EU, alarmed by China's new export curbs on germanium and gallium, hastens to assess exposure

European Union officials are scrambling to map the bloc's exposure to Chinese supplies of germanium and gallium, after Beijing said it would restrict their export from August 1.

China's Ministry of Commerce on Monday ordered export restrictions on the two technology-critical elements as well as several of their compounds, in retaliation for new Western curbs on its semiconductor industry, citing national security concerns.

The minerals are key to making advanced electronics, including microchips, new electric vehicles and solar panel technology.

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The restrictions came after the Netherlands followed the lead of the United States in blocking China's access to equipment used for making advanced chips, also citing national security reasons without naming Beijing directly.

On Thursday in a meeting with trade diplomats in Brussels, European Commission officials said they were "scared" of the scope of the Chinese retaliation, according to people involved in the discussion.

China's claim of national security as the reason has spooked them, fearing the restrictions could be extended to other key minerals.

An assessment is under way into which industries and member states are most vulnerable to the supply shocks, with several diplomats raising concerns about their countries' exposure during the meeting.

China is the world's largest producer of the two elements, with more than 95 per cent of the global gallium output and 67 per cent of germanium.

According to the commission's own data, the European Union relies on China for 71 per cent of its gallium imports and 45 per cent of its germanium; the analysis should provide a more granular picture of where the pain points may be.

Dependencies on China are much higher when it comes to other minerals, such as heavy rare earths (100 per cent), magnesium (97 per cent) and light rare earths (85 per cent).

The analysis may also suggest potential countermeasures in case China escalates its restrictions.

The EU recently adopted an anti-coercion instrument, a trade weapon that allows it to slap punitive measures including tariffs and market bans on countries accused of economic bullying. However, given that Beijing's measures are retaliatory, it is unclear whether it would be used here.

In exchanges with its Chinese counterparts, EU officials have requested that they ensure the measures comply with global trading rules and narrow their scope accordingly, sources said. Diplomats expect a fresh update during a meeting of the European Council's trade policy committee next week.

On Friday in Geneva, the EU was one of seven World Trade Organization members to complain about China's new export controls; the others were Japan, Canada, South Korea, Australia, Britain and Switzerland.

China countered by raising US, Dutch and Japanese chip controls, and accused Washington of "abusing" the system by invoking national security defences on a regular basis, according to sources who were present.

China has not issued an outright ban, but will require Chinese companies to secure licenses if they want to ship the metals overseas. In Geneva, Chinese officials said the controls were "common international practice for dual-use goods". It cited other WTO members that have also imposed export controls.

EU officials, who spoke anonymously because they were not authorised to speak publicly, said that the episode was a "textbook example" of why the bloc needs an economic security strategy, which is being pushed by the commission but which has been met with some opposition in capitals.

Some EU leaders have spoken against the scale of Brussels' "de-risking" plans, which include outbound investment controls for hi-tech sectors in China, and a "Europeanisation" of the export controls regime.

Some member states have complained that the plans were too close to those of the United States; others warned the commission that it was trying to make rules that are traditionally left to the 27 member capitals.

At a meeting in Brussels last week, the EU's national leaders pledged measured support for the concept of de-risking, but there is still no agreement on what it should constitute.

The restrictions, however, are seen as a "credible threat" to EU supplies in their own right. But even if they are not enforced, Beijing may be able to collect data on where Chinese shipments are going, thereby building a fuller picture of European dependencies and supply chains, a senior source said.

Bryan Mercurio, a professor of trade law at the Chinese University of Hong Kong, said that Beijing's move could backfire by adding momentum to the EU debate over de-risking.

"While China is quite clearly the dominant producer of the two metals, it's my understanding that neither are very rare," Mercurio said.

The restrictions could squeeze supply and push up prices in the short term, he added, but could "spur production" elsewhere in the world in the long term.

In some European capitals, concerns are growing about the increased linkage of economic and national security. The prospect of being dragged into a spiralling tit-for-tat dispute with China is anathema to some, including France and Germany.

There is also scepticism towards Washington's claim that it is pursuing a "small yard, high fence" approach to keeping key technologies out of Chinese hands.

Observing the US effort to ensure the Netherlands followed its export controls on semiconductor-making equipment, one senior European diplomat described it as "high fence, massive park".

China's increasingly securitised approach to trade policy also leaves Europe wary. Earlier this year, China moved to restrict the export of several core solar panel technologies.

In March, European Commission President Ursula von der Leyen declared that "China has now turned the page on the era of 'reform and opening' and is moving into a new era of security and control".

Nicolas Kohler-Suzuki, an associate researcher at the Jacques Delors Institute in Paris, said that despite its dominance in critical minerals, China may be "impotent" to respond to some of the Western measures.

"The US export restrictions are massive. Semiconductors are the largest imports in China ... more than oil, which I always find quite astonishing," Kohler-Suzuki said.

"It's also quite clear that this 'small yard, high fence' approach that [US National Security Adviser] Jake Sullivan always talks about is more talk than actual reality in my opinion," he added.

This article originally appeared on the South China Morning Post (SCMP).

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