Potential Effects of China’s Gallium and Germanium Export Restrictions on the U.S. Economy

China’s role as a major supplier of critical mineral commodities, such as gallium and germanium, has significant implications for the global economy, especially for countries like the United States, which depend heavily on these minerals for various industries, including telecommunications, electronics, aerospace, and defense. The potential disruption of China’s exports of these minerals could have far-reaching consequences for U.S. economic performance, particularly in terms of GDP, industry output, and price stability. This analysis explores the potential effects of China's export restrictions on gallium and germanium to the U.S. economy, using insights from sensitivity analyses and modeling exercises.

Sensitivity Analysis and Projected Economic Impact

A key feature of this analysis is the sensitivity analysis, which simulates various levels of restrictions on China’s net exports of gallium and germanium, ranging from 0% to 100%. The analysis focuses on several key outcomes: equilibrium quantities, prices, and U.S. Gross Domestic Product (GDP).

• Gallium: The analysis reveals that a complete restriction of China’s gallium exports could result in a decrease in U.S. GDP of between $1.7 billion and $8.2 billion, depending on the severity of the impact. Gallium is a crucial material in the semiconductor industry, and disruptions could cause severe price increases and reduced production capacity, exacerbating the economic downturn. This effect is especially pronounced in the high-impact scenarios, where the price increases are steep, and a higher percentage of the semiconductor industry is reliant on gallium.
• Germanium: While the effects of germanium restrictions are less severe than gallium’s, they are still notable. The decrease in U.S. GDP from a total ban on China’s germanium exports could range from $0.01 billion to $1.1 billion. Germanium, used in telecommunications and fiberoptic technologies, is similarly important, but the impact on GDP is less pronounced due to its relatively lower market share compared to gallium.

The sensitivity analysis also highlights a critical threshold in these restrictions. For gallium, the U.S. economy begins to feel significant pressure when China restricts exports by just over 41%. Beyond this point, the supply curve shifts drastically, leading to larger price increases and more significant reductions in supply, which in turn result in a more substantial negative impact on U.S. GDP. Similarly, germanium’s impact on U.S. GDP becomes more substantial at 94.1% of China’s export restrictions.

Price and Quantity Effects

The model identifies that the reduction in mineral quantities available has a greater impact on U.S. GDP than the price increase caused by export restrictions. For gallium, price increases contribute only 6.1% to the decrease in U.S. GDP under full export restrictions, with a slightly higher contribution (12-16%) under lower levels of restriction. This suggests that decreased availability of gallium and germanium (rather than just rising prices) is the primary driver of the economic downturn. The value of industries relying on these minerals, such as semiconductors, electronics, and telecommunications, is much higher than the cost of raw materials, making the loss of supply a more significant factor than price escalation.

Simultaneous Restrictions and Interconnectedness of the Affected Industries

A simultaneous disruption of both gallium and germanium exports from China is expected to cause a decrease of U.S. GDP by $3.4 billion (with a range of $1.7 billion to $9.0 billion depending on the case). Notably, the combined effect is slightly less than the sum of individual restrictions on gallium and germanium. This is due to the interconnectedness of industries: certain sectors dependent on both minerals do not experience further losses when both minerals are restricted at the same time, as they are already facing constraints from the individual disruptions.

Moreover, industries that use both minerals in telecommunications and electronics might see some degree of concurrent use or substitution, reducing the overall economic damage. However, the overall decrease in U.S. GDP would still be substantial, especially if industries fail to find viable substitutes for these critical materials.

Conclusion

The potential effects of China’s export restrictions on gallium and germanium would likely result in significant economic disruption for the U.S., particularly within industries reliant on these critical materials. While the price increases are a contributing factor, the more substantial impact arises from the decreased availability of these minerals, which could lead to significant reductions in industrial output and GDP. The interconnected nature of the affected industries and the possibility of adapting to these disruptions over time offer avenues for mitigation. However, as the model highlights, proactive measures such as expanding strategic inventories, resource recovery, and policy initiatives are essential to reduce the risks posed by such supply chain disruptions.

References

https://pubs.usgs.gov/publication/ofr20241057/full

Nassar, N. T., Ensieh Shojaeddini, Alonso, E., Jaskula, B., & Tolcin, A. (2024). Quantifying potential effects of China’s gallium and germanium export restrictions on the U.S. economy.?Antarctica a Keystone in a Changing World. https://doi.org/10.3133/ofr20241057