Critical Minerals: China strikes back

Beijing imposed restrictions on its exports of some critical metals. More precisely, from August 1st, 2023, exports of raw and processed forms of gallium and germanium will be subjected to export licenses. This new regulation gives the Chinese authorities significant discretion over whom to grant these licenses based on the identity of their overseas buyers and the intended applications. It enables Beijing to leverage these critical inputs for the production of microprocessors in its relations with the West. 

This comes just a few days before the visit to China of US Secretary of State, Janet Yellen, and the EU’s High Representative for Foreign Affairs Josep Borell, This is not a fortuitous coincidence. With this move, China clearly signals it will not fall prey to any discriminatory measures and containment strategies against its industrial and technological development without retaliating where it hurts most the West: access to critical materials and supply chain components, over which China has a significant dominance and leverage. 

Over time, Western markets and nations might well adapt to this new Multipolar Normal, as expressed and hoped for by some commentators: “If Beijing did at some point restrict shipments and cut supply to other nations, prices would likely rise and make it more economical to boost output in Japan, Canada, the US or elsewhere.” But time is of the essence in the global economic competition.

A backlash against the “China decoupling” strategy

It wasn’t China but the United States that first weaponized the economy and initiated a new confrontational era in international relations, in which economic statecraft and geopolitical rivalry take precedence over cooperation and “open door” policies. Restrictions on the imports of advanced microprocessors were imposed upon China by the United States - and reluctantly followed through by their European NATO allies. These restrictions are framed alongside a very classical “Containment” playbook, that had been defined first as far back in time as in 1946-1947, at the eve of the Cold War, by US diplomat George Kennan, in what became known as The Long telegram and subsequently in an article published in Foreign Affairs in 1947, under the title “The sources of Soviet conduct”). 

The European Union’s much-vaunted strategic autonomy is nowhere to be found on these matters. The EU’s Members' strategic choices are shaped and bound by their subordinated status within the NATO alliance, as well as by the extra-territorial reach of most if not all US rules and regulations enacted on the ground of national security. The Dutch company ASML experienced firsthand what that means. It had to stop supplying its Chinese customers almost overnight, following repeated pressures that the United States exerted on the Dutch government.

China hits the West at the low end - some would say the low-hanging fruit - of the global electronics supply chain. Yet it hurts. It comes following years of growing concern in the West over the dependence on China for the supply of some Critical Minerals (CM). As reported by The Hague Center for Strategic Studies in a recent report: Chinese production dominance is staggering, and in some cases, it nears 80%: yttrium and neodymium (86%), samarium (86%), germanium (76%), and tungsten (82%).18 Furthermore, for many of these materials the second or third-highest producer is Russia, - a Chinese close ally even more so since the start of the War in Ukraine - which also represents a geopolitical challenge to the West. China also controls some parts of the supply chain in Africa. Cobalt for example is mined for 53% in the Democratic Republic of Congo (DRC) but Chinese companies own or have a financial stake in 15 out of 19 Congolese cobalt mines as of 2020.

This concern is understandable given the critical importance of these materials in the economy. It is also critical for the aerospace and defense sector as the chart below from The Hague Center for Strategic Studies shows.

A flurry of strategic initiatives on both sides of the Atlantic

In this context, the COVID-19 pandemic served as a catalyst for a flurry of “strategic initiatives” aiming at achieving security of supply and policies in the United States, the European Union, the United Kingdom, and in other Western allies and affiliates.

This led to new subsidies and protectionist measures in the United States through the Inflation Reduction Act. Across the Atlantic, the European Commission proposed in March 2023 a Critical Raw Materials Act.

However, these initiatives have yet to produce any meaningful results, the United States and Europe even more so remain highly dependent on countries like China and Russia for their supply of critical (and not-so-critical) commodities. The hard truth is that it will take years, if not decades, to diversify supply chains for some critical minerals.

For years, the mining industry has been declining in Europe and the United States, on the back of increasingly stringent environmental regulations, local communities' rights, and the stigma associated with investing in the old-fashioned “brick and mortar economy”, as opposed to the shining digital economy. 

The limits of recycling and the prospect of friend-shoring

In the short term, increasing the share of inputs provided by recycling used materials could provide temporary relief. However, given the considerable amount of minerals required for supporting the range of connected objects, industrial robotics, telecommunications (5G, 6G), EVs, and renewable energy industries - not to mention the defense industry - over the long term this will not be sufficient.

The more feasible and socially acceptable alternative - at least for the Western public - would be to develop new extraction capacities in neighboring countries through “nearshoring” or “friend-shoring”, provided these neologisms really make sense. The geopolitical map is being reshaped and the concept of a docile “strategic backyard” cannot be taken any more for granted. 

The US managed with great pain to enforce the Monroe Doctrine across the Americas throughout the XXth century - facing challenges and failing to bring down unfriendly regimes in the likes of Cuba, Venezuela, and a range of other Latin American countries. Perhaps more importantly, Brazil has taken a new geopolitical direction in the XXIth century by joining the BRICS grouping, even though its military capabilities are still limited today. 

In a multipolar world, alliances will change according to circumstances and the idea of “bandwagoning” with one of the Great Powers in the same sense as was common practice during the Cold War might not apply.

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