On July 3, China’s Ministry of Commerce announced new export licensing requirements for gallium and germanium, metals widely used in semiconductor manufacturing. These measures are a tit-for-tat response to U.S., Japanese, and Dutch export controls on semiconductor chips, manufacturing equipment, and other measures designed to restrict China’s usage of high-end chips. The new measures do not prevent export altogether, but they will increase time, administrative costs, and the risk of rejection for those hoping to import the metals from China, which produces 94% of the world’s gallium and 83% of the world’s germanium. While these controls have raised consternation in many importing countries, history shows that China may face difficulties in ensuring the effectiveness of these measures.
China’s 2010 Export Controls on Rare Earths
This is not the first time that China has introduced export controls on critical materials used in electronic applications, employing what many deem to be “economic coercion.” In 2010, China began to tighten its controls on rare earth exports, decreasing its quotas relative to 2009 in the first half of the year. Additional controls adopted in September 2010 were reportedly intended to limit the export of pure rare earths, rare earth oxides, and rare earth salts. Shipments from China to Japan, the United States, and the European Union were reportedly stopped for days in September. A representative from China’s Ministry of Commerce denied that it was a ban, although the impact was widely felt.
Throughout 2010, China enacted a series of other measures: in addition to the 40% lower quota for the export of rare earths, China also imposed a tariff of 15–20% on the export of rare earths and further reduced the quotas by 32.5% in 2011. In 2010 and 2011, China also raised export tax rates on some “rare earth metals, rare earth oxides, rare earth fluorides and rare earth carbonates.” The controls were particularly serious for Japan, which at the time imported almost all its rare earths from China for a range of electronic applications and received nearly half of China’s production of rare earths in 2010. The export controls caused the prices of rare earth materials to skyrocket and sent importing countries scrambling to find alternatives.
How Rare Earth Export Controls Did NOT Work
China’s measures did not go as planned, however. To begin with, in 2012, Japan, the European Union, and the United States filed a suit against China at the World Trade Organization (WTO). China lost the suit, and the WTO led countermeasures that eased prices and increased China’s export quantities of rare earths. In response to the suit, China informed the WTO that the restrictions on rare earth-exporting enterprises had been removed. Instead, Beijing adopted more stringent export licensing measures, announced at the end of 2014 and expanded later.
The export controls also faced challenges beyond legal ones. The biggest issue facing the effectiveness of the export control measures in the short term was smuggling. This had already been a problem prior to the export controls; in 2009, smuggling accounted for 40% of China’s rare earth exports, and at one point reached a peak of nearly 50%.
In the wake of stricter controls, exporters expanded smuggling routes and sold to Japan through third-country plants. An analysis of Japan’s import data reveals few serious impacts to imports of rare earths from China beyond decreased imports of cerium oxide. From 2009 to 2011, Japan’s import from China of pure, intermixed, and inter-alloyed rare-earth metals only fell by 10%, and imports of yttrium and lanthanum oxides in fact rose sharply despite the Chinese export control measures. Exporters also got around controls by adding miniscule amounts of other metals to rare earth metals to allow for their continued export in a different product category, further weakening the controls’ effectiveness.
Chinese efforts to crack down on illegal mining and smuggling did not appear to have much of an effect. A report from China’s State Council revealed that in 2011, figures reported by countries receiving China’s rare earth exports were 120% higher than China’s own figures. Given the profit incentives for exporters in light of the export controls and the resultant skyrocketing prices of rare earths, this figure was likely even higher. 40,000 metric tons of rare earths were reportedly smuggled out of China in 2014.
Importers’ Pushback
Further hindering the effectiveness of China’s controls on rare earth exports in 2010 was importing countries’ shift to diversify their supply and move away from China as a main supplier of critical materials. Japan took the most drastic steps, shifting nearly 30% of its rare earths import mix from China to other countries by 2021. Since the rare earth export controls were enacted, Japan has signed rare earth development agreements with Mongolia, Australia, and Vietnam, and invested in Australian producer Lynas. The United States also took steps to diversify, decreasing China’s share of its rare earth imports from about 100% in 2010 to 80% from 2017–2020. The European Union did not take major steps to diversify and still relied on China for 98% of its rare earths near the end of 2022.
