The Next Chip War’s Bottleneck May Lie Here: China Tightens Exports as the U.S. and Japan Pour Money Into Critical Minerals

The next chip war may not be fought over wafer fabs at all. A new vulnerability is emerging in the minerals that support semiconductor production, as China tightens exports of rare earths and other critical materials and the United States and Japan rush to secure supplies elsewhere.

Through government subsidies and industrial investment, Washington and Tokyo are trying to build mining, refining and processing capacity outside China. The aim is to create a separate supply chain for minerals needed by the chip industry. But mines and refineries cannot be built overnight. Slow-moving agreements between governments and unresolved geopolitical tensions could make it difficult for the two countries to reduce their dependence on Chinese suppliers quickly.

China’s export controls this year have already put pressure on manufacturers of semiconductors, batteries and defense equipment. Companies face new licensing requirements, longer delivery times and higher material costs. The United States and China are expected to discuss whether to extend a one-year trade truce, which expires in November. If negotiations fail, China could tighten restrictions further, adding to pressure on global supply chains.

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Have we had problems between us and China? We always have. We just have to figure out how to deal with them.

Washington has begun accelerating its response. On Aug. 31, the U.S. Defense Department announced about $174 million in equity financing for a gallium production facility at Alcoa’s alumina refinery in Wagerup, Australia. Japan’s Sojitz and Export Finance Australia are supporting the project, which aims to produce 100 metric tons of gallium a year for radar, missile defense and other military systems. The Energy Department also announced on Aug. 20 that it would invest $500 million in seven projects to expand U.S. critical-mineral and materials processing, battery manufacturing and recycling.

Chip-related companies in the United States and Britain that use large amounts of rare earths and other critical minerals say they have not yet faced a supply crisis. They can still obtain enough raw materials, but administrative procedures have become more complicated and costs have risen. Ian Croston, Lumentum’s vice president of operations, said companies must understand where suppliers come from and what restrictions they face, then manage the risks. “The point is simply to reduce friction.”

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The point is simply to reduce friction.