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Trade restrictions hit chips and rare metals

On November 15, U.S. President Joe Biden and the Chinese leader Xi Jinping held a summit meeting in California to discuss a range of bilateral issues. The meeting did yield some positive results with China agreeing that it would investigate its domestic production of fentanyl precursor while the U.S. in turn agreed to remove the Chinese Institute of Forensic Science from its Commerce Entity List.  Both leaders also agreed to resume military-to-military contacts after communications between the two militaries were suspended over former House Speaker Nancy Pelosi’s visit to Taiwan in August 2022.  

However, significant challenges remain as no agreements were made on the most pressing issues affecting bilateral relations including ongoing semiconductor restrictions, forced labor concerns, and Taiwan. In particular, Chinese leader Xi Jinping mentioned that the status of Taiwan remained the “most dangerous” issue in bilateral relations with the United States. Tensions between the two sides over Taiwan and the South China Sea remain high after China’s military blamed the American naval ship USS Gabrielle Giffords for illegally entering its claimed territory in the South China Sea on December 4. 

New semiconductor controls pose regulatory and supply challenges 

The latest round of U.S. export controls on advanced semiconductors of October 17 further tightened restrictions on the kinds of chips that can be exported to China. These restrictions are already raising regulatory risks for American companies such as Applied Materials, Inc. which was reported to be the subject of a criminal probe by the U.S. Justice Department on November 17. The U.S. chipmaking equipment supplier is suspected to have circumvented chip export controls by selling machinery to the sanctioned Semiconductor Manufacturing International Corporation (SMIC) via a subsidiary in South Korea. 

Chinese companies have been stockpiling advanced chip-making tools produced by leading Dutch manufacturer ASML in preparation for an export restriction on the company’s DUV lithography systems which will come into force in January 2024. Trade data indicates that China has seen a 93% increase in imports of semiconductor manufacturing equipment in Q3 2023 alongside a nearly sixfold increase in imports of lithography equipment from the Netherlands. This is reported to account for 46% of ASML’s machinery sales in the quarter. 

China maintains controls on critical metals 

Chinese exports of germanium and gallium-related goods began to resume in October following a two-month gap which saw shipments of both critical metals drop to virtually zero following the implementation of government export controls on August 1. The controls were implemented in retaliation against U.S. led chip restrictions, but exports of the metals have resumed as some Chinese companies have been able to obtain appropriate licenses under a presumption of approval policy. Trade statistics indicate that 0.65 tons of germanium and 0.25 tons of gallium were exported from China in October compared to 8.78 tons and 7.58 tons in July respectively.  

However, the restrictions of both metals do not appear to have disrupted electronics and renewable supply chains thus far. Both germanium and gallium are also reportedly easy to extract as by-products from other metal mining processes.  

In addition to gallium and germanium, China has also begun implementing permit requirements for exports of certain graphite products from December 1. The curbs require entities exporting graphite items including high purity, high hardness, and some natural graphite to apply for permits. The restrictions could affect the supply of graphite used to produce rechargeable batteries used in electric vehicles and some EV battery makers have reportedly stockpiled graphite and begun securing supplies of artificial graphite in an attempt to reduce their reliance on China.  

South Korean and Japanese battery makers appear particularly exposed to graphite export controls as China accounts for 90% and 80% of all graphite exports to both countries respectively. In the long term, restrictions on Chinese graphite exports will push the EV industry to become less reliant on China for critical metal supplies.  

The U.S. government has also taken steps to encourage companies to diversify graphite supply chains by announcing a measure to exclude EVs with Chinese-made components from receiving certain government subsidies. Starting from January 2024, EVs containing battery components from China will fail to receive subsidies from the $369 billion climate incentive package or the Inflation Reduction Act. This move could prompt U.S. automakers to source rare metals from alternate countries and could increase investment in rare-earth-free technologies in the long term.  

