Introduction

The Chinese government is intensifying its efforts to dominate the rare earth element (REE) supply chain. China currently produces 60% of the world's REEs but processes roughly 90%. In addition to developing strong REE production, processing, and recycling capabilities, Beijing is increasingly engaging in supply chain warfare, placing export controls on REE extraction and separation technologies, as well as certain metals. In its most recent and stringent round of trade restrictions, which were announced in early December, China’s Ministry of Commerce banned the sale of antimony, germanium, gallium, and superhard materials to the United States. China also recently announced that it will be acquiring ownership of the last two foreign-owned REE refineries within its borders. Together, these developments reflect a deliberate strategy to solidify China’s dominance in the REE supply chain and reinforce its near-monopoly on these critical materials. 

The implications of these recent actions – and China’s broader consolidation of REE supply chains – are manifold. Rare earth elements, such as gallium, dysprosium, and germanium, are integral to the production of many advanced technologies, including semiconductors. As such, China’s heightened influence over these critical natural resources could escalate geopolitical tensions between itself and the United States (U.S.), further disrupt and reorient trade of critical minerals, and impact REE prices and the cost of downstream technologies for industry and consumers alike.

REE Uses and Impact on Semiconductor Industry

REEs covered by Chinese restrictions are critical in producing semiconductors for various uses. Antimony is used to make infrared detectors and diode components, as well as batteries and sheathing layers of cables. Gallium is generally combined with other materials to produce wide-bandgap semiconductors, which are smaller, more efficient, and widely used in weapon systems, such as g advanced radar systems for missile defence and target acquisition. Their civilian use is also on the rise, covering cutting-edge developments including 5G signal towers, fast charging stations, and improved solar cells. Germanium is currently utilised for sensors, infrared optics, solar cells, and fibre-optic cables. While its role as the main material of transistors has been replaced by silicon, germanium is making a comeback as researchers investigate the potential of next-generation chips that are solely based on the rare earth element.

Given their importance, Western users have stockpiled these metals given the impending implementation of the export controls. When similar policies were previously enacted by the Chinese government, prices of gallium and germanium significantly increased. A similar pattern price hike is expected to happen for antimony following the latest announcement on new export controls. The persistent high prices of these metals are poised to push up semiconductor prices, while the limited supply may potentially cause a chip supply crunch.

Reactions by Western Governments

Most commercially viable mines of antimony, gallium, and germanium are located in China, which controlled 48%, 98% and 93.5% of production of these materials worldwide, respectively. In response to this potential bottleneck, Western governments have worked to increase domestic production, raise refining capacity, and develop alternative replacements.

In the United States, the Department of Defense (DoD) is working to increase the production of the country’s only antimony smelting plant, while a private mining firm is expected to obtain government approval by the end of 2024 to open an antimony and gold mine in the state of Idaho. For gallium and germanium, after the initial reaction by the Pentagon to “proactively act to increase domestic mining and processing” of these resources, the U.S. has seemingly adopted a more laissez-faire approach to raising gallium production and refining capacity. Government funding was provided to execute technical studies to develop alternative extraction methods and create new semiconductor chips without gallium. The U.S. DoD has also worked to alleviate a potential germanium glut by awarding contracts to expand the production capacity of germanium substrates, and to develop infrared imaging modules with no germanium use. However, these initiatives are not aimed at addressing immediate needs, such as opening new mines and smelters.  

In Europe, primary gallium production facilities existed as late as the 2010s before shuttering due to low-priced Chinese exports that flooded the market. Aware of potential future supply issues, the European Union (EU) has since attempted to resuscitate the production of gallium and germanium. This strategy is exemplified by the EU’s Critical Raw Materials Act, which aims to extract 10%, recycle 25% and process 40% of gallium, antimony, germanium, and other crucial materials within the EU by 2030.

Australia is the biggest producer of bauxite ore. Since gallium is produced during the production of smelting that ore, government agency researchers are now looking into the possibility of also extracting gallium during the production process. The Australian government also added an additional AUD2 billion for critical minerals financing in 2023, which covered the three rare earth elements in question.

Canada promulgated its Critical Minerals Strategy in 2022 and has provided CAD192.1 million and tax credits to support the development of new processing strategies and exploration of new reserves as of September 2024.

Finally, the Minerals Security Partnership (MSP), a multinational collaboration between 14 Western countries, was founded in 2022 to facilitate financial support across the whole value chain for various essential raw critical minerals, including the REEs discussed in this article. The MSP’s activities increased after Beijing raised its export restrictions in 2023, including various conferences and dialogues with Global South countries.

Implications

The Chinese government’s continued efforts to dominate the rare earth element industry mark a significant escalation in tensions between the U.S. and China, with geopolitical considerations shaping public policy in both nations. The White House has warned that China’s actions leave the U.S. and its Western allies “vulnerable to supply chain shocks” and undermine their “economic and national security.” The two countries are locked in a power struggle to gain the competitive edge in advanced technologies, with a focus on semiconductor chips that are key to artificial intelligence and military applications. In 2022, the U.S. imposed export controls to restrict China’s access to U.S. semiconductor technologies in an effort to maintain technological superiority in the sector. In response, China levied export restrictions on two REEs – gallium and germanium – that are critical to the production of advanced semiconductors. The latest measures by China may be considered additional retaliatory maneuvers signaling the country’s continued displeasure with the U.S. Government’s export policies and underscore China’s willingness to weaponize its mineral resources to address its own economic and security priorities.

China’s new export restrictions may intensify calls for nearshoring initiatives and alter global trade in rare earth elements. In recent years, the U.S. and its Western allies have reached a general consensus regarding the importance of augmenting domestic REE production and securing alternative supplies from countries with which they have stable and positive relations. Meanwhile, a similar state-directed strategy is being executed by China. The broader decoupling of U.S.-China trade relations and the emergence of parallel supply chain networks for critical minerals could lead to a bifurcated global trading system, with each nation spearheading separate blocs. 

However, some Western industry analysts are concerned by this trend, particularly as it relates to resource access and market complexities in REE supply chains. Outside of China, new REE production projects encounter significant challenges including high upfront costs, stringent regulatory requirements, permitting delays, limited technical expertise, environmental concerns, and lengthy project timelines, all of which discourage private investment. As a result, Chinese companies are likely to retain their competitive advantage due to their advanced technology, established infrastructure, and substantial government support.

Amid a lack of plausible alternative REE sources, industry is now sounding the alarm about future shortages. A more restrictive global ecosystem for rare earth minerals is expected to adversely affect key players in the semiconductor industry, such as TSMC and Nvidia. Reduced REE supplies will likely lead to supply chain bottlenecks and drive up resource prices, which exacerbates supply chain volatility and puts upward inflationary pressures on downstream products, including semiconductors. In fact, China’s 2023 export controls on germanium and gallium caused prices of the resources to more than double. Inflated prices may stifle research and development efforts, increase production costs, and cause manufacturing slowdowns, resulting in less innovation and smaller profit margins across the industry.

China's monopolization of rare earth elements has granted it unparalleled control over critical global supply chains, underscoring the global semiconductor industry’s vulnerability to supply disruptions. While Western nations are pursuing alternative supply chains and domestic production, significant barriers hinder rapid progress, allowing China to maintain its dominant position. This escalating resource competition is likely to deepen the fragmentation of global trade networks and increase geopolitical tensions between China and the United States.