The US-China tech race is moving from chips to the raw materials they're made of
The high demand for advanced semiconductors is increasing tensions between the US and China.
Production power is key to the conflict, but tensions have shifted to the supply of raw materials.
Supply chain and foreign relations experts told BI why the AI race is similar to a new Cold War.
In the race against the US for global tech supremacy, China has the upper hand in at least one critical area: rare earths.
The term refers to a group of 17 elements required to make tech products ranging from semiconductors to industrial magnets and some solar panels — the same items embroiled in the US-China trade war.
For more than a year, Beijing has slowly been tightening its grip on critical minerals and rare earths.
In December, China banned the export of a range of rare earth processing technologies. Last month, China further tightened its grip on the sector. Citing resource protection and national security, Beijing made it mandatory for exporters to track how rare earth minerals are used in supply chains.
Now, there are fears that China could tighten the global rare earths supply chain even more.
Here's what you need to know about rare earths, what makes them so valuable, and how they play into the tech war between the US and China.
China's rare earth dominance
China has long dominated the rare earths market due to supply, low labor costs, and lax environmental standards.
The country produces 60% of the world's rare earth mineral supply and accounts for 90% of global refined output.
The late Deng Xiaoping — the Chinese leader who spearheaded the country's economic reforms in 1978 — recognized their strategic importance in 1992, saying, "The Middle East has oil, China has rare earths."
Under the new regulations introduced last month, China's rare earth resources now belong to the state. Two Canadian-owned rare earth refineries in China are also being acquired by state-owned companies.
This is not the first time Beijing has placed restrictions on rare earths. In 2010, China imposed strict rare earth quotas, citing environmental concerns and resource preservation. The move sent prices up sharply and prompted the US, the European Union, and Japan to file a complaint against China for unfair trade practices at the World Trade Organization. China lost the case and lifted exported quotas in 2015.
Various countries tried to diversify their rare earth supply chains in the wake of China's quotas in the 2010s, but success has been limited due to the high cost of investment and environmental concerns.
There are renewed efforts to boost global production in the face of rising tensions.
In 2022, the US Department of Defense awarded $45 million to MP Materials for rare earth oxide processing, and in 2023, it awarded over $288 million to Lynas USA to set up commercial-scale rare earth oxide production facilities.
How is China leveraging rare earths?
Beijing's moves to control critical minerals and rare earths are part of a toolbox Beijing has developed over the last four years, Rick Waters, the managing director of Eurasia Group's China practice, said at a press briefing.
During President Donald Trump's first term, the US and China slapped retaliatory tariffs on each other. However, China has less leverage in a tariff fight because it exports more to the US than it imports, so it came up with another regulatory framework — this one involving rare earths — that it can use in a trade dispute.
"They're experimenting with its use, and I think, in a way, they could go further — if they perceive they need to," said Waters.
Any further tightening of rare earth supplies — which are a subset under critical minerals — could leave the US vulnerable to supply shocks.
"China has cornered the market for processing and refining of key critical minerals, leaving the US and our allies and partners vulnerable to supply chain shocks and undermining economic and national security," the White House said in a statement in September.
What do the restrictions on rare earths mean for TSMC and Nvidia?
China's control over rare earths could weigh heavily in the trade war between Washington and Beijing, with chips in the center of the conflict.
Chips are found in everything from computers to cell phones, cars, and defense equipment. Taiwan dominates the market, producing over 60% of the world's chips and over 90% of the most advanced ones.
One company — Taiwan Semiconductor Manufacturing Company — is responsible for most of the output and is the key supplier to AI chip giant Nvidia, which is in the thick of the tech rivalry.
The US has already moved to block the export of advanced chips and chipmaking equipment to China.
If the trade tiff escalates — such as in the form of higher tariffs — China could pull its rare earth card, Oxford Economics wrote in a report published in July.
"China's dominance in the battery supply chain accords policymakers with leverage to withhold industry-specific inputs from Western manufacturers, which could prove inflationary and economically disruptive," wrote Louise Loo, the lead economist for Greater China at Oxford Economics.
This could involve further controls on critical commodity exports, particularly in rare earth minerals, Loo added.
As happened with China's rare earth export curbs in 2010, prices are likely to spike if supply is tightened, so any prolonged supply crunch could drive up inflation for end products.
The tech Cold War
The US and China's moves to outmaneuver each other in the tech race have some analysts drawing parallels to the Cold War.
Zongyuan Zoe Liu, a senior fellow for China studies at the Council on Foreign Relations, told Business Insider the idea that the US ought to out-compete China and prevent the nation from developing advanced chips plays into a "bigger power competition narrative."
She said the tensions are similar, though not identical, to the tensions between the US and Soviet Union that began after the end of World War II.
As Bloomberg reported last month, the US is considering limiting export licenses for both Nvidia and AMD chips in an unfolding trade war that has also hit several sensitive industries, including electric vehicles, batteries, and some solar panels.
The US imposed similar trade limits, embargoes, and economic sanctions on the Soviet Union, North Korea, China, and North Vietnam during the Cold War.
"I think the heart of the issue is concern about how China will use AI chips for military applications and surveillance," Chris Tang, a UCLA professor and expert in global supply chain management and the impact of regulatory policies, told BI. "It's a different type of Cold War."
Beyond a tense relationship, the dynamics between the US and China are also creating parallel systems, with the US and its allies on one side, and China and its allies on the other, Nick Vyas, the founding director of USC Marshall's Randall R. Kendrick Global Supply Chain Institute, told BI.
Vyas said he's concerned the tension could escalate from this new Cold War to a hot one between global powers.
"When we stop transacting horizontally with each other, that's only creating a larger conflict," Vyas said. "And then with a South China Sea conflict, the geopolitical conflict could turn into a larger conflict, which can lead to a major situation that leads up to a war."
Representatives for Nvidia declined to comment for this story. Representatives for AMD and the Bureau of Industry and Security didn't respond to requests for comment from BI.
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