China readies its legal arsenal for a trade war with Trump
Chinese export prohibitions on critical minerals to the United States signal Beijing’s readiness to return fire in a potential trade war.
In a nutshell
- Beijing stages tit-for-tat response to U.S. limits on advanced chips
- Critical mineral security is linked to Sino-U.S. trade and strategic positioning
- China is ready to adopt more forceful measures targeting U.S. interests
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United States President Donald Trump upon his return to the Oval Office has imposed an additional 10 percent tariff on imports from China, accusing Beijing of failing to stem the flow of precursor chemicals used in the production of the fentanyl drug entering the U.S. through overseas criminal cartels. As Washington’s new tariffs took effect, Beijing moved with levies of 15 percent on American coal and liquefied natural gas and 10 percent on crude oil, farm equipment and certain vehicles, among other measures set to begin on February 10, according to China’s finance ministry.
Earlier, Mr. Trump had threatened to impose new tariffs on all Chinese goods following President Joe Biden prohibiting the sale of advanced microchips to China. In turn, Beijing, which dominates global supply chains for critical minerals essential to high-tech sectors, on February 4 also announced sweeping export controls targeting five metals used across defense, clean energy and other industries.
Prior to the latest measures, Beijing’s retaliatory responses came after Washington launched its third crackdown in as many years on China’s semiconductor industry. Mr. Biden’s last trade measures curbed technology exports to 140 Chinese enterprises in relation to manufacturing technology producing artificial intelligence systems and advanced weaponry.
Beijing’s ban signals a more aggressive posture against Washington.
In challenging these and further U.S. measures, the Chinese government introduced the Export Control of Dual-Use Items regulations that came into force only weeks prior to Mr. Trump’s inauguration. The legislation builds on China’s 2020 Export Control Law, requiring that both civilian and military goods be subject to national security oversight.
The new rules ban shipments of gallium, germanium, antimony and several “superhard” materials to the U.S. market for semiconductors, electric vehicles and weapons. Graphite and tungsten exports will also come under greater scrutiny with the possibility of export bans.
U.S. strategic response to China’s curbs
China’s ban on critical mineral exports to the U.S. was its first direct response to Washington’s restrictions on advanced technologies. Rather than merely limiting supplies of the materials, Beijing’s ban signals a more aggressive posture against Washington. It also set a precedent for export controls being levied solely against the U.S. while excluding other countries.
Chairman John Moolenaar of the U.S. Congressional Select Committee on the Chinese Communist Party warned:
The decision to restrict exports of gallium, germanium, antimony and other key high-tech materials to the United States reaffirms the urgency of reducing our dependence on imports from the PRC [People’s Republic of China]. … We cannot allow our supply chains to be at risk like this, and the Select Committee will continue to work on ambitious legislative solutions that secure critical minerals for our economy and national security.
The measures stoke concerns that Beijing may crack down on supplies of other critical resources, such as cobalt and nickel, in response to trade restrictions being mulled by the Trump administration.
The Chinese move, however, was not unexpected. Some U.S. companies have already begun acquiring new critical minerals from different overseas sources, resulting in Chinese shipments of germanium and gallium effectively falling to zero in 2024. In the past, over half of U.S. imports of these materials came from China. Some American entities have also been reviewing potential investments in domestic extraction and refining capabilities for gallium and germanium.
Scope and significance of China’s new export controls
Beijing’s new regulations are roughly equivalent to the U.S. Export Administration Regulations (EAR) implemented by the U.S. Department of Commerce and the Bureau of Industry and Security. They impose extraterritoriality for the first time in relation to any Chinese legislation concerning dual-use items. This mirrors the EAR’s “Foreign Direct Product” rules, insomuch as they apply to dual-use products manufactured outside China by utilizing specific technologies and other dual-use items originating in China.
The Chinese regulations do not elaborate on how enforcement would apply in practice. Even so, one can assume this expands the scope of dual-use items that are subject to Beijing’s export controls while enabling China’s commerce ministry to impose license requirements when certain dual-use items are transferred among foreign countries and overseas end-users.
Other significant Chinese legislation that has extraterritorial effect and imposes sanctions to complement export controls include the Unreliable Entity List (UEL) law and the Anti-Foreign Sanctions Law (AFSL).
China ramps up new sanctions for the Trump administration
As trade and geopolitical tensions between the U.S. and China persist, Beijing has also launched a series of sanctions on American weapons manufacturers. In the first wave, China’s commerce ministry announced restrictions on 13 U.S. defense and aerospace firms and their representatives. Executives from six of these companies have been banned from entering China and have had assets there frozen. Chinese enterprises and individuals are also prohibited from engaging in transactions with the sanctioned persons.
China’s commerce ministry subsequently banned supplies of dual-use goods to 28 U.S. defense companies on grounds of national security. Ten of the entities were subject to the UEL law over weapons sales to Taiwan. For the first time, these include well-known companies such as Boeing and General Dynamics. These companies are banned from trading and investing in China. Their directors and staff are also prohibited from entering the country, while work permits or residency permits for those in China were revoked.
