I learned an important lesson some 30 years ago when I visited the Chengdu Giant Panda Breeding and Research Center in southeastern China. As I drew closer and closer to a panda, which was playing with abandon, I was pulled back by a friend. When provoked, or if it perceives an attack, the cuddly animal might claw you, he admonished me.
It occurred to me that a parallel exists in international relations, where attacking others also triggers retaliation.
On Dec. 2, for the third time in three years, the Biden administration in the United States ramped up technology restrictions on China, including blacklisting 140 Chinese companies and placing more controls on 24 types of chipmaking equipment and three categories of software essential for semiconductor development. It was clearly a tactic to stunt China’s high-tech development.
Beijing’s response was uncharacteristically swift, and came with a dose of revenge. The following day, the Ministry of Commerce banned sales to the United States of a number of dual-use metals having both civil and military applications, including gallium, germanium, antimony and other super hard materials.
Beijing’s move was seen by many as an escalation of its existing measures. When it announced export controls on gallium and germanium in August 2023, it said the controls did not aim at any particular country. This time, however, it made it clear that the measures specifically target the United States. Further, the new measures cover more than just the defense sector, as the previous controls were intended to do. They also affect civilian sectors, too, including telecommunications and renewable energy. The retaliatory measures will undoubtedly have a detrimental impact on the U.S. high-tech sector.
China is America’s largest supplier of the critical metals. According to the U.S. International Trade Commission, China accounted for 54 percent of U.S. imports of germanium and 53 percent of its imports of gallium from 2018 to 2021.
The existing measures are already inflicting pain on some American companies. U.S. imports of the metals from China have plummeted since the controls went into effect. Its imports of germanium were down by two -thirds and gallium by one-third. Meanwhile, the price of gallium jumped by 19.1 percent and germanium by 88.3 percent as of Dec. 3. Further, there have been reports of U.S. companies being forced to cut back on production of military hardware owing to the reduced supply of the metals.
Since no export license has been granted in the U.S. market since August 2023, we know that U.S. companies are getting the needed metals through third parties. However, Beijing’s updated rules forbid the resale of any of these metals sourced from China, plugging a loophole in the previous export control regime. This makes it extremely difficult for the U.S. to circumvent the ban.
China is by far the top supplier of these critical minerals globally. In 2023, it produced 98 percent of the world’s gallium, 60 percent of its germanium and 77 percent of all natural graphite. Given China’s dominance in the market, it will be very difficult, if not impossible, for the U.S. to find alternative sources of supply in adequate quantity and at comparable prices for years to come. The situation will only get worse in the immediate future. Developing alternative sources of supply will require an immense capital investment and will take time.
On the same day China’s Ministry of Commerce announced retaliatory measures, four Chinese national industry associations that cover the internet, semiconductors, automobiles and telecommunications urged their members to be cautious when considering purchasing U.S.-made semiconductors, saying they are neither safe nor reliable. This move by the industry bodies was well-coordinated and unprecedented, reflecting their fury over the Biden administration’s attempt to choke China’s chip sector and their resolve to hit back.
So far, restrictions on U.S.-made electronic products in China have been largely confined to government departments. Despite popular calls to restrict American products, the government has kept its hands off the market. However, the industry initiative could alter the dynamics.
The four associations involved in this action cover most of the major semiconductor players in the country. As someone who once served as the chairman of a major national trade body in China, I know well that their call will have a profound impact on the purchasing decisions of their members, who will take it extremely seriously. When the great majority of these members shun U.S.-made chips, a consumer boycott will likely ensue.
China has the capacity to largely meet demand for the kinds of chips the Biden administration permits to be exported to the country. In the first 10 months of this year, it exported approximately $128 billion of such chips. The switch to chips made domestically is expected to be relatively easy, although it would mean a dramatic drop in the sales of chips from U.S. suppliers, dealing a heavy blow to businesses on the Chinese mainland — for example, Nvidia, Qualcomm and Intel, which derive a substantial portion of their revenues from domestic sales in China.
Chinese industries’ retaliation against Washington’s latest sanctions, coupled with the Biden administration’s ban on the export of advanced chips to China, appears to shut the door to the world’s largest chip market for America’s entire chip industry, ranging from legacy chips to advanced ones. Biden’s decision will come home to roost.
Beijing’s response took the Biden administration by surprise. Indicative of its lack of readiness for Beijing’s countermeasures, the U.S. State Department offered few clues about how Washington would cope. Instead, it resorted to the tactics of the thief crying, “Stop thief!” as it accused China of enacting “coercive” measures.
Indeed, Washington had underestimated Beijing’s willingness to retaliate. Beijing had been vowing to safeguard its interests, but until now its warnings had been mostly barks with few bites, largely because of its concern for the global stability of supply chains.
However, Beijing’s move earlier this month marks an important shift in its approach to Washington. It ushers in a new era between the world’s largest economies. While open to negotiations with Washington, China is prepared to confront the challenge head on. The new measures could well be a harbinger of how Beijing would react to aggressive China trade policies under Donald Trump 2.0.
Beijing’s hardened attitude may reflect a more pragmatic approach in the offing. Trump views China as America’s principal geopolitical adversary and is bent on an economic decoupling. There is little prospect for progress to be achieved through compromise, so what is the point of making any concessions at all?
China, moreover, is more confident in dealing with Trump than it was during his first term, and it is now better positioned, as its reliance on the U.S. market is substantially reduced. The share of U.S. in China’s global export picture plummeted to 14.7 percent in 2023 from 19.3 percent in 2018. China has also achieved excellent technological progress and innovation. In the chip sector, a complete industrial chain has now been set up and is in full operation. In this context, China will be inclined to strike back when Trump hits.
American farm products, such as soybeans and corn, are widely considered to be targets of Beijing’s retaliatory measures. They certainly do look like good candidates. However, China’s measures could go beyond import controls. Export controls are set to become an important tool as well. In the chip sector, it has been suggested that the export ban to the U.S. should be expanded to embrace the resale of products that contain the critical metals, as well as exports of the metals themselves. Suggestions have also been made that the export ban should be expanded to products such as aluminum and other critical minerals.
A notable case involves rare earth minerals. Beijing has demonstrated restraint in using this option. However, the possibility can not be ruled out. When push comes to shove, a continuation of the current policy may no longer be considered justified.
Beijing’s retaliatory move has put Trump on notice that China will fight to safeguard its interests. A giant panda, notwithstanding its mild temperament, will attack someone who pokes it in the eye. China, likewise, will strike back with greater frequency and force when hit.
