US heightens charm offensive as China announces export curbs

US Treasury Secretary Janet Yellen arrives in China on Thursday, picking up from where US Secretary of State Anthony Blinken left off a few weeks ago, in an attempt to stabilize deteriorating relations between the countries.

Despite — or perhaps because of — either visit, this week China announced it will make it more difficult for Chinese companies to export gallium and germanium, two raw minerals used to make microchips and other key technologies. China accounts for 94% of global gallium supply and 83% of germanium, according to a 2023 European Commission report.

The move is retaliatory: In October, the US introduced export controls aimed at curbing China's access to certain advanced computing semiconductors or related manufacturing equipment. Analysts said the US move posed a significant hurdle to China's technological ambitions. Access to advanced semiconductors is key to improving military capabilities.

The global semiconductor market is dominated by just a few companies, with key players based in Taiwan, the Netherlands and the US. In recent years, China has been making desperate attempts to prop up its domestic industry. In May, the Chinese government also told operators of important infrastructure to stop buying products from the US chipmaker Micron Technology.

With latest curbs, China fires warning shots

The latest Chinese retaliation, which requires companies to get extra licensing before exporting, is more of a warning than an attack, analysts have said. 

"This move will have a limited impact on global supply given the targeted scope," Eurasia Group analysts, Anna Ashton, Xiaomeng Lu and Scott Young, wrote in a note.

"It is a shot across the bow intended to remind countries including the United States, Japan, and the Netherlands that China has retaliatory options and to thereby deter them from imposing further restrictions on Chinese access to high-end chips and tools."

Relations between the two superpowers have been at an all-time low as the US and other Western countries encourage their domestic businesses to move away from dependency on China. The coronavirus pandemic and Russia's invasion of Ukraine have laid bare the vulnerabilities of globally integrated supply chains.

Chinese pandemic recovery slows

But Beijing has bristled at this strategy, which it sees as a concerted attempt to hobble its economic growth and weaken its position as a global superpower. 

The current economic conditions are likely to make China even more sensitive to any perceived threats. The country is still recovering from the fallout of its strict pandemic policies, which were only lifted in December. While economic growth in the first quarter of 2023 hit 4.5% compared to a year earlier, it is still below the Communist Party's goal of close to 5%. May figures showed that consumer and export demand in China slowed.

High inflation and rising interest rates around the world have also hit global demand, with a knock-on effect on Chinese manufacturing. As the second largest economy after the US, a slowdown in China could also become a burden to global economic growth, which is already expected to see a slowdown in 2023, according to IMF figures. China's role in this economic web is certain to be on Yellen's mind during her visit. 

West sweetens its words on China

In recent months, the US and EU have softened the rhetoric around their trade policies with China. While previously policymakers have spoken of "decoupling" their economies from China, which has some echoes of divorce, today they prefer to talk about "de-risking."

According to the US Department of State, de-risking means terminating or restricting business relationships to avoid risk altogether, rather than trying to manage it. One example could be recent moves by the US, EU and other countries to forbid access to the Chinese-owned social media app TikTok, which is seen as a security risk, on government devices. The US has flirted with a nationwide ban on the popular app, an idea that has also angered Beijing.

At the World Economic Forum New Champions meeting in Tianjin, China in late June, Chinese officials reiterated their stance that de-risking and decoupling are fundamentally the same concepts and that business leaders should have the freedom to assess and manage risks as they see fit. China has traditionally had better relations with foreign business leaders than with politicians and appears to be leaning on these relations, hoping they can exert some influence of their own.

"Allowing companies to be in the driver's seat would mean supply chains would operate without much government interference," Zhou Xiaoming, a researcher at the think tank Center for China and Globalization, told Bloomberg News.

With Yellen's visit, and a recent visit by US Secretary of State Antony Blinken, the US appears to be trying to lower the temperature. But the new export curbs out of China ahead of the US Treasury secretary's visit indicate Beijing won't be won over so easily.

Edited by: Ashutosh Pandey