China’s new export controls on gallium, germanium and antimony are likely to cause shortages in the U.S. that won’t immediately be felt by consumers but will force the U.S. to find ways to secure new sources -- though there are no easy options, analysts tell Inside U.S. Trade.
Beijing last week banned exports of gallium, germanium and antimony to the U.S. in retaliation for the Commerce Department’s latest round of export controls, which were aimed at limiting China’s ability to acquire advanced technologies. The minerals are key inputs for defense and consumer technologies, among other products.
China’s ban was not entirely unexpected: Beijing has long threatened to restrict access to the critical minerals for which it holds dominant positions. It imposed export controls on gallium and germanium last summer and on antimony just a few months ago.
Commodity markets adjusted to the initial export controls, with prices on those minerals higher now than they used to be, the analysts said. However, those adjustments did not change the underlying dependence the U.S. has on China for the minerals, setting up the looming possibility of shortages and difficult policy choices as the ban takes effect.
“The outlook is bleak because we have little alternative actions we can execute on,” said Sarah Stewart, the CEO and executive director of Silverado Policy Accelerator, who co-authored a paper on strategic defense critical minerals in September. “What we’ve seen is lesser steps and warning signals. Now we’re seeing actual bans in place.”
“Will there be an effect tomorrow? No,” she continued, noting that supplier networks already have some of the minerals needed.
However, the U.S. is vulnerable: It is not prepared to correct for the Chinese bans “because we don’t have domestic production or processing,” Stewart said. And, analysts note, creating domestic production is an expensive, years-long process.
The financial incentive for U.S. companies to invest in minerals production could make greater domestic production economically viable, for now, but the volatility of commodity markets puts that economic viability into perpetual question, analysts said.
More questions than answers
The U.S. government, like industry, has been stockpiling the minerals in question, according to Sharon Burke, the president of the research and advisory organization Ecospherics -- and this, she said, offers “a little bit of time before people feel the sting of not being able to get them. We won’t have angry consumers tomorrow.”
“Companies that rely on gallium and germanium knew the supply from China could dry up,” added Tom Moerenhout, the critical materials lead at Columbia University’s Center on Global Energy Policy. “They keep their own stocks and those stocks go for several months.”
The production cycles for goods that contain the minerals also are relatively long, said Burke, who was an adviser to the Biden-Harris transition team in 2020 and was assistant Defense secretary for operational energy during the Obama administration. “There’s a lag here on the impact people feel, which makes it more complicated,” she said. “As a supply chain disruption, people know it’s a problem. But consumers won’t feel it just yet.”
But while China’s announcement was “highly symbolic,” it exposes an “important vulnerability,” according to Center for Strategic and International Studies critical minerals security program director Gracelin Baskaran. The U.S. has not received any shipments of wrought or unwrought gallium or germanium from China over the past year, she noted, and imports of antimony have dropped 97 percent since Beijing levied the initial export control on it three months ago.
The harm that China’s export controls could wreak on the U.S. economy is difficult to gauge “because it might be death by a thousand cuts,” said Cullen Hendrix, a senior fellow at the Peterson Institute for International Economics. Gallium compounds are used throughout the semiconductor supply chain and in LED lights; germanium compounds are used in any number of transistors, including those in electric guitar pedals, he said. “This is going to have a significant, but small impact on a much more diverse set of sectors within the U.S. economy,” he said.
How strictly China chooses to enforce the ban also will play a part in how hard it hits the U.S. Last week’s announcement from China’s Ministry of Commerce did not include harmonized system codes specifying which products would be covered by the ban, noted Anne Clawson, the co-founder and head of the policy and government affairs practice at Cascade Advisory. Usually, MOFCOM follows an announcement like last week’s with a more granular policy release weeks or months later, Clawson said. Such a release is likely to include details that exporters need, such as which mineral compounds are covered by the ban.
