Beijing has the semiconductor and defence industries in its sights
China is ramping up its trade war capacities. Last week the national government announced that it was passing new laws to prepare the country for a full-scale trade war against the West if it continued to be provoked. Now, Beijing has made a clear first step in this direction: export controls on rare metals germanium and gallium to countries it deems economically hostile.
Currently, China’s actions remain a bluff of sorts. The country has made clear that it does not want to engage in a trade war and that it is instead being pushed into one, primarily by the United States. By putting the exports of germanium and gallium on the table, China is showing its hand so that the West can start to understand just what a full-blown trade war would entail.
China currently produces around 60% of the world’s germanium and 80% of the world’s gallium. Gallium is converted into gallium arsenide for use in electronics and only a few companies can undertake this process, many of which are in China. The metals are also used in a good portion of products needed for a functioning hi-tech sector. These include fibre optic cables, high-speed computer chips, plastics and infrared sensors, as well as military equipment such as night vision wear and satellite sensors.
For those who thought that China simply exported plastic junk to the West, this should be a wake-up call. We may not like that the world is now heavily globalised, but that is the reality. Right now, many of our hi-tech industries — together with our manufacturing base — are highly dependent on China for basic inputs. And many of these inputs are very difficult to make.
What’s more, this is only the beginning. Right now, Beijing is only targeting industries related to semiconductors. It’s worth recalling that when the US sanctions targeted semiconductor exports, China responded in kind by sanctioning American chip producer Micron’s exports. If China expands its scope beyond semiconductors and adjacent industries, we will come to realise the extent of our dependence on Beijing.
In light of these conditions, it is hard to get away from the obvious conclusion: the Biden administration is not thinking through the consequences of its actions. In seeking to be assertive and aggressive with its largest rival, China, the White House has not considered how integrated global supply chains are, and how much larger Chinese manufacturing has become, relative to American manufacturing.
If this trade war really heats up, it will make the effects of the Russian sanctions pale in comparison. Our economies will struggle in the face of incoming inflationary depression, with the possibility of social unrest, the beginnings of which we have already seen in France amid falling food consumption. We can have a constructive conversation about deglobalisation and industrial policy, but only if we recognise that it will be a gradual process. Fools rush in where angels fear to tread.