<aside style="background-color:#f1f1ef;color:#000000">💡<div>Opinion: Trade negotiations between China and the United States are already tense, and Donald Trump hasn’t even taken office yet. But as the Chinese withhold gallium and other important tech-related minerals, it’s clear that they are prepared to be tough in return. The United States has been developing alternatives to Chinese minerals, but with China’s almost total control over certain materials, the advantage is theirs. Both nations will eventually need to reach a compromise. Until that happens, things might get tough for tech companies in the United States. Inflation and supply chain disruptions may be inevitable.</div></aside>China responds to US tariffs in early December—export bans on several highly sought-after minerals. You know the ones--gallium, germanium, antimony, and so on. If those words don’t mean much to you, it’s because you probably don’t manufacture computer chips or military technology.This export ban is the latest installment in a long series of increasingly heated policy decisions exchanged between the United States and China. The Chinese government was responding specifically to the Biden administration’s <a href="https://www.csis.org/analysis/updated-october-7-semiconductor-export-controls" target="_blank" rel="noopener noreferrer">decision to limit semiconductor-related exports</a>—another manufacturing component used in tech hardware.“China has lodged stern protests with the U.S. for its update of the semiconductor export control measures, sanctions against Chinese companies, and malicious suppression of China’s technological progress,” <a href="https://www.pbs.org/newshour/world/china-bans-exports-to-u-s-of-key-high-tech-materials-in-response-to-chip-sanctions" target="_blank" rel="noopener noreferrer">a Chinese Foreign Ministry spokesperson said</a> in response to the decision.Things are only expected to escalate in January when the self-described “Tariff King,” Donald Trump is sworn into office.How will the increasingly heated tech trade war influence the two largest economies on the planet? And more to the point, what impact will export restrictions have on the price and availability of tech products?<h6>Background - Export Bans</h6>To provide a comprehensive explanation of how trade-related tension has developed between China and the United States, one would need considerably more than the 1000 or so words that constitute this article.Going back just a year, China announced <a href="https://www.reuters.com/markets/commodities/china-bans-exports-gallium-germanium-antimony-us-2024-12-03/" target="_blank" rel="noopener noreferrer">in the Summer of 2023</a> that they would require exporters to apply for a specialized licence to ship materials like gallium—a key component for everything from weapon development to cell phone technology—to the United States.<figure><img src="https://images.unsplash.com/photo-1689489607950-092e6e9cb1cb?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wzMDc1NjV8MHwxfHNlYXJjaHwyOHx8ZmluZSUyMG1pbmVyYWxzfGVufDB8fHx8MTczNDY3MzA0N3ww&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" alt="Export bans on extracted gallium"><figcaption>Extractions of gallium</figcaption></figure>They also put restrictions on the export of more common components like graphite and diamonds—which are often used in small quantities for cutting tools.They followed those restrictions up later with a ban on antimony exports—a material common to weapon development. They described this ban as a national security initiative. One needn’t stretch their imagination to understand the reasoning. You don’t shake your fists at an opposing country on the one hand and give over the ingredients for nuclear weapons with the other.Still, these restrictions did nothing to relieve trade tensions.The United States furthered the conflict considerably this December when the Biden administration announced <a href="https://fortune.com/asia/2024/12/03/us-chinese-technology-companies-export-controls/" target="_blank" rel="noopener noreferrer">140 companies</a> (almost all of which were either located in China or owned by Chinese individuals) on an “entity list.”Basically, companies on this list are very limited in what they can import from the United States.<h6>Why does this matter? - Importance of Gallium</h6>China is the global leader in gallium extraction. Simply put, it’s a material that every tech company needs. Restricting access to U.S. companies could have a significant impact both on the availability of new products, and their price.Historically, the United States has gotten about half its gallium supply from China. That’s significant. Worse yet, finding a secondary supplier might be tricky. China controls an <a href="https://www.newsweek.com/us-industries-china-news-mineral-export-controls-1998251" target="_blank" rel="noopener noreferrer">estimated 98% of the global gallium supply.</a>Totaled, these export restrictions influence the manufacturing of products that constituted 10% of the U.S.’s GDP in 2023.In other words, it’s a noticeable disruption. While trade figures are often abstract to the average consumer, a potential 10% reduction to the GDP is the sort of swing that could influence jobs and product pricing.<figure><img src="https://images.unsplash.com/reserve/NV0eHnNkQDHA21GC3BAJ_Paris%20Louvr.jpg?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wzMDc1NjV8MHwxfHNlYXJjaHwxfHxwZW9wbGUlMjBtb3ZpbmclMjB0byUyMHdvcmt8ZW58MHx8fHwxNzM0NjczMzkwfDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" alt="Commuters are reduced from job losses"><figcaption>People commuting to work</figcaption></figure>However, it’s important to understand that this deficit is not an inevitability. What happens next will depend on how trade negotiations between China and the United States go, and if U.S. tech companies will be able to source sustainable alternatives to Chinese components.While it’s true that China is a considerable exporter of gallium, it isn’t the only option. Japan exports virtually all of its gallium. They source it primarily through recycling.The Biden administration has also been focused on identifying sustainable alternatives, primarily through the <a href="https://www.state.gov/minerals-security-partnership/" target="_blank" rel="noopener noreferrer">“Minerals Security Partnership,”</a> a partnership between the United States, the European Union, and fourteen other countries to source necessary manufacturing minerals.<h6>Consequences</h6>In the short term, alternative mineral supply chains may prevent global consumers from feeling the sting of the U.S./China trade war.Still, China’s almost total control of gallium and other important tech-related minerals means that a long-term solution will eventually be necessary.When one nation controls almost 100% of <a href="https://www.usgs.gov/news/national-news-release/us-geological-survey-releases-2022-list-critical-minerals" target="_blank" rel="noopener noreferrer">one of the world’s most critical minerals</a>, that gives them a lot of bargaining power.Without Chinese gallium, many tech-related products will eventually experience shortages. Costs will rise. Accessibility will dwindle. Getting the new iPhone will be a whole heck of a lot harder, and people will hoard things like LED lightbulbs, exacerbating the shortage and driving prices up.Does it have to be that way?<figure><img src="https://images.unsplash.com/photo-1674515489647-fd8f76b86f65?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wzMDc1NjV8MHwxfHNlYXJjaHw3fHxjb3N0JTIwb2YlMjBsaXZpbmd8ZW58MHx8fHwxNzM0NjczNjk4fDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" alt="While China responds to US tariffs, cost of living increase"><figcaption>Cost of living crisis</figcaption></figure><h6>Moving Forward - Trump and his US Tariffs</h6>Both the United States and Chinese economies will eventually need to de-escalate this trade conflict. Of course, “De-escalating trade conflict,” is not in President-Elect Donald Trump’s middle name. Trump has already been pretty clear about his position on tariffs. The incoming president has announced plans to raise tariffs on China by <a href="https://www.hklaw.com/en/insights/publications/2024/12/president-elect-trump-announces-tariff-plans" target="_blank" rel="noopener noreferrer">10%</a> when he returns to office in January.It&#039;s hard to say how that will influence the trajectory of this conflict. Things may very well get worse before they get better.<h6>Conclusion</h6>Trade wars and supply chain disruptions are justifiable topics of concern. Most people reading this will have vivid memories of pandemic-related supply chain disruptions when everything from cars to home appliances were very difficult to acquire.Challenging though these situations can be, they are not permanent. China needs to export just like the United States requires imports.Neither country wants to tank their economies just to prove a point.“Trade wars,” are ultimately just negotiation tactics. Things will calm down eventually. What happens until then remains to be seen.

