China Strikes Back: How Export Restrictions Could Impact Global Semiconductor Industry

Wednesday - July 12 2023, 12:41 UTC - 1 year ago

On July 3, 2023, the Chinese Ministry of Commerce announced that the export of gallium and germanium, chemicals used in the semiconductor industry, will now be subject to a license system. This is likely a retaliation to Western countries putting restrictions on the export of advanced technologies. Gallium and germanium - though important - are relatively niche with their applications in the semiconductor industry. However, they have a wide variety of uses in modern weapons and are seeing a surge in demand, driving up prices and stock prices of Chinese suppliers. The restrictions are set to be implemented on August 1, 2023.

China has been on the receiving end of semiconductor export restrictions for years. Now, it is striking back with the same tactic. On July 3, the Chinese Ministry of Commerce announced that the export of gallium and germanium, two elements used in producing chips, solar panels, and fiber optics, will soon be subject to a license system for national security reasons. That means exports of the materials will need to be approved by the government, and Western companies that rely on them could have a hard time securing a consistent supply from China. The move follows years of restrictions by the US and Western allies on exports of cutting-edge technologies like high-performing chips, lithography machines, and even chip design software. The policies have created a bottleneck for China’s tech growth, especially for a few major companies like Huawei. China’s announcement is a clear signal it aims to retaliate, says Kevin Klyman, a technology researcher on the Avoiding Great Power War Project at the Harvard Kennedy School’s Belfer Center for Science and International Affairs. "Every day the technology war is getting worse," Klyman says. "This is a notable day that accelerated things further." But even though they immediately sent the price of gallium and germanium up, China’s new curbs are not likely to hit the US as hard as American export restrictions have hit China. These two raw materials, though they are important, still have relatively niche applications in the semiconductor industry. And while China dominates gallium and germanium production, other countries could ramp up their own production and export enough to substitute for the supply from China.

Here’s a quick look at where things stand and what comes next. Gallium and germanium are two chemical elements that are commonly extracted along with more familiar minerals. Gallium is usually produced in the process of mining zinc and alumina, while germanium is acquired during zinc mining or separated from brown coal. "Beijing likely chose gallium and germanium because both are important for semiconductor manufacturing," says Felix Chang, a senior fellow at the Foreign Policy Research Institute. "That is especially true for germanium, which is prized for its high electrical conductivity. Meanwhile, gallium has unusual crystallization properties that lead to some useful alloying effects." Gallium is used in the manufacture of radio communication equipment and LED displays, while germanium is widely used in fiber optics, infrared optics, and solar cells. These applications also make them useful components in modern weapons.

What’s the immediate impact? The new export license regime will start being implemented on August 1. Right after it was announced, purchase orders reportedly began swarming into Chinese gallium and germanium producers. The stockpiling has raised the price of the two materials, as well as the stock prices of Chinese companies that produce them. AXT, an American maker of semiconductor wafers, quickly responded to say that its China-based subsidiary would apply for an export license to maintain business as usual. It’s important to remember that these restrictions might not hit the US semiconductor industry so hard. Chinese companies dominate the global production, which means that any delays to technology shipments could hurt China itself, Klyman says. But the material is also produced by other countries such as Canada, Russia, and South Africa.