Last week, China radically “retaliated” against the United States’ biggest attack on the chip industry: it banned the export of gallium and other critical minerals. The trade war between the two countries has risen to a new level; It has become a concern for everything from renewable energy sources to the construction of basic devices. What we didn’t know was that the scope went much further. Even to significantly influence the war in Ukraine.

Embargo and innovation. The first was the New York Times. Media reported that the Chinese ban had fine print. Yes, the country had imposed an export embargo on four critical minerals needed for semiconductors. Namely: gallium, germanium, graphite and antimony. But there was more.

The action was not only targeting the USA. The measure included, for the first time, an explicit transfer ban restricting access to third-country companies that could transfer these minerals to the United States. It’s an approach that sets a precedent for regulating Chinese exports and represents an unprecedented escalation in trade tensions with the United States.

Coup. The most pressing of these is that the China ban threatens to further fragment global supply chains, forcing companies to choose between Chinese and US markets. Although some companies have stockpiled these minerals out of caution, China continues to dominate the mining and refining of these materials, as well as superhard compounds used in semiconductors and munitions.

I veto the drone. Shortly after, Bloomberg reported that restrictions were further increased. China has also reportedly begun restricting exports of key drone components. We are talking about engines, batteries and flight controllers – essential elements for the defense of Ukraine.

These restrictions, which could turn into a full embargo in January as a prelude to broader regulations, directly affect companies in the US and Europe, making it difficult to produce these war devices in a context where they are vital in the Ukrainian conflict.

Supply chains. According to media, the restrictions have greatly reduced access to cheap parts produced in China, which dominates 80% of the global market for these drones. The situation is forcing Western manufacturers to seek alternative suppliers in regions such as South Korea and Japan, but despite these initiatives, Ukrainian manufacturers still rely heavily on Chinese components to make cheap drones used in the conflict with Russia.

In fact, the restrictions also affect the production of more advanced models in Europe and the USA, and Ukraine has no choice but to increase its own production.

Geopolitical tension. There is no doubt that the Chinese restrictions are a direct response to US measures, such as sanctions on US companies related to the military industry and restrictions on advanced semiconductors. Not only this. They also reflect a growing technological and commercial dispute between the two powers, which includes cross-sanctions on key companies such as DJI and Shield AI.

In this regard, Beijing has denied supplying weapons to Russia, but as we will see below, there are Western reports suggesting that many of the Chinese components are used in Russian drones and attack machines.

Flow of dual-use goods. These reports detail that China has become Russia’s main supplier of sanctioned dual-use goods, including microchips, drone components and CNC tools needed for military capabilities. In 2023, the country supplied nearly 90% of G7 priority products, significantly increasing its share from 30% in 2021. These goods bypass Western sanctions and reach Russia as Chinese products or through re-export.

Although Beijing refrains from supplying “lethal weapons” to Russia, its indirect exports such as electronic components significantly support the Russian military industry. In addition, this support will allow China to maintain “critical distance” and strengthen its strategic alliance with Moscow to preserve its international reputation and avoid additional sanctions.

Military economy. Exports of critical goods such as semiconductors have boosted key sectors of Russian defense, from radar systems to attack drones. However, Moscow’s dependence on these goods also increases costs; because China demands higher prices due to increasing supply needs.

In short, as we see, a multi-party struggle is currently being waged in the geopolitical key. China appears to play a key role in this context; for it appears to play a key role in maintaining the Russian war machine to the detriment of Ukraine by procuring dual-use goods while banning key elements of the war machine (drones). All this while carefully balancing geopolitical and economic interests.

While the West intensifies sanctions, it envisions only one possible way out, led by the United States: diversifying supply chains and reducing options for countries that depend on Chinese components in key sectors such as defense and technology.

Image | Gary Lerude, Morning Calm

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