In 2010, China implemented a series of export controls on rare earth minerals, a move that led to significant smuggling activities and prompted Japan and the United States to diversify their rare earth supply chains. China’s recent export controls on germanium and gallium have reignited discussions about the need to diversify critical material supply chains away from China. While diversifying supply chains can be a lengthy and costly process, these new controls are compelling countries to accelerate policies aimed at reducing their reliance on China for essential materials.
On July 3, China’s Ministry of Commerce introduced new export licensing requirements for gallium and germanium, metals crucial in semiconductor manufacturing. These measures are seen as a response to export controls imposed by the United States, Japan, and the Netherlands on semiconductor chips and manufacturing equipment, part of a broader effort to restrict China’s access to advanced chips. While these measures do not completely ban exports, they are expected to increase the time, administrative burdens, and the risk of rejection for those importing these metals from China. China is a dominant player in this field, producing 94% of the world’s gallium and 83% of the world’s germanium. While these controls have raised concerns in many importing countries, past experiences suggest that China may face challenges in ensuring the effectiveness of these measures.
China’s Previous Export Controls on Rare Earths This is not the first time China has implemented export controls on critical materials used in electronics, a strategy some describe as “economic coercion.” In 2010, China began tightening its export controls on rare earth minerals, reducing export quotas in the first half of the year. Additional controls introduced in September 2010 aimed to limit the export of pure rare earth minerals, rare earth oxides, and rare earth salts. Shipments from China to Japan, the United States, and the European Union were reportedly halted for several days in September. Although China’s Ministry of Commerce denied calling it a ban, the impact was significant.
Throughout 2010, China introduced a series of other measures, including reducing export quotas for rare earths by 40%, imposing export tariffs of 15-20%, and further lowering quotas by 32.5% in 2011. The export controls particularly affected Japan, which relied heavily on Chinese rare earth imports for various electronic applications, receiving nearly half of China’s rare earth production in 2010. These export controls caused rare earth prices to soar and forced importing countries to seek alternative sources.
Why Rare Earth Export Controls Fell Short China’s export control measures did not proceed as planned. Japan, the European Union, and the United States filed a complaint against China at the World Trade Organization (WTO) in 2012. China lost the case, leading to countermeasures that eased prices and increased China’s rare earth exports. In response to the WTO ruling, China informed the organization that it had removed restrictions on rare earth-exporting enterprises. Instead, Beijing implemented stricter export licensing measures, which were announced in late 2014 and expanded later.
Another challenge facing the effectiveness of these export controls was smuggling. Smuggling was a problem even before the controls were introduced, accounting for 40% of China’s rare earth exports in 2009. Smugglers expanded their routes and utilized third-country intermediaries to sell to Japan, circumventing China’s controls. Japan’s import data showed minimal disruptions in rare earth imports from China, with only cerium oxide imports decreasing. Smugglers also evaded controls by mixing minuscule amounts of other metals with rare earth metals, allowing them to be exported under a different product category.
Chinese efforts to combat illegal mining and smuggling had limited success. A report from China’s State Council revealed that in 2011, figures reported by countries receiving China’s rare earth exports were 120% higher than China’s own figures. Given the lucrative incentives for exporters due to the export controls and surging rare earth prices, this figure was likely even higher. It was estimated that 40,000 metric tons of rare earths were smuggled out of China in 2014.
Importers’ Response and Diversification Another factor undermining the effectiveness of China’s 2010 rare earth export controls was the response of importing countries, which sought to diversify their supply sources and reduce dependence on China. Japan was particularly proactive, diversifying nearly 30% of its rare earth imports away from China by 2021. Japan signed rare earth development agreements with Mongolia, Australia, and Vietnam and invested in Australian producer Lynas. The United States also took steps to diversify, reducing China’s share of rare earth imports from about 100% in 2010 to 80% from 2017 to 2020. The European Union did not take significant diversification measures and continued to rely on China for 98% of its rare earths supply by late 2022.
This diversification effort had a significant impact, reducing China’s share of the global rare earth supply from at least 90% (possibly as much as 97%) in 2010 to just 60% in 2021. Other producers such as the United States (16% of global supply in 2021), Myanmar (9%), Australia (8%), and Thailand (3%) began providing alternative supply sources. Favorable policies in countries seeking diversification, including government investments in rare earth separation and supply chain resilience in the United States, contributed to this trend. Calls to respond to what was perceived as China’s economic coercion grew louder.
Implications for Current Circumstances Similar to 2010, China’s recent controls on gallium and germanium have reignited discussions about diversifying supply chains in countries worldwide. Many nations are increasingly exploring ways to reduce their dependence on China for critical materials. For the European Union, this time is different. In April 2023, the European Union passed legislation aimed at enhancing its self-sufficiency in the production of critical materials. The export controls on gallium and germanium are already prompting countries to consider alternative sources and are likely to erode China’s market dominance in the critical materials sector.
However, diversification is a gradual process with associated costs. While there is currently no global shortage of germanium and gallium, Chinese manufacturers maintain a competitive cost advantage that may deter international
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