Third-country enforcement also remains an open question. An update to China’s export control regulations that took effect on Dec. 1 included a provision similar to U.S. foreign direct product rules, stipulating that foreign-made goods containing Chinese-controlled content are subject to Chinese export controls. But it’s unclear whether China would immediately strictly enforce that provision. Beijing, according to Stewart, is more likely to slowly and consistently ramp up retaliatory measures to push back against the U.S. and try to move Washington and allies “to back off” rather than immediately cut U.S. access to products from third countries that contain those minerals.
The extent of surveillance China carries out in downstream manufacturing facilities that utilize the minerals will impact the significance of China’s export control update, Hendrix said. For instance, he asked, would China have insight into whether a foreign gallium wafer producer sourced gallium from multiple countries? Beijing also could take an approach similar to what the U.S. has adopted with the Uyghur Forced Labor Prevention Act and require that companies rebut the presumption that gallium they use comes from China, he said. “If that is the interpretation and it is being aggressively enforced extraterritorially, then theoretically China can put sanctions on that [foreign] company,” he said.
China might not want to employ a scorched-earth enforcement approach immediately, Stewart said. “There is a check and balance on all of this. China doesn’t want to cut off all of its markets,” she said. “China wants to show us it can constrain us by restricting access, but at some point there has to be a tipping point because that’s not good for them either.”
Chinese companies, however, are not known for responding to market-economy pressures, Stewart noted. “China’s companies that are subsidized by the Chinese government have operated at low levels of capacity for many years without having to correct in the same way that [U.S.] companies would by cutting down supply or idling facilities,” she said. “Do they care? I don’t know. They may not.”
China undercuts its prices so much in an attempt to drive out competitors that its companies can “wait it out,” said Mahnaz Khan, the vice president of policy and critical supply chains at Silverado and co-author of the group’s strategic defense critical minerals paper.
Clawson also suggested that reducing global demand might not lead China to reach a tipping point. The drop in demand created by cutting out the U.S. could force China’s minerals market to become more efficient, Clawson said. China has an overcapacity problem for a lot of metals, with plants running at only 40-60 percent capacity, she continued. A drop in demand could push the older plants with higher operating costs out as the remaining facilities absorbed their capacity, according to Clawson.
Another possibility, Clawson said, is that Chinese plants either don’t see a drop in demand or are hit only by a temporary lull as demand within China increases. One of Beijing’s long-term goals, which Chinese officials often reiterate, is to upgrade its manufacturing supply chain and advance the types of technology China produces and, in turn, be less reliant on foreign imports, Clawson noted.
China’s wartime posture and relations with other countries make a demand drop unlikely, said Baskaran. “China is going to use these resources to produce defense technology,” she said.
Just because those minerals aren’t headed to the U.S. doesn’t mean China won’t be able to export them, Baskaran continued, suggesting other potential destinations for Chinese exports. Germany has indicated it wants to maintain close ties with China, she said, as has Australia.
Looking for a solution
The U.S. has options as it looks to secure the supply of some minerals, the analysts suggested, but each brings its own set of challenges. Producing more gallium and germanium is not an overly complicated process because both minerals are byproducts -- gallium is extracted from bauxite and germanium is extracted from zinc. According to the U.S. Geological Survey, the U.S. in 2023 produced “a limited amount of bauxite and bauxitic clay … or nonmetallurgical use in Alabama, Arkansas, and Georgia.” Meanwhile, seven mining operations in five states mined $2.4 billion worth of zinc in 2023, USGS said.
Recycling is one option, according to Clawson, Burke and Gregory Wischer, the founder of the critical minerals consulting firm Dei Gratia Minerals. Clawson pointed to how Japan reacted in the face of a Chinese rare earths export ban in 2011. Japan was able to obtain roughly half of what it had been importing from China in part by becoming the world leader in the recycling space, she said.
The U.S. doesn’t focus on recycling those minerals “because it’s expensive,” Burke said, noting that the U.S. has only one gallium recycling facility. Recycling can help, Wischer added, but it cannot fully replace the supply the U.S. has been importing from China.
