U.S. and China with little room to maneuver. The cross-currents in the U.S. China relationship were highlighted this past week when, in advance of Treasury Secretary Yellen’s trip to Beijing, China’s Commerce Ministry announced restrictions on sales of gallium and germanium products starting 1 August in the most recent salvo of its ongoing battle with Washington over access to advanced semiconductors. On the one hand, Washington has sent two cabinet level officials to Beijing in the past month and U.S. climate envoy John Kerry is expected to make his third visit to China next week, at a time when China’s Covid reopening boost is fading and it is loath to see further U.S. restrictions on cutting edge technology. Both sides appear committed to taking down the temperature of this great power relationship where the two economies remain inexorably interconnected and underpin the global economic order. There is the possibility for continued high-level diplomatic dialogue with potential meetings between Presidents Joe Biden and Xi Jinping on the margins of the September G20 Summit in New Delhi or the November APEC Leaders Meeting in San Francisco.
Yet major breakthroughs remain highly unlikely as U.S. and China core strategic interests run in opposite directions. The annexation of Taiwan is a paramount and pressing goal for Xi, backed by an assertive ascendant military, while the Biden Administration has increasingly signaled overt support of Taiwan self-determination and is strengthening its Indo-Pacific presence and alliances. The Administration’s October 2022 restrictions on China’s access to advanced semiconductors, and the tools and experts necessary to produce them, are backed by a rare domestic political consensus that rewards tough action and makes further measures likely. With trust at an all-time low, both sides would do well to lay the groundwork now for even small wins at its Fall meetings.
Latin America now matters to China in more ways than one. For years, China has been expanding its influence in Latin America and its sustained efforts have positioned Beijing as a solid economic alternative to Washington. Most recently, China signed a free trade agreement with Ecuador, adding to the active agreements it already has with Chile, Peru, and Costa Rica. In addition to these agreements, twenty-one countries in Latin America are part of China’s Belt and Road Initiative (BRI). According to statistics from China’s General Administration of Customs, last year China was the largest trading partner for Argentina, Bolivia, Brazil, Chile, Cuba, Paraguay, Peru, Uruguay and Venezuela.
Traditionally, China looked to Latin America to support its own burgeoning growth – purchasing items like petroleum, oil, and soybeans. But now, Latin American governments are looking for Chinese investment in more than raw materials and agriculture. As evidenced by Brazilian President Lula’s recent agreement with China to support semiconductor production, cybersecurity, and 5G in Brazil, Latin American countries want China to help them develop multiple types of Information and Communications Technologies (ICT). This, in addition to several anticipated mega-infrastructure projects in the region.
China isn’t constrained in its foreign investments by the same domestic pressures as the United States, and this has implications for foreign policy. Beijing plays a role in both where and how Chinese private funds are used and in return, China not only gets economic partners, but also potential political ones. Indeed, China’s increasing economic deals with Latin America are likely at least partially responsible for why many in the region have been aligning less frequently with the United States during UN votes or at other international forums – a side benefit that is only likely to reinforce Chinese investment in the region.
Critical development is needed in Africa. There is more volatility in the world subsequent to Russia’s invasion of Ukraine and the partial decoupling of the West from China’s powerhouse supply chain. The upheaval and economic disruptions subsequent to these events has made the Global South a critical political and economic partner for both prosperity and vying for dominance in the world’s economy. Africa for example is the fastest-growing region in the world today. Much of that growth has been facilitated by Chinese investments in transportation infrastructure through its Belt and Road Initiative, even though the resulting enormous debt to China could be a long-term strategic drag on these economies. This investment has boosted diplomatic relationships with China and created a great deal of positive sentiment with local constituents.
Still, much of the African economy has not reached a critical capacity to ensure a viable opportunity for private investors, which would be a real driver for sustainable growth. And sustainable growth is what is most critical for political stability and the potential for prosperity. What’s more, this current economic sclerosis creates significant political volatility, which has resulted in great upheaval in countries like Burkina Faso, Central African Republic, Libya, Mali, and Sudan. In those countries as well as others like Chad, Ivory Coast and Madagascar, Russia or its proxies like the Wagner Group has moved in to ensure security for the victors and secure valuable mining and mineral contracts that rob the African people of the opportunity to benefit from its natural resources. The Wagner Group’s own uncertain future following Prigozhin’s mutiny may be yet another source of instability to the continent. Still, developing viable and robust opportunities in Africa and other economies in the Global South is important for global stability, maintaining a solid international rule of law, and ensuring prosperity with democratic underpinnings.
Growing rare earth competition. The war in Ukraine and the Covid-19 pandemic have focused attention on the fragility of international supply chains for vital goods. Another potential disruption is beginning to play out around rare earth elements (“REE”), vital components in the production of semiconductors, electric vehicles, medical devices, mobile phones, and advanced weapon systems. REE are top of mind as UN-hosted talks in Jamaica this week discuss whether to allow deep-sea mining in international waters pitting environmentalists against advocates who believe REE and other metals are critical to powering the green tech needed to fight climate change.
China’s export restrictions on gallium and germanium will start creating a bottleneck in supply as the country accounts for 80% and 60%, respectively, of the global supply of these resources. In recent years, the U.S. has looked to secure its own REE supply chain, but China still dominates the industry with the vast majority of REE being either produced or refined in the country. The Trump and Biden administrations both created initiatives to spur domestic production and to secure access to international REE supplies outside of China. In the U.S., those efforts have helped revitalize an REE mine in Mountain Pass, California, and creation of a refining facility in Fort Worth, Texas. While these projects can ensure access to REE including cerium, lanthanum, neodymium, and europium, experts have noted that they are insufficient to meet long term U.S. requirements and the country must secure other domestic and international REE sources outside of the Chinese-controlled supply chain. Going forward, we will see the U.S. and China competing for sources of raw REE in regions like Africa and Central Asia using their arsenals of diplomatic tools such as China’s Belt and Road Initiative. Whatever strategies the U.S. deploys, it must secure access to enough REE that future supply chain disruptions will not derail domestic technology and defense industries.
The Arkin Group is a strategic intelligence firm offering investigative research, due diligence, international risk and crisis consulting, and security & preparedness services. We can be contacted at 212-333-0280.