An eye for an eye,
Makes the world go blind.
It was 2018. Trump was in power and he just fired his biggest trade bomb halfway around the world to China. “Build the wall” was perhaps his most famous quote, meant for Mexico in curtailing the inflow of immigrants into the U.S.
Looking back, that was perhaps the foundation on which the U.S. has built in its ongoing conflict with China. In the latest development, China has decided to impose restrictions on the exports of germanium and gallium, which are critical to the production of semiconductors.
This was implicitly targeted at the U.S. as it is one of the biggest importers of these metals from China. You might be wondering how this restriction could have an impact on you or rather why you should care.
Why You Need to Know (WYNK)
- You could be spending more on electronic products
- U.S. and global semiconductor stocks’ prices may decline
- China and U.S. markets could go down
#1 Exporters in China need to apply for permission from State Council
If you are exporting germanium or gallium in China, you are in for a bureaucratic nightmare. You will now be required by law to apply for permission to do so from the State Council.
Most importantly, you will need to provide information on who the END users are and how the materials will be used. This could increase the time taken to export these materials overseas and cause a possible shortage of materials. A shortage will increase the prices of these materials in the global markets.
I emphasise the END because many companies have been circumventing export rules in the global markets by exporting the products to a country where the rules don’t apply. From there, they re-export the products to the intended countries.
While China has officially said that this was important to ‘safeguard national interest’, we all know that this was intended as a form of retaliation against the U.S. for its export restrictions on China previously.
Here’s where it might get dicey for the U.S. and other countries that need them like Taiwan, South Korea, and Japan.
#2 China controls most of the production of these materials
China produces 95% and 67% of the world’s gallium and germanium respectively. It has the power to determine the supply and indirectly the prices of these materials in the global markets.
How do they do this? It all falls back to demand and supply. When you demand an apple, the farmer will supply and sell you the apple.
However, should the farmer be greedy and the only seller in the market, he or she could hoard all the apples and only sell some. If you need the apple, you will be forced to buy it at a higher price from the farmer.
What China is doing now is akin to the example above but they are not greedy, they just want to make the U.S. pay for what it did to China’s semiconductor industry (target of U.S. export restrictions).
Hence, an eye for an eye. Very soon, it could also make the world go blind as other countries are also involved in this.
Both South Korea and Japan boast the world’s best production facilities for semiconductors, and they could be indirectly impacted if shipments of germanium and gallium are delayed.
Japan, in particular, has previously also agreed to impose some restrictions (on the advice of the U.S.) on high-tech exports to China. Hence, it will also be in the crossfire of China’s export restrictions.
#3 Electrical appliances and products could be more expensive
In the last point, it was highlighted that the control of exports by China and delayed shipments due to the need to get permission and approvals could cause a shortage of these materials in the global market.
When that happens, the prices of these products increase. Semiconductor companies that need these materials could also increase their prices, and this will have a chain effect on companies like Apple, Samsung, Tesla, Sony, and Panasonic.
Even Apple is unsafe because they source most of their components from other countries and send them to China for assembly.
If you recall, during the pandemic, prices of many electrical and electronic products actually skyrocketed as there was a severe shortage of materials and labour. Furthermore, shipping costs were so high as there was a shortage of labour to manage the logistics process.
A similar situation (maybe not as bad as the pandemic) might occur if the process and timeline in which these materials are exported become more complicated and lengthier.
#4 U.S. and global semiconductor stocks might be affected
On 5th July 2023 (3 July was the announcement of export restriction), U.S. semiconductor stocks such as Nvidia (-0.2%) and NXP (-1.7%) fell, while Taiwan Semiconductor Manufacturing Corp (TSMC) also moderated by 2.1%.
Meanwhile, electric appliance producers such as Apple (-0.6%) and Samsung also experienced the same thing (-1.4%).
Surprisingly, Tesla’s share price rose by 1.0%, but that was due to the strong news of EV sales The other car manufacturers were also the same with Toyota and Volvo gaining on a strong EV trend.
#5 U.S.’ and China’s broader markets could face increasing risks in the future
In light of the continued tensions surrounding the U.S. and China, both markets are expected to face the brunt of the tensions between the two governments.
While the U.S. is performing much better (Nasdaq since the beginning of the year: + 31.8%) compared to China (Shanghai Composite Index: +3.2%), these tensions have flared up consistently over the year and have rattled investors’ confidence.
I do not have a crystal ball but I don’t see how the tensions could cool down if both sides keep provoking each other like that. It’s safe to say, there are dark clouds ahead for both countries if they keep this up.
Conclusion
Whether you are an ordinary consumer or an active investor in the U.S. and China markets, this information and facts about China’s export restrictions on germanium and gallium will be crucial for you.
If it happens, you will need to be aware of potential price spikes in electronic and electrical products and prepare accordingly.
For investors, it’s good to keep an eye out on the potential impacts on share prices and financial performances of semiconductor, electric vehicle, and smartphone stocks.
Next up, I will be exploring how Apple is making its products around the world, and hopefully, that will provide more valuable insights for you to use in your everyday life and investment decisions.
Slice of P.I.E 