China’s Threat to Ban Critical Minerals Exports Is a Bluff

Weaponizing commodities is in fashion. In September 2022, Russia cut off gas flows to Europe in a bid to weaken European economies after its invasion of Ukraine. Almost one year later, in July 2023, the Chinese government announced that exports of gallium and germanium, two niche metals used in technology manufacturing, would henceforth require licenses. These metals share two features. First, they form part of a group of around 30 raw materials that are crucial for the green energy transition, digital hardware, and defense production. Second, as is the case for many critical raw materials, China holds a dominant position for the mining and processing of gallium and germanium, giving Beijing leverage over Western economies.

Chinese threats to clamp down on exports of critical raw materials have raised alarm bells in Western capitals. According to the U.S. Geological Survey, a 30 percent cut in the supply of gallium available to U.S. companies could shave around 2 percentage points from projected U.S. GDP growth, a similar economic hit to that taken by Europe following Russia’s gas embargo.

How serious is the Chinese threat? Here, the Kremlin’s decision to weaponize gas flows is an instructive precedent. The Russian embargo holds five lessons that should caution Chinese leaders against carrying out with their threats. In sum, these lessons suggest that curbing commodity supplies certainly inflicts short-term pain on Western economies—but comes with unintended consequences in the medium term.

Lesson 1: A price shock for critical raw materials would not necessarily be a bad thing. A sharp rise in energy prices across Europe was the first tangible sign of Russia’s decision to curb gas supplies. Similarly, a full-fledged Chinese export ban on any critical raw material would send global prices for that substance spiking. In 2021, for instance, the temporary shutdown of some Chinese magnesium smelters fueled a 260 percent rise in magnesium prices, affecting the automotive, aerospace, and other sectors. However, higher prices for critical raw materials whose production is dominated by China might not have as big an impact as many fear.

For one, the monetary value of these commodities remains small. For example, the European Union’s annual import bills for critical raw materials range from $5 million in the case of beryllium (used for satellites, semiconductors, and weapons) to $4 billion for palladium (a critical component for catalytic converters), with imports for most minerals at just a few hundred million dollars. These numbers are mere rounding errors in the EU’s annual $3 trillion import bill. In other words, the issue with critical raw materials is their availability, not their price. Second, China’s domination of the sector stems from its strategy of flooding the market to depress prices—a textbook case of dumping to suppress the competition. Higher prices for critical minerals would therefore boost the competitiveness of non-Chinese producers and help them enter the market. There are precedents: After gallium prices rose in 2021, a German company announced that it would restart production.

Just like Russia is now swamped with gas that no one wants to buy, China would struggle to find alternative customers for its raw materials outside the advanced economies.

Lesson 2: Finding alternative commodity suppliers is never impossible. Listening to Kremlin backers, there was no chance that the EU would find alternative energy suppliers quickly enough to avoid shortages last winter. The reality was different: Europe rapidly secured additional gas shipments from Norway, Algeria, and the United States. A Chinese export ban on critical raw materials would yield a similar result by accelerating existing Western plans to decrease dependency on China. Of course, finding alternative suppliers would take time and money. But there are reasons to be optimistic. China may be the leading producer of some critical raw materials, but it is not the only player in town.

Excluding rare earths, the EU relies on China for 65 percent or more of its supply of five critical raw materials: bismuth, cobalt ore, magnesium, manganese, and strontium. Alternative suppliers for each of these materials exist and would probably be happy to ramp up production if global prices rose. Non-Chinese producers also exist for the six raw materials that will be the most critical for the global energy transition: lithium, graphite, cobalt, magnesium, nickel, and copper. The largest known reserves for each of these minerals are outside China—in Australia, Chile, the Democratic Republic of the Congo, Indonesia, and Turkey. In addition, new deposits of critical raw materials could soon be discovered, as exploration spending rose by 20 percent last year, fueled by investment from Australian and Canadian firms.

Lesson 3: The green transition offers an opportunity to develop Western processing infrastructure. At the onset of Europe’s energy crisis, another talking point from Moscow and its supporters was that Europe did not have sufficient infrastructure to process enough liquefied natural gas (LNG) from other countries to make up for the shortfall. Almost one year later, it is clear that Russia’s blackmail accelerated the development of such projects; Europe is now heading toward overcapacity. Critical minerals, too, require processing infrastructure after their ore is mined. In that field, China is a hegemon: The country processes around 50 percent to 70 percent of the global lithium supply, for instance. Yet this may not last forever. Beijing’s threats could unintentionally speed up existing Western plans to build processing infrastructure, undermining China’s dominant position.

The timing to develop new processing facilities outside China looks ideal. The global energy transition will boost demand for critical raw materials by four to six times in the 2020s. This situation presents a chance for producer countries such as Bolivia, Brazil, the DRC, Guinea, and Indonesia to move up the value chain by building processing facilities where the ores are mined. This, in turn, would be an opportunity for Western democracies to tackle China’s influence in developing economies: The EU, Japan, and the United States could offer resource-rich countries concessional financing, tailored trade deals, and access to processing technology. In return, developing economies could reassure foreign investors by guaranteeing that they would not seize private investments (Mexico nationalized its lithium sector last year) or impose export bans (Indonesia outlawed nickel ore exports in 2020).

Lesson 4: Crises boost collaboration among allies. Russian President Vladimir Putin hoped that stopping gas exports would stoke tensions and divisions across the EU and peel European countries away from the United States. His move backfired: Instead of bickering for supplies, European states built a common purchasing mechanism for natural gas and boosted LNG imports from the United States and elsewhere. Similarly, a Chinese export ban on critical raw materials could turbocharge collaboration between like-minded allies. Already, signs of such cooperation are emerging, with the United States and Europe discussing collaboration to secure supplies of critical raw materials. Going further, the EU has proposed setting up a buyers’ club for critical minerals—a cartel that would need to include both producers and other big consumers of critical raw materials such as the United States, Japan, and South Korea to be effective.

All would not be rosy for allied collaboration, though. Mining and processing facilities are run by private companies; Australian, Canadian, South African, and U.K. firms account for about 80 percent of exploration expenditure in Africa, for instance. These businesses compete with each other for the most profitable projects. Public cooperation is most likely to happen for unprofitable activities, such as mapping geological resources, creating extraction standards, and researching ways to recycle critical raw materials. The International Energy Agency will hold the first summit on critical raw materials in September, giving the institution an opportunity to spearhead work on these issues.

Lesson 5: China has nothing to gain from signaling that it is an unreliable supplier. Perhaps the longest-lasting and least intended side effect of Russia’s decision to turn off the gas tap will be reputational. For a long time to come, the Kremlin will struggle to convince anyone that it is a reliable commodity supplier. If China were to stop exports of raw materials, then Beijing, too, would suffer from serious reputational damage. By undermining Beijing’s repeated claims that Chinese economic projects come with no political strings attached, that damage would not be restricted to critical minerals trade with the West.

Chinese firms would bear the brunt of the embargo. Only a handful of rich economies absorb the vast majority of China’s exports of critical raw materials. Just like Russia is now swamped with gas that no one wants to buy, China would struggle to find alternative customers for its raw materials outside the advanced economies. Chinese high-tech companies would also find it difficult to import components that are manufactured in Western countries using these critical raw materials. In turn, the interdependencies between China and the West that Beijing believes act as a deterrent against sanctions and economic decoupling would decrease.

Chinese threats to weaponize critical materials have more bark than bite. Like most threats, they only have leverage when they’re not acted on. Should Beijing choose to implement an export ban, the benefits could even accrue to the Western countries that China is now targeting.