Gallium and germanium markets have been operating largely at equilibrium, Clawson said, meaning that companies have no financial incentive to produce more. But the price shock that is expected to occur as a result of China’s ban could provide companies outside of China with the incentive to increase production, she said.
“This is potentially a mechanism forcing the U.S.’ hand to get serious about investing in developing alternatives sources of supply,” Hendrix said.
Companies also have not seen sufficient financial incentive to invest in the creation of stable gallium and germanium markets in the U.S., he said, but “that calculus may be changing rapidly.” A key part of that equation, he noted, will be higher prices, which is the cost of domestic mineral security.
“I think we are trending toward a world where mineral security for higher prices is the reality of Western advanced economies,” he said.
U.S. investors are willing to put money into mineral production, Khan said, but Chinese competition suppresses mineral prices in the U.S. to such a point that the investment is not economically viable.
“The current ecosystem to facilitate capital is very, very bad,” added Moerenhout -- and the economic case for producing more minerals domestically “might improve, but it’s not a given,” he contended.
Part of the issue is the long-term nature of mineral projects, Moerenhout continued. “When you make these investments, you’re thinking about two or three decades, not two or three years,” he said, and companies have little certainty in making such investments.
“China can change its mind at any time and go back to lowering the global price,” agreed Burke. “That is one of the huge problems with commodity markets in general -- they’re very volatile markets. It’s difficult to make sustained investment. But only a sustained investment will work.”
“Who's to say China won’t pull the export controls off and flood the market?” asked Wischer, who questioned whether a price hike on gallium or germanium would be structural or temporary. For instance, nickel prices shot up in 2022, he said, but now Australian companies are putting nickel mines in care and maintenance.
The U.S. also should consider more significant public investments, according to several analysts. “When there’s an export ban and we’re going into an area of national security concern, I think that will open up more incentive,” Khan said. Stewart and Wischer suggested the administration could turn to the Defense Production Act. DPA Title III, which authorizes the president “to create, maintain, protect, expand, or restore domestic industrial capabilities essential for National Defense” through the use of loans, loan guarantees, purchases, purchase commitments, grants and subsidies.
“The first step is to incentivize U.S. companies to meet U.S. demand,” Wischer said. That incentive should consist of public investments and tariffs to protect those investments, he said.
“To protect U.S. companies, tariffs are one of the easiest things you can do,” he said, adding that duties should be applied “broadly, because like we’ve seen with solar panels, production can shift pretty easily.”
Much of the U.S. demand for critical minerals is being met by foreign actors, Wischer noted. “You capture that demand by levying tariffs so high that only U.S. companies can offer lower prices,” he said.
Stewart similarly said that public investment and tariffs must go together. “The U.S. needs to adopt a strategy that is not just about investing at home and hoping the market sets the price,” she said. “We need to invest at home and protect that investment with whatever measures are appropriate to disciple the global market to act fairly.”
But Stewart and Wischer diverge on how helpful allies can be in securing critical mineral supply chains. “Our allies have mutual interests here that should help,” Stewart said. “We’re all in the same boat in terms of risk.”
If the U.S., Canada, Australia and other nations that import minerals from China are willing to invest in new mineral processing operations, they could send the needed demand-side signal to the market that spurs more investment, Stewart said.
Wischer, meanwhile, said he doesn’t oppose working with allies, but said the focus must be on domestic production. U.S. mineral imports were severely disrupted in both world wars as well as during the Korean War, he noted, and “even Canada imposed export controls on critical minerals in World War II. Allies and partners are not always close friends when their own interests are at stake.”
China’s export ban on gallium, germanium and antimony is just the beginning, warned Khan. She cited Silverado’s paper, which laid out a list of 12 critical minerals that pose the greatest risk to national security should supplies be curtailed.
“What’s more concerning are the minerals on that list that don’t have those restrictions or a ban right now,” she said. “We still have a wide exposure.”
For instance, the U.S. is 100 percent reliant on arsenic and tantalum imports. “There’s no way to de-risk from that right now,” Khan said. -- Brett Fortnam (bfortnam@iwpnews.com)