China's export controls: An aggressive new posture

China is trialling a new approach to global supply chain control. If successful, this approach could become part of a new Beijing playbook at a time when the U.S. is struggling to decouple from its largest rival.

Photo: Tim Winkler via Unsplash

The People’s Republic of China (PRC) under President Xi has been steadily securing its domestic and overseas supply chain through initiatives like Belt and Road and Made In China 2025. To date, many investments have been based on building goodwill overseas and encouraging innovation and investment domestically. 

October 9, the PRC changed its posture. The Ministry of Commerce (MOFCOM) published six announcements that enable China to  control its supply chains through to finished goods in the lithium-ion battery, rare earths, and semiconductor sectors. (Translations of all six controls are available here courtesy of journalist Fred Gao.) To be sure, some of these announcements represent retaliation – the restrictions on certain chip exports, to name one example.

At the same time, this is not just another export control measure – of which we have seen many in the past few years. It is also not merely a negotiating ploy before a planned meeting between Presidents Trump and Xi in less than a month. 

Export controls in China are relatively new, dating to 2020. The PRC appears to be learning from recent U.S. semiconductor export restrictions as it fleshes out its own controls. The difference is the massive supply chain dominance China already enjoys in the sectors addressed by many of these measures. Countries can no longer count on Chinese technology to help them decouple from China. An independent path forward may not yet exist.

Business implications of China's new export controls

• Long-Term Upside for New Market Entrants; Short-Term Uncertainty: These PRC restrictions point to benefits for those companies investing in rare earth and semiconductor production technologies outside China – in the long term. In the short term, access to processing equipment, consulting technology, and precursor materials is likely to be scarce and more expensive. Companies should take actions to stockpile materials and machinery, conduct risk analyses, and diversify supply chains.

• Extraterritorial Supply Chain Control: In particular with the “0.1% rule” for rare earths, China is laying claim to the intermediate and final products containing its rare earth metals, even when those intermediate and final products are made outside its borders. This could make China the decider of which applications and which countries can use its products. 

• Licenses as Political Leverage: China has shown it will use export licenses as political leverage. In April, when the PRC imposed a first raft of measures on rare earths, U.S. carmakers faced almost immediate and severe supply chain disruptions. China granted a series of export licenses to Ford, GM, and Stellantis as part of a deal with the U.S., but it has demonstrated it can just as easily withhold future licenses.

• Supply Chain Tracking: Even where export licenses are granted, the requirement to identify each company along a supply chain and specify final destination countries will provide China with unprecedented detail about global supply chains in the rare earths and semiconductor sectors. These supply chains remain mysterious even for many companies participating in them, so China would gain a major advantage.

• Leveraging Processing Dominance: The PRC built out its rare earth (and broader critical minerals) processing capabilities when the U.S. and most developed countries abandoned many of these environmentally damaging and dated technologies. Over time, the PRC took a seemingly unwanted and “dirty” technology. Chinese companies came to dominate and modernize the equipment and manufacturing technology needed for these supply chains. These new export controls limit export of the whole range of processing technologies, making it difficult for other countries to set up their own processing capability after ceding it to China for decades.

• Limits on Technology Transfer: The October 9 announcements prohibit Chinese citizens from providing technology or services to the rare earths sector without PRC approval, whether inside or outside China, to non-citizens. This approach is in line with “deemed exports” in U.S. export restrictions. While this is initially a narrow restriction in one sector, one could imagine a broader application having wide ramifications.

U.S.-China trade war escalation?

China's export controls are a major escalation in the U.S.-China trade war. President Trump's initial reaction was to threaten escalation, but both sides appear to have developed more conciliatory tones. An October 13 China Daily article stresses, "China's export controls are not export bans, as licenses will be granted for eligible applications."

Even so, the Chinese government has created a new tool to throttle U.S. and global manufacturing supply chains. What's more, U.S. and allied manufacturers do not yet have a viable alternative to China. This dynamic is unlikely to change in the next several years, and no retaliatory tariffs on America's part can change this fact.

Included in the new export controls

This companion post on the Cascade Blog covers what is included in the October 9 export controls, including effective dates.

Want to discuss what these export controls mean for your organization? Contact us at info at cascade advisory dot co.