By Li Panpan

(JW Insights) Jul 5 -- China's decision to restrict critical mineral exports will hit key sectors in the European Union's effort to decarbonize its economy, and demonstrates the limits of western aspirations to shift supply chains beyond the reach of policymakers in Beijing, reported Bloomberg on July 4.

China is the largest global producer of the two minerals, gallium and germanium, which will be subject to export restrictions on August 1 and that are crucial to the semiconductor, telecommunications and electric-vehicle industries. The EU gets 71% of its gallium and 45% of its germanium from China.

"China's action is a stark reminder of who has the upper hand in this game," Simone Tagliapietra, a researcher at the Bruegel think-tank in Brussels, said in an interview. "The harsh reality is that the west will need at least a decade to de-risk from China's minerals supply chains, so this really is an asymmetric dependency."

The commission, the EU's executive arm, could confront China's new export restrictions via dispute settlement proceedings at the Geneva-based World Trade Organization, reported Bloomberg.

However, such a dispute could take years to wind its way through the WTO's partially dysfunctional dispute settlement body. Furthermore, China's claim that the measures are necessary for national security could trigger a WTO loophole that allows governments to take "any action which it considers necessary for the protection of its essential security interests."

But more immediate for the EU, an escalation of tensions could threaten the bloc's ability to transform its economy to become more environmentally friendly, said Bloomberg.

"Europe today largely depends on China for a set of clean technologies and critical components, so an escalation of these tensions might make Europe's green transition more bumpy for sure," Tagliapietra said.

Based on reports from Bloomberg and Yonhap on the 4th, as major importers of the two metals, the Japanese and South Korean governments have responded to this, saying they are seeking countermeasures. Japanese Minister of Economy, Trade and Industry Yasutoshi Nishimura said that Japan does not believe that China's move is a countermeasure against Japan's control of the export of semiconductor manufacturing equipment in May. The South Korean Ministry of Industry also held an emergency meeting to assess the impact of this matter, hoping to negotiate and communicate with China.

A manager at a China-based germanium producer reported receiving queries from buyers in Europe, Japan and the United States hoping to build stockpiles before August 1 and who expected it could take as long as two months to obtain export permits, said a July 5 Reuters report. Some downstream users with long-term sales contracts "are vexed about a possible jump in raw material prices, as it raises their production costs and may cause them losses", he said.

Domestic offers rose 2% to RMB10,000 ($1,380) per kg on Tuesday, he said, with export prices up 7% to $1,500 per kg, according to Bloomburg.