Highlights
- PIIE analysis reveals Chinese export controls on gallium, germanium, and graphite have not significantly affected US import shares.
- Export licensing, rather than outright bans, allows continued trade while providing China with commercial intelligence.
- The minimal impact of export controls may be encouraging market diversification and Western investment in rare earth element production.
According to an analysis by Cullen S. Hendrix, PhD (opens in a new tab) in political science and senior fellow with the Peterson Institute for International Economics (opens in a new tab) (PIIE), known until 2006 as the Institute for International Economics (IIE), is an American think tank based in Washington, D.C. The group was founded by C. Fred Bergsten in 1981 and has been led by Adam S. Posen since 2013. PIIE conducts research, provides policy recommendations, and publishes books and articles on a wide range of topics related to the US economy and international economics. According to Hendrix in a piece for PIIE, atleast to date Chinese export controls on strategic rare earth elementshave not had much of a material impact on U.S imports, perhaps contrary to popular belief.
Hendrix reports via the PIIE website that based on an analysis of US Customs data indicates that the much concerned impact of Chinese export controls on gallium, germanium, and graphite, intended to adversely impact semiconductor supply chains. According to Mr. Hendrix:
“But as blows in the emerging US-China tech war go, so far, they have been closer to a jab than a haymaker. Analysis of US Customs data indicates that China’s shares of total US imports of these commodities haven’t moved much, if at all.”
Cullen S. Hendrix, PhD, Author of Important Analysis
Export Controls
In July announced export controls (opens in a new tab) for gallium and germanium, and October for graphite (opens in a new tab), last year. They were to be part of what Hendrix calls a “tit-for-tat” response to American export controls against China (opens in a new tab) announced October 2022.
Both the opening salvo and the response strategy take advantage of each country’s unique positions in global supply chains goes the logic of the unfolding situation at the time. Yet again according to the Hendrix review of the Customs data there has not been much of a change in the flow of relevant goods.
It would make sense in a real trade war the PIIE piece conveys given the commanding position America has over global semiconductor innovation, and then of course China’s apex position controlling the rare earth elements supply chain—the building blocks for the high-tech goods.
What’s the Data Reveal?
The PIIE analyst conveys an important point however, when ignoring the chatter and political talk.
“If the United States denies China advanced semiconductors, China will deny the United States the basic building blocks of both semiconductors and green tech. And given the United States’ industrial policy–fueled ambitions to become a leading producer of both (opens in a new tab) and China’s dominance of critical mineral supply chains, this exchange of export controls had all the makings of an effective war of mineral attrition.”
Yet such a war is nowhere to be detected when reviewing the data. China continues to export to America graphite and germanium in a similar quantity to those prior to controls.
Visit the PIIE piece based on data from January 2020 to August 2024, the most recent month for which import data are publicly available and review the figure plotting Chinese exports as a share of total US imports for gallium arsenide wafers (HS 3818000010), germanium oxides (HS 282560), and natural graphite in flake or powder form (HS 250410), the type used in electric vehicle (EV) and renewable energy storage batteries.
Also, the graphite data reveal large monthly declines in October 2023 (the month the controls were announced) and January 2024 (the month after they took effect), with Chinese imports nearly zeroing out in the latter. However, PIIE reports from February to August 2024, “Chinese suppliers accounted for 65.6 percent of US graphite imports—only a hair lower than in the seven months preceding the announcement of export controls (67.7 percent).”
PIIE reports that the “impact of germanium export controls is much harder to eyeball in the data.”
For example, American germanium imports via China dropped considerably by October 2023 (two months after the ban on gallium and germanium went into effect), however, “in the ten months of data since, import shares have restabilized around 22 percent of total, down only 1 percentage point from the ten months preceding the ban.”
One segment of trade that Hendrix does report a decline in the exports, given since July 2023 American imports of GaA wafers have effectively fallen to zero. However, the PIIE analysis also shows the U.S. has never been that dependent on China for sourcing this material. For example, before the announcement of export controls China only accounted for 4.8 percent of US GaA wafer imports on average. To date the most effective export controls impact products for which America is least reliant.
What’s Going on?
This is what PIEE analyst Hendrix asks of his readers. His answer:
China’s approach has revolved around export licensing, which is different from an export ban. Export bans are the most stringent export control, allowing no product to legally leave the country. Export licensing, however, is a process that, at least in the Chinese case, requires exporters to file paperwork that includes export agreements, descriptions and certifications of end consumers and intended end use, information on the importing company, and a variety of technical reports (opens in a new tab). This process is potentially onerous but clearly navigable. In the short term, an effect of the export controls has likely been to subsidize the hiring of in-house compliance officers for larger firms and the billable hours of international law firms specializing in compliance for smaller ones.
It has never been clear that China’s goal was to actually starve US supply chains of critical minerals. Doing so would both deprive Chinese producers of a growing, heavily subsidized market and accelerate US and Western investments in diversifying these supply chains. Building an indigenous leading-edge semiconductor industry is incredibly time- and resource-intensive, and developing expertise and supply chains could take five years (opens in a new tab) or more—though some think only three (opens in a new tab). Finding new places to mine and process graphite, gallium, and germanium may be costly and time-consuming, but know-how is not as binding a constraint. Beyond flexing some muscle in the tech war, the compliance process provides China with commercial intelligence about how these products are being used and by what consumers, intelligence that may be useful should US-China relations deteriorate further. As of October 2024, China is now requiring Chinese exporting firms to provide more detailed information on end use by foreign firms (opens in a new tab), which may be a stronger deterrent moving forward.
Hendrix goes on to report on other fascinating, in some cases surprising insights. For example, prices of many of the critical minerals have plummeted and that miners in the West covet higher prices necessary to “catalyze investment.” In fact, the analysts suggest that “US tariffs on graphite (opens in a new tab) can be interpreted as an attempt to do just that.”
On the margin, Chinese export controls seem to be a necessary prod for the market, helping to induce the Western producer business case for diversification less a crashing semiconductor and EV supply chain.
And at least for now, the export controls announced by China on rare earth elements such as gallium, germanium, and graphite and not materially moved the market. Hendrix reports if looking at all of this in the context of a Sino-American trade war it’s little more than “flexing of Chinese muscle and a fact-finding mission.” Maybe an all-out assault emerges in the years to come?
Daniel
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