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More recently, the commerce ministry has proposed export restrictions on technology used for making battery components and processing critical minerals, such as lithium and gallium, according to media reports.
In parallel, China’s antitrust regulator opened an investigation into the U.S. company Nvidia regarding its $7 billion acquisition of Israel’s Mellanox Technologies, despite having approved the deal in 2020. The investigation, which could result in fines of up to $1 billion, is widely viewed as a retaliatory action against recent U.S. export controls on advanced integrated circuits imposed last year.
In the near future, China will likely escalate its countermeasures.
During Mr. Trump’s first term, Beijing’s responses to his tariffs were largely symbolic and designed for minimal impact. This approach was also applied in countering most of the Biden administration’s measures. But now, as Beijing seeks more leverage and ways to exert counterpressure, the robust newfound stance highlights the range of tools China has at its disposal should trade disputes, and strategic conflict, with the U.S. intensify.
Over the past four years, China’s government has been working on developing more powerful policy responses to U.S. moves. In the near future, China will likely escalate its countermeasures, which could include increasingly rigorous and targeted sanctions, tariffs and other tools aimed at damaging U.S. business interests.
Scenarios
Most likely: China aggressively ramps up sanctions and export controls
China’s export controls are likely to continue targeting critical commodities over which it maintains significant supply chain advantages and which are vital to U.S. technology and national security interests. In the past, Beijing’s system of export controls could have been characterized as piecemeal and administratively weak, but it has progressively evolved in recent years in response to U.S. and other developed nations’ sanctions regimes.
The gradual increase of China’s export controls began in 2020, consistent with China’s expanded application of lawfare (the use of legal action to hinder an opponent) and enhanced regulatory capabilities. This has enabled Beijing to weaponize supply chains, as evidenced by recent targeting of specific critical minerals.
China is likely to demonstrate a greater willingness to employ these new tools to counter foreign actions that threaten its own economic and national security interests. This emerging lawfare and weaponization of supply chains is a key element of Beijing’s more frequent and intensifying use of economic coercion to achieve its goals.
While China’s own highly developed export control system may now be a match for restrictive U.S. trade measures, Beijing has also brought into play an array of other retaliatory economic policy tools. These include weapons within the UEL law and AFSL, which it has used to hit several large U.S. companies and their representatives.
Alongside these tools, Beijing has demonstrated its willingness to employ antimonopoly and security investigations to retaliate against U.S. companies that it considers complicit in disadvantaging Chinese interests. China may also impose high tariffs and investment restrictions on the U.S.
Such policy options could impose significant costs for numerous American companies benefiting from China’s giant domestic market − one that Beijing is looking to re-invigorate in 2025 through stimulative fiscal, monetary and other measures. In so doing, Beijing may turn to import more from U.S. corporate competitors in Japan, South Korea and Europe.
Even so, it is unlikely that the new Trump administration will de-escalate its hawkish economic intentions. A one-way trajectory toward conflict escalation appears almost inevitable − the only questions are how, and how fast?
Less likely: China reins in retaliation with the U.S.
China’s approach in its development of export controls has principally revolved around export licensing. This differs from export bans, which are the most stringent form of control in the sense of not allowing products to leave the country. Export licensing, on the other hand, is onerous but manageable.
It has also not been apparent that Beijing’s objective is to substantially squeeze U.S. supply chains of critical minerals. Pursuance of such a strategy could lead to it backfiring against Chinese suppliers. Not only would it deprive Chinese producers of a fast-growing market for such commodities when China is looking to boost its economy, but it could risk triggering the U.S. and its companies to diversify their supply chains both abroad and domestically.
Instead, Beijing is gauging how the new export controls against U.S. firms impact Chinese enterprises. As an example, the most recent export ban on critical minerals was undertaken for the singular purpose of retaliating against U.S. technology export curbs, with the added intention of undermining specific U.S. national security plans.
Additionally, it can be argued that the detailed guidance found in Chinese export license applications for critical minerals and other resources – particularly the extensive descriptions of each mineral – suggests that Chinese regulatory bodies aim to protect domestic corporate interests from economic harm.
In a similar vein, the Chinese government is exercising caution in the application of other legal mechanisms contained in the sanctions designed for use against specific foreign entities and individuals.
It appears as though Beijing’s primary aim is to underscore its policy redlines regarding foreign support for positions that oppose official Chinese views concerning Taiwan, Hong Kong and Xinjiang, rather than to punish foreign intervention across the board.
Should these legal devices be implemented in retaliation to other economic and commercial threats, such an outcome would signal a significant shift in Beijing’s policy priorities, triggering a highly negative message to foreign businesses and undermining China’s otherwise main priority of attracting overseas investors. Given Beijing’s intense efforts to restore flows of much-needed inward investment, the expansion of such measures against foreign companies may remain limited.
Ultimately, neither China nor the U.S. are likely to be victorious in a protracted and damaging trade war. Hence, mutually assured economic destruction may be an effective restraint on how far both states are prepared to go.
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