China’s Rare Earths Export Curbs Will Sink US’ Microchip Manufacturing

Chinese export controls on germanium and gallium have stepped into effect amid fears that this will mean more expensive microchips, solar panels, cars, and even weapons. More significantly, the restrictions threaten to sink the Biden administration’s ambitious domestic microchip manufacturing goals, says China-US trade expert Thomas Pauken II.

China’s rare earths restrictions officially stepped into force on Tuesday, with the measures, announced last month after Beijing said it needed to protect its “national security and interests,” expected to cause a sharp jump in the cost of an array of advanced manufactured goods, particularly electronics.

The export controls, which will require companies seeking to export the pair of rare earth metals to apply for licenses, come in retaliation to a long list of US hostile measures, including restrictions on the import of Chinese high-tech goods.
“This is just the beginning,” former Chinese Vice Commerce Minister Wei Jianguo said last month, warning that “China’s tool box has many more types of measures available” should Washington try to retaliate to the rare earths semi-ban.

“Obviously, these consequences are going to be devastating to US efforts to promote their manufacturing industry, to create these factories where they’re reshoring back home,” said Thomas Pauken II, a veteran consultant and commentator on Asia-Pacific affairs, referring to the $50+ billion push announced by the Biden administration last year to restore the US’ domestic electronics component manufacturing capabilities. “The thing is, you need these ingredients that are necessary for the chips and the semiconductors,” he said.

“So now I’m hearing that TSMC," the Taiwan-based semiconductor giant, “is now having a rethink about doing their fab or semiconductor foundry that they were thinking about opening in Arizona. Also, there's another story about Intel. They were going to open up this major chip manufacturing plant in Ohio, and now suddenly they're saying, 'Well, maybe we won't open up this factory in Ohio because we lost all our Chinese customers. And because of these export controls we don't have the ability to create all these chips,'” Pauken said.

Pauken believes the US and its allies may not have expected Beijing to go through with its rare earths export restriction threats, judging by the limited reporting on the matter, apart from specialized Washington-based think tanks warning about the “devastating impact” such export controls could have on the US, Europe, Japan, “and much of the world.”

“I think the real story is that the West maybe thought China was bluffing. Maybe they thought that China wasn’t being serious about these export controls. And now that they are starting to go into effect, they are realizing how destructive they can be. The fact of the matter is that the US has not done proper preparations to deal with the counter-sanctions or the counter-attacks led by China…They just thought that if they made all these announcements that they were going after China and all these other countries were following them, then somehow, China was going to wimp out, look scared, and then change their mind under the pressure. But in reality, what China has learned is that you cannot back down under peer pressure coming from Washington,” the observer said.

Pauken expects the export restrictions to put a “big hurt” on the global economy, but not so much on Beijing, which could even receive a boost to its domestic manufacturing industry as rare earths that once went to other countries will stay in China.

“So basically it's a case of if you're tough to China, China will fight back just as tough. If you're nice to China, then China will be nice. Right now, Europe decided they want to support the US and want to push back against China. So, of course, China is not only going after the US, but they're also hitting Europe,” the observer said.

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