China has recently initiated a series of retaliatory measures in response to U.S. pressure to impose sanctions on its technology sector. These actions include halting the supply of rare earth elements and penalizing American firms operating within China. President-elect Donald Trump has consistently indicated his intention to impose tariffs on Chinese exports, and analysts anticipate that once he assumes office, he will intensify restrictions on Chinese technology. What additional strategies might Beijing employ in the ongoing trade and technology conflict with the United States in 2025?
United States is intensifying its “chip war” against China
On December 23, the U.S. government announced the initiation of a “Section 301” investigation into China’s traditional semiconductor sector. This inquiry aims to assess China’s ambitions to dominate the market for traditional chips, also referred to as mature process chips, and the implications of this dominance for the U.S. economy. These mature process chips are essential across various industries, including automotive, healthcare, infrastructure, aerospace, and defense.
In response, China’s Ministry of Commerce criticized the U.S. investigation as unilateral and protectionist, asserting that it would disrupt and distort the global chip industry and supply chain, ultimately harming the interests of American companies and consumers.
The United States’ strategy to maintain its lead in the “chip war” has become central to its efforts to restrict China’s technological advancements. In the semiconductor sector, this strategy encompasses two main components: limiting China’s access to cutting-edge chip technology and equipment, and enforcing export controls that prevent the shipment of high-end chips and lithography tools necessary for production to China. Additionally, the U.S. is scrutinizing China’s subsidies for traditional chips to mitigate the risk of low-end Chinese chip products flooding the international market.
On December 2, the Bureau of Industry and Security (BIS) within the U.S. Department of Commerce implemented a new set of export control measures targeting China, aimed at diminishing its capacity to manufacture advanced node semiconductors essential for next-generation weapon systems, artificial intelligence (AI), and sophisticated computing technologies. This initiative also involved adding 136 Chinese firms to the U.S. Department of Commerce’s Entity List and imposing regulations on over 20 types of semiconductor manufacturing equipment, along with three software tools used in semiconductor development and production.
Ruby Scanlon, an assistant fellow at the Center for a New American Security (CNAS), noted that China’s options for direct retaliation in the chip technology arena are limited due to the dominance of the U.S. and its allies in advanced processes. She remarked to VOA, “When the United States restricts the export of leading Nvidia chips to China, China may find it challenging to respond in kind, as they lack the capability to produce advanced chips domestically.”
Restrictions on rare earth elements
In reaction to the restrictions placed on China by the United States and its allies, China has recently implemented a series of counteractions.
An article published by China Daily on December 25 highlighted that these counteractions include the enforcement of export controls on critical resources such as rare earth minerals, which are crucial for military and technological applications.
Data from relevant U.S. agencies indicates that China holds approximately 68% of the world’s gallium reserves and produces over 90% of the global supply. The total proven reserves of germanium worldwide stand at 8,600 tons, with the United States and China controlling 45% and 41% respectively; over the past decade, China has supplied 68.5% of the world’s germanium. Furthermore, China’s production of graphite constitutes about 77% of the global total.
There is a growing belief that gallium, germanium, antimony, and other dual-use materials primarily supplied by China could serve as a strategic tool against the United States. On December 3, the Chinese Ministry of Commerce announced a ban on the export of key minerals, including gallium, germanium, antimony, and superhard materials, specifically targeting the United States. This marks the first instance of China imposing such a ban on these materials, which have extensive military applications, solely against the U.S.
The Wall Street Journal highlighted in a December 30 article that China’s export restrictions on essential minerals have led to tighter prices in the global market. This situation has prompted international competitors to boost their investments in the sector, thereby easing the purchasing process and costs for American buyers.
The article noted that while China is a leading producer and refiner of these critical minerals, it is not the sole supplier worldwide. Data from the U.S. Census Bureau indicates that last year, the United States imported more unprocessed gallium from Canada than from China, with Germany being the primary source of processed germanium.
According to the International Trade Center (ITC), the U.S. reliance on rare earths from China has diminished in recent years. Specifically, the share of germanium imports from China has decreased from approximately 75% in 2023 to 33.9% currently, while gallium imports from China now represent only 9.1% of total imports, a significant drop from 39.6% two years ago.
The Center for Strategic and International Studies (CSIS) previously reported that Ingal Stade GmbH in Germany, which halted operations in 2016, responded to the surge in global gallium prices by announcing plans to resume production in 2021. Additionally, Australia possesses substantial reserves of zinc and bauxite, which are crucial for gallium production, and Alcoa’s facilities near its Pinjarra alumina refinery may enhance Australia’s gallium production capabilities.
Data from the U.S. Geological Survey indicates that China’s dominance in global rare earth production decreased from 98% in 2010 to 70% in 2022, attributed to increased production capacity in Australia and the United States.
Scott Lincicome, vice president of macroeconomics and trade policy at the Cato Institute, remarked that China’s price advantage in rare earths is not sustainable. He stated to VOA, “While they may enjoy a temporary price edge, they are likely to lose their market influence over time… This is due to the emergence of alternative production sources, which will lead to lower prices.”