The diversification has had a major impact: in just over a decade, China’s share of the global supply of rare earths has fallen from at least 90%—perhaps as much 97%— in 2010 to just 60% in 2021. Other producers such as the United States (16% of global supply in 2021), Myanmar (9%), Australia (8%), and Thailand (3%) have increasingly provided alternative sources of supply. Favorable policies in countries seeking to diversify, such as government investments in separation of rare earths and supply chain resiliency in the United States, will continue to drive this trend. Voices that have already been calling to step up responses to what they describe as China’s economic coercion will only become more powerful.
Implications for Today
Much like in 2010, China’s new controls on gallium and germanium have added to ongoing conversations in countries all over the world on diversified supply chains. Many countries are increasingly looking to reduce dependence on China to meet their supply needs. For the European Union, this time is different. In April 2023, the European Union passed an act to make the bloc more self-sufficient in the production of critical materials. The export controls on gallium and germanium are already putting pressure on countries to consider alternatives and will continue to erode China’s market dominance for critical materials.
Having said that, diversification takes time and costs money. While there is no global shortage of germanium and gallium, China’s manufacturers have a competitive cost advantage that may keep international competitors out of the market until prices rise sufficiently. U.S. allies Japan and South Korea produce gallium, and the United States, Canada, and Belgium produce germanium, but operations can take years to scale up and continue to be sensitive to fluctuations in prices. Price-setting by processing companies in China could radically impact competitors given China’s ongoing dominance in the global market. Despite these challenges, many countries will continue to seek to diversify their supply chains to avoid the negative repercussions of losing access to critical materials, as Japan and the United States did in 2010. Between China’s own smuggling problem and the importers’ determination to decrease their dependence, China’s export controls on germanium and gallium may not work as much as Beijing would like.
Why China’s Export Controls on Germanium and Gallium May Not Be Effective
By Sarah Godek
China
In 2010, China adopted a series of export controls on rare earth exports to Japan, the United States, and the European Union. Those export controls led to massive smuggling and pushed Japan and the United States to diversify their rare earths supply chains, cutting at least 30% of China’s market share of the global supply of rare earths from 2010 to 2021. China’s recent export controls on gallium and germanium are now increasing calls in more countries for a similar diversification of supply chains of critical materials away from China. While it can take years to diversify supply chains and the cost of doing so is often prohibitive, the new controls will force countries to continue to advance policies that reduce their dependence on China for critical materials.
On July 3, China’s Ministry of Commerce announced new export licensing requirements for gallium and germanium, metals widely used in semiconductor manufacturing. These measures are a tit-for-tat response to U.S., Japanese, and Dutch export controls on semiconductor chips, manufacturing equipment, and other measures designed to restrict China’s usage of high-end chips. The new measures do not prevent export altogether, but they will increase time, administrative costs, and the risk of rejection for those hoping to import the metals from China, which produces 94% of the world’s gallium and 83% of the world’s germanium. While these controls have raised consternation in many importing countries, history shows that China may face difficulties in ensuring the effectiveness of these measures.
China’s 2010 Export Controls on Rare Earths
This is not the first time that China has introduced export controls on critical materials used in electronic applications, employing what many deem to be “economic coercion.” In 2010, China began to tighten its controls on rare earth exports, decreasing its quotas relative to 2009 in the first half of the year. Additional controls adopted in September 2010 were reportedly intended to limit the export of pure rare earths, rare earth oxides, and rare earth salts. Shipments from China to Japan, the United States, and the European Union were reportedly stopped for days in September. A representative from China’s Ministry of Commerce denied that it was a ban, although the impact was widely felt.
Throughout 2010, China enacted a series of other measures: in addition to the 40% lower quota for the export of rare earths, China also imposed a tariff of 15–20% on the export of rare earths and further reduced the quotas by 32.5% in 2011. In 2010 and 2011, China also raised export tax rates on some “rare earth metals, rare earth oxides, rare earth fluorides and rare earth carbonates.” The controls were particularly serious for Japan, which at the time imported almost all its rare earths from China for a range of electronic applications and received nearly half of China’s production of rare earths in 2010. The export controls caused the prices of rare earth materials to skyrocket and sent importing countries scrambling to find alternatives.
