The microprocessors that make all modern technology possible — from phones to cars, power plants to defence systems, and nearly everything else our everyday lives now depend on — require hundreds of minerals for their manufacture.
Those minerals, which include graphite and gallium and are referred to as critical minerals for the key role they play, are mined in various countries around the world. But over the last few decades, China has established a dominant position in processing and refining many of them, as well as having significant reserves of its own. And as trade and other tensions between China and the West have increased, the latter’s vulnerability if China decides to leverage its dominance has become more apparent and more urgent to address.
In a recent research paper, the Center for Strategic and International Studies, a Washington, D.C.-based think tank, makes the case for a co-ordinated Western Hemisphere response to reduce dependence on China in what it calls “the coming chip wars.”
The report, produced with support from Scotiabank, details China’s goal to dominate the critical minerals space and create a world-leading semiconductor industry and chronicles the growing tensions between China and the U.S. over the issue. The authors also examine the “disruption potential” of China’s dominant position of five key critical minerals for which there are no readily-available substitutes and suggest how a coordinated response by countries in the Western Hemisphere with shared values could help alleviate potential supply chain shocks.
“It's going to take us time and effort and deliberate public policies in order to wean ourselves from China for some of those critical materials that go into the semiconductor in order to fortify ourselves in the earlier part of the supply chain,” Ryan Berg, Director of the Americas Program at CSIS and one of the authors of the report, said in an interview.
Supply chains already seeing ripple effects
Tensions between China and the West are already impacting microprocessor supply chains, in both directions. The United States has moved to restrict China’s access to advanced semiconductor manufacturing technology, and China has restricted exports of certain critical minerals, such as gallium, germanium and graphite.
“The West’s reliance on China’s minerals poses worrisome risks of supply shocks and China exercising its leverage over prices,” the think tank’s report says. “A secure supply of critical minerals for the semiconductor industry is not only necessary for the private sector but also a concern for national security and defense.”
Complete self-sufficiency in the making of microprocessors is unlikely, the report says, even for the U.S., but the West could make itself much more resilient by, among other things, strengthening supply chains of critical minerals across the Americas and further afield.
“Although the Western Hemisphere may not be ready yet to alleviate existing chokepoints, it can help address the current challenge,” the report says. “Due to its rich mineral reserves and highly skilled workforce, the region is of utmost importance for any successful de-risking strategy.”
Reserves of many critical minerals exist in the Americas, including copper, fluorspar, and bauxite (used to produce aluminum, the processing of which produces gallium as a byproduct). But the processing and refining capacity is limited.
Bringing processing capabilities back to the West is key
China developed its dominance in those areas in part because it could do the work more cheaply and because Western countries were unwilling to take on the environmental impacts, which can be significant.
Developing that capacity would be costly and would require substantial subsidies from richer countries to get it off the ground. But doing so would have benefits across the hemisphere.
“Bringing processing capabilities back to the Western Hemisphere therefore promises not only to help counteract China’s influence over semiconductor supply chains but also to allow Latin American countries to advance in the value-added manufacturing space,” the report says.
“Whereas countries such as Chile, Peru, and Brazil currently export much of their raw minerals to China for further processing, building up the domestic refinery capabilities in these countries would allow them to export finished materials.”
It has been extremely difficult for new refining activity to emerge because of China’s dominance over the industry, which allows them to control pricing and make new entrants uncompetitive, Berg said. Thus, the need for state support.
“There's really no way to do this unless you have the ability to subsidize the industry, at least at the start to get it off the ground,” he said. “It needs help from the state and through public policy in order to get its feet under it, otherwise it's not going to be competitive.”
‘Mutual interests across the board’
Getting the private sector involved is fundamental, Berg said. While state involvement is probably needed to make the initial investment where the private sector might be a more hesitant, the goal should always be to hand things off to the private sector when possible.
“I think the role of public policy here is really to constantly ask the question, what has kept the private sector back from investing more in this space? How do we use public policy to ameliorate some of those concerns?”
Berg says there will need to be “big conversations” in the West about the importance of mining critical minerals and how to use the tools at its disposal to increase mining and processing capacity. That includes acknowledging the environmental impacts of those practices.
“It’s not always a beautiful thing, but the future that we want to build with all those extra materials is hopefully a much nicer future,” he said.
Despite all the challenges inherent in trying to build a safer, more resilient supply chain for critical minerals and microprocessors, Berg says he remains optimistic that friendly countries with shared values can come together to face those challenges.
“I am optimistic because I think that there are mutual interests across the board,” he said. In Latin America, countries have the mining but want more refining in-house, and North American countries want more final-user supply chain security.
“So the interests there are aligned. And for North America, I’m even more optimistic because we have the USMCA, we have the North American Leaders Summit, we have all of these binational and trinational tools that we can use with our closest trade partners, like Canada and Mexico.”