Moreover, exerting pressure on U.S. companies could diminish the willingness of foreign firms to invest in China.
Additionally, it is anticipated that China will continue to target American companies in its trade and technology conflicts.
Following the latest round of U.S. chip technology export restrictions imposed on China on December 2, China initiated an antitrust investigation into U.S. chip giant Nvidia, claiming that the company may have breached China’s Anti-Monopoly Law and the antitrust agreement established with Chinese regulators during Nvidia’s prior acquisition of an Israeli tech firm.
“Antitrust has emerged as a crucial tool for the Chinese government to counter the United States,” noted Scanlon from the Center for a New American Security.
Scanlon also anticipated that the Chinese government might replicate its earlier strategies against Australia by creating covert barriers for American products entering the port.
“Under a Trump administration, we can expect an increase in tariffs on Chinese technology exports to the U.S.,” she stated. “Similar to the first Trump administration, we are likely to witness reciprocal tariff hikes from China against the U.S. … Consequently, tariffs on American goods will also rise.”
“China has limited options available to them. They might choose to postpone the importation of perishable goods from the U.S., a tactic frequently employed against other nations.”
In April 2020, following Australia’s call for an inquiry into the origins of the coronavirus, China imposed barriers on Australian exports, including barley, wine, and timber, in the subsequent months. Numerous vessels carrying Australian coal were left stranded at Chinese ports for extended periods, unable to receive clearance to unload.
Simultaneously, the Chinese government has established an “unreliable entity list,” which subjects companies to additional challenges when operating in China. In September, Beijing indicated it was contemplating adding PVH, the parent company of U.S. clothing brands Calvin Klein and Tommy Hilfiger, to this list due to reports of the company’s boycott of “Xinjiang cotton.” China has faced allegations of utilizing forced labor in Xinjiang factories, a claim that the Chinese government refutes.
The analysis by the Wall Street Journal indicates that imposing penalties on American firms operating in China may not be as impactful as it once was. Currently, China’s economy is experiencing a downturn, primarily due to the real estate crisis and a significant decline in foreign investment. Increased pressure on American businesses could lead them to scale back their operations in China and deter new investments from entering the market.
China might consider devaluing the yuan and liquidating U.S. Treasury bonds
China could implement some limited counteractions at the currency and treasury levels. The potential devaluation of the yuan, along with Beijing’s substantial reserves of U.S. Treasuries, is viewed by some analysts as a strategic asset to counter U.S. actions.
A weaker yuan could make Chinese exports more competitive in the U.S. market, especially in response to anticipated high tariffs. However, the Wall Street Journal notes that such depreciation could also trigger capital flight from China, a scenario that the Chinese government aims to avoid. Economists suggest that while the Chinese authorities may accept a controlled and moderate depreciation of the yuan, they would resist any drastic declines.
Stephen Roche, an economist and Yale University professor who previously chaired Morgan Stanley Asia, cautioned in a Financial Times article on December 13 that China, including Hong Kong, retains over $1 trillion in U.S. Treasuries. Should tensions between the two nations escalate further and China opts to divest from these Treasuries, it could inflict severe damage on the U.S. economy.
The Wall Street Journal’s analysis suggests that China’s actions may ultimately be detrimental to itself, while the United States possesses strategies to counter China’s sell-off.
Experts indicate that the Federal Reserve can stabilize the bond market through unlimited bond purchases. If China sells U.S. Treasury bonds, it will result in the Chinese government holding a significant amount of U.S. dollars, necessitating investment in alternative assets. Should China opt to sell U.S. dollars in favor of purchasing RMB, it would lead to an increase in the RMB exchange rate, which contradicts China’s objective of boosting exports.
Is increasing investment in semiconductors the correct strategy?
Analysts have noted that in response to Washington’s technology “strangulation” strategy, China’s long-term approach must involve substantial investment to develop its own high-end chip industry.
“Since the passage of the (U.S.) CHIPS Act, China has invested three times more than the United States,” stated James Lewis, director of the CSIS Strategic Science and Technology Program. “China has a robust technological foundation and skilled engineers. Although they encounter challenges, they are capable of overcoming them.”
This year, China has committed to raising over 300 billion yuan (approximately 47 billion U.S. dollars) to bolster semiconductor development. The third phase of the National Integrated Circuit Industry Investment Fund, known as the “Big Fund,” was registered in May with a capital of 344 billion yuan, surpassing the first two phases and marking the largest semiconductor investment fund in China’s history.
The initial two phases of the “Big Fund” were launched in 2014 and 2019, respectively. The first phase had a registered capital of 138.7 billion yuan, while the second phase’s registered capital increased to 204 billion yuan.
Lewis forecasts that China may eliminate its reliance on advanced U.S. chip technology within the next five years. He noted that five years ago, China was uncertain about its intentions to develop its own chips. Although they have been working on establishing a domestic chip industry for some time, their commitment was not as strong. Currently, however, they are dedicated to creating their own products, indicating that they will eventually become independent from Nvidia.