How Rare Earth Export Controls Did NOT Work
China’s measures did not go as planned, however. To begin with, in 2012, Japan, the European Union, and the United States filed a suit against China at the World Trade Organization (WTO). China lost the suit, and the WTO led countermeasures that eased prices and increased China’s export quantities of rare earths. In response to the suit, China informed the WTO that the restrictions on rare earth-exporting enterprises had been removed. Instead, Beijing adopted more stringent export licensing measures, announced at the end of 2014 and expanded later.
The export controls also faced challenges beyond legal ones. The biggest issue facing the effectiveness of the export control measures in the short term was smuggling. This had already been a problem prior to the export controls; in 2009, smuggling accounted for 40% of China’s rare earth exports, and at one point reached a peak of nearly 50%.
In the wake of stricter controls, exporters expanded smuggling routes and sold to Japan through third-country plants. An analysis of Japan’s import data reveals few serious impacts to imports of rare earths from China beyond decreased imports of cerium oxide. From 2009 to 2011, Japan’s import from China of pure, intermixed, and inter-alloyed rare-earth metals only fell by 10%, and imports of yttrium and lanthanum oxides in fact rose sharply despite the Chinese export control measures. Exporters also got around controls by adding miniscule amounts of other metals to rare earth metals to allow for their continued export in a different product category, further weakening the controls’ effectiveness.
Chinese efforts to crack down on illegal mining and smuggling did not appear to have much of an effect. A report from China’s State Council revealed that in 2011, figures reported by countries receiving China’s rare earth exports were 120% higher than China’s own figures. Given the profit incentives for exporters in light of the export controls and the resultant skyrocketing prices of rare earths, this figure was likely even higher. 40,000 metric tons of rare earths were reportedly smuggled out of China in 2014.
Importers’ Pushback
Further hindering the effectiveness of China’s controls on rare earth exports in 2010 was importing countries’ shift to diversify their supply and move away from China as a main supplier of critical materials. Japan took the most drastic steps, shifting nearly 30% of its rare earths import mix from China to other countries by 2021. Since the rare earth export controls were enacted, Japan has signed rare earth development agreements with Mongolia, Australia, and Vietnam, and invested in Australian producer Lynas. The United States also took steps to diversify, decreasing China’s share of its rare earth imports from about 100% in 2010 to 80% from 2017–2020. The European Union did not take major steps to diversify and still relied on China for 98% of its rare earths near the end of 2022.
The diversification has had a major impact: in just over a decade, China’s share of the global supply of rare earths has fallen from at least 90%—perhaps as much 97%— in 2010 to just 60% in 2021. Other producers such as the United States (16% of global supply in 2021), Myanmar (9%), Australia (8%), and Thailand (3%) have increasingly provided alternative sources of supply. Favorable policies in countries seeking to diversify, such as government investments in separation of rare earths and supply chain resiliency in the United States, will continue to drive this trend. Voices that have already been calling to step up responses to what they describe as China’s economic coercion will only become more powerful.
Implications for Today
Much like in 2010, China’s new controls on gallium and germanium have added to ongoing conversations in countries all over the world on diversified supply chains. Many countries are increasingly looking to reduce dependence on China to meet their supply needs. For the European Union, this time is different. In April 2023, the European Union passed an act to make the bloc more self-sufficient in the production of critical materials. The export controls on gallium and germanium are already putting pressure on countries to consider alternatives and will continue to erode China’s market dominance for critical materials.
Having said that, diversification takes time and costs money. While there is no global shortage of germanium and gallium, China’s manufacturers have a competitive cost advantage that may keep international competitors out of the market until prices rise sufficiently. U.S. allies Japan and South Korea produce gallium, and the United States, Canada, and Belgium produce germanium, but operations can take years to scale up and continue to be sensitive to fluctuations in prices. Price-setting by processing companies in China could radically impact competitors given China’s ongoing dominance in the global market. Despite these challenges, many countries will continue to seek to diversify their supply chains to avoid the negative repercussions of losing access to critical materials, as Japan and the United States did in 2010. Between China’s own smuggling problem and the importers’ determination to decrease their dependence, China’s export controls on germanium and gallium may not work as much as Beijing would like.
Recent & Related