Supply chain and foreign relations experts told Business Insider why the global race for AI dominance continues to draw comparisons to the Cold War.iStock; Rebecca Zisser/BI
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High demand for advanced semiconductors is increasing tensions between the US and China.
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Manufacturing power is the key to the conflict, but tensions have shifted to the supply of raw materials.
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Supply chain and foreign relations experts told BI why the AI race is akin to a new Cold War.
In the race against the US for global technological supremacy, China has the upper hand in at least one crucial area: rare earth elements.
The term refers to a group of 17 elements needed to make tech products ranging from semiconductors to industrial magnets and some solar panels – the same items that have been embroiled in the US-China trade war.
For more than a year, Beijing has been slowly tightening its grip on crucial minerals and rare earths.
In December, China banned the export of a range of rare earth processing technologies. Last month, China has further strengthened its grip on the sector. Citing resource protection and national security, Beijing has made it mandatory for exporters to track how rare earths are used in supply chains.
Now there are fears that China could further tighten the global supply chain for rare earths.
Here’s what you need to know about rare earths, what makes them so valuable, and how they factor into the US-China technology war.
China’s dominance over rare earth elements
China has long dominated the rare earth market thanks to its supply and low labor costs lax environmental standards.
The country produces 60% of the world’s supply of rare earths and invoices for 90% of global refined production.
The late Deng Xiaoping – the Chinese leader who led the country’s economic reforms in 1978 – recognized its strategic importance in 1992, when he said, “The Middle East has oil, China has rare earths.”
Under new regulations introduced last month, China’s rare earths are now owned by the state. Two Canadian rare earth refineries in China are also being taken over by state-owned companies.
This is not the first time Beijing has imposed restrictions on rare earth elements. In 2010, China imposed strict rare earth quotas, citing environmental concerns and resource conservation. This measure caused prices to rise sharply and prompted the US, European Union and Japan to file a complaint against China for unfair trade practices with the Chinese government. World Trade Organization. China lost the case and lifted export quotas in 2015.
Several countries have tried that diversify their rare earth supply chains in the wake of China’s quotas in the 2010s, but success has been limited due to high investment costs and environmental concerns.
There are renewed efforts to boost global production despite rising tensions.
In 2022 the USA Ministry of Defense awarded $45 million to MP Materials for rare earth oxide processing, and in 2023 it awarded more than $288 million to Lynas VS establishing commercial-scale rare earth oxide production facilities.
How does China use rare earth metals?
Beijing’s moves to control critical minerals and rare earths are part of a toolbox that Beijing has developed over the past four years, Rick Waters, director of the Eurasia Group’s China practice, said at a news conference.
During President Donald Trump’s first term, the US and China imposed retaliatory tariffs on each other. However, China has less leverage in a tariff battle because it exports more to the US than it imports. So it came up with another regulatory framework – this one regarding rare earths – that it can use in a trade dispute.
“They’re experimenting with using it, and I think in some ways they could go further — if they find that’s necessary,” Waters said.
Any further tightening of supplies of rare earths – which are a subset of crucial minerals – could leave the US vulnerable to supply shocks.
“China has cornered the market for the processing and refining of key minerals, leaving the U.S. and our allies and partners vulnerable to supply chain shocks and undermining economic and national security,” the White House said in a statement . statement in September.
What do the restrictions on rare earth elements mean for TSMC and Nvidia?
China’s control over rare earths could weigh heavily in the trade war between Washington and Beijing, with chips at the center of the conflict.
Chips are found in everything from computers to cell phones, cars and… defense equipment. Taiwan dominates the market, producing more than 60% of the world’s chips and more than 90% of the most advanced chips.
One company – Taiwan Semiconductor Manufacturing Company – is responsible for most of the production and is the main supplier to AI chip giant Nvidia, which is in the middle of the technology rivalry.
The US has already taken measures to block the export of advanced chips and chip manufacturing equipment to China.
If the trade war escalates – for example in the form of higher tariffs – China could pull its rare earth card, Oxford Economics wrote in a report published in July.
“China’s dominance in the battery supply chain gives policymakers the opportunity to withhold sector-specific inputs from Western manufacturers, which could prove inflationary and economically disruptive,” wrote Louise Loo, chief economist for Greater China at Oxford Economics.
This could mean further controls on exports of critical raw materials, especially rare earth minerals, Loo added.
As happened with China’s export restrictions on rare earths in 2010, prices are likely to rise as supply tightens, so a prolonged supply crunch could drive up final product inflation.
The technical Cold War
The US and China’s attempts to outsmart each other in the technology race are causing some analysts to draw parallels with the Cold War.
Zongyuan Zoe Liu, a senior fellow for China Studies at the Council on Foreign Relations, told Business Insider the idea that the US should outpace China and prevent the country from developing advanced chips is in a “greater power competition narrative.”
She said the tensions are similar, but not identical, to those between the U.S. and the Soviet Union that began after the end of World War II.
If Bloomberg As reported last month, the US is considering restricting export licenses for both Nvidia and AMD chips in an unfolding trade war that has also hit several sensitive industries, including electric vehicles, batteries and some solar panels.
The US imposed similar trade restrictions, embargoes and economic sanctions on the Soviet Union, North Korea, China and North Vietnam during the Cold War.
“I think the core of the problem is the concern about how China will use AI chips for military applications and surveillance,” Chris Tang, a professor at UCLA and an expert in global supply chain management and the impact of regulatory policies, told me. to BI. “It’s a different kind of Cold War.”
In addition to a tense relationship, the US-China dynamic also creates parallel systems, with the US and its allies on one side, and China and its allies on the other, Nick Vyas, the founder and director of Randall R. Kendrick of USC Marshall. Global Supply Chain Institute, BI told.
Vyas said he worried that tensions could escalate from this new Cold War to a hot war between world powers.
“If we stop doing horizontal business with each other, there will only be a bigger conflict,” Vyas said. “And then with one Conflict in the South China Seathe geopolitical conflict could escalate into a larger conflict, which could lead to a major situation that could lead to war.”
Nvidia representatives declined to comment for this story. Representatives for AMD and the Bureau of Industry and Security did not respond to requests for comment from BI.
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