Shipments from Malaysia and Vietnam lead rise in UFLPA inspections  

The Uyghur Forced Labor Prevention Act (UFLPA) continues to serve as another barrier in U.S.-China relations. On December 8, U.S. authorities added three Chinese companies to the UFLPA Entity List, bringing the total number of identified companies to 30. The latest additions to the list include sugar producer COFCO Sugar Holding Co., Ltd., Sichuan Jingweida Technology Group Co., Ltd. which makes transformers and other electronic components, and synthetic fiber maker, Anhui Xinya New Materials Co., Ltd.  

Detainments under the UFLPA have also increased with the number of import shipments detained under the Act in October 2023 reaching its highest level since August 2022.  In October, 2023, 285 electronics items (including solar panels and semiconductors) were seized by U.S. Customs and Border Protection (CBP), accounting for 58% of the total 490 shipments recorded, followed by industrial and manufacturing materials (107), and apparel, footwear, and textile shipments (37). When it comes to the country of origin, a total of 261 shipments from Vietnam were detained in October followed by Malaysia (70), Thailand (69), China (76), others (11), and Mexico (1). 

In total, 6,045 shipments have been detained by the CBP for review since the UFLPA was first implemented in June 2022 with 2,464 shipments released, 2,598 denied, and 983 pending inspections. Shipments from Malaysia and Vietnam have come under particular scrutiny as over two-thirds of rejected cargoes under the UFLPA have reportedly originated from both countries. Around 1,590 shipments from Malaysia have been detained under the Act with 487 shipments of electronics valued at over $184 million denied. Around 57% of all goods detained from Vietnam under the UFLPA have also been denied. The majority of these denied shipments comprised industrial and manufacturing materials followed by electronics.  

The implementation of forced labor legislation like the UFLPA does not appear to have slowed down export growth from the Xinjiang region. Exports from Xinjiang reportedly hit a record high in October 2023 and total exports from the region were higher for each month in 2023 compared to the same period in 2022. Overall, trade data indicates that goods exported from the northwest Chinese region have reached $34.59 billion in value from January to October in 2023, constituting a 33.5% year-on-year growth.   

Geopolitical outlook uncertain as Taiwan prepares for January elections 

In addition to trade-related risks, U.S.-China relations also face increased risks from Taiwan’s upcoming legislative and presidential elections on January 13, 2024. The outlook of the election is uncertain, but recent polls conducted from November 24 – 26 suggest that the incumbent Democratic Progressive Party (DPP) is holding a narrow three-point lead in the presidential race. The DPP is seen as an anti-mainland party that rejects the ‘One China Principle’ in favor of a separate Taiwanese identity. Relations between Taiwan and mainland China have deteriorated under the current government led by President Tsai Ing-wen.  

On the other hand, the two main opposition parties, the Kuomintang (KMT) and Taiwan People’s Party (TPP) are seen as parties which are more likely to take a friendly or neutral stance with Beijing. Efforts by the KMT to form a joint opposition ticket with TPP fell apart on November 24, increasing the DPP’s chances of winning by splitting the opposition vote.  

In addition to the presidential election, competition for Taiwan’s legislature, the Yuan, also appears to be increasingly close with observers suggesting that the DPP is likely to lose its six-seat governing majority to the opposition.  

Mainland China is expected to adopt more coercive measures with respect to Taiwan if it sees the likelihood of a peaceful reunification with Taiwan decreasing. A scenario in which the DPP retains both the presidency and legislature is likely to pose the most risk to geopolitical stability in the region due to the DPP’s anti-mainland leanings. On the other hand, a split win, whereby different parties take the presidency and control of the legislative yuan, could help reign in the DPP’s anti-mainland policies and reassure Beijing. An outright win by the more mainland leaning KMT or neutral TPP would likely be positively viewed by the mainland in the short term and help decrease tensions in the region.  

In addition to geopolitical risks, Taiwanese companies have also been targeted by a surge in cyberattack attempts made by Chinese hackers in the run-up to the elections. Around 100 ransomware groups are reported to have targeted Taiwan’s defense, government, and private companies between June to November and there is a chance that cyber risks could continue to increase as the 2024 election nears.   

Everstream clients are receiving more detailed insights and recommendations about this risk. 

Contact us to learn how we can give you a complete view of the risks affecting your end-to-end supply chain and what you can do to mitigate them. 

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