the Western measures as unfair and unjustified, but this is the first time it has retaliated with a practical action that could hurt Europe’s economic interests and ambitions.

Gallium is a soft silvery metal that is used to make compounds for microwave and infrared circuits, semiconductors, and LEDs. Germanium is a silvery-white metal that is used to make fiber optics, high-speed chips, and infrared devices. Both metals have military applications, such as night-vision goggles.

There are no substitutes for some of their uses, and they are not easily recyclable. The United States imported about $3 million worth of gallium metal and $200 million worth of gallium arsenide wafers from China in 2022, according to the U.S. Geological Survey.

Analysts said that China’s export curbs could disrupt the global supply chains of these metals and drive up their prices, affecting industries such as electronics, aerospace, and renewable energy.

They also warned that China could use its leverage over other rare metals, such as neodymium and dysprosium, which are essential for making magnets for electric vehicles and wind turbines.

Observers expect the current dispute to turn into a trade war between the European Union and China. This was confirmed by the Vice-President of the European Parliament, Nicola Beer, who said: “The decision by China…[regarding] export of gallium and germanium clearly shows that the Communist Party will put on its economic boxing gloves sooner rather than later.”