China responds to US tariffs by withholding gallium and other important tech-related minerals.

English

China responds to US tariffs. Effects of key export bans on tech critical minerals

<aside style="background-color:#f1f1ef;color:#000000">💡<div>Opinion: Donald Trump is already talking tariffs following his victory in the 2024 U.S. presidential election. To date, no major tariff has ever focused specifically on software products. Should that change? While tariffs can work, they also have a long record of causing more problems than they solve. The French policy on digital service taxes may be a gentler and ultimately a more effective alternative.</div></aside>President-Elect Donald Trump has suggested, with the stated purpose of reducing undocumented immigration and drug trafficking, a <a href="https://www.brookings.edu/articles/assessing-trumps-proposed-25-tariff-on-imports-from-mexico-and-canada/" target="_blank" rel="noopener noreferrer">25% trade tariff</a> on goods from Canada and Mexico as part of his Trump Tariff Plan. He also suggested an additional 10% tariff on goods from China (current tariffs are <a href="https://taxfoundation.org/research/all/federal/tariffs/" target="_blank" rel="noopener noreferrer">25-100% depending on the import</a>), citing fentanyl trafficking as the motivation.Tariffs, basically just trade taxes, can be an effective way to raise revenue and add teeth to global policy. However, they are often criticized as being an overly blunt instrument that creates as many problems as it solves.There is no one-size-fits-all attitude toward tariffs. In fact, Trump’s proposal raises interesting questions. Might there be a benefit to factoring “new” products into tariff discussions? Software is a major export, valued at <a href="https://www.fortunebusinessinsights.com/software-as-a-service-saas-market-102222" target="_blank" rel="noopener noreferrer">almost $300 billion.</a> Should nations start putting a trade tariff on software products?<h4>The Problem with Tariffs</h4>Like any major policy, tariffs walk a thin line between effective and senseless. More than 17 million jobs, and almost one trillion dollars in trade would be influenced by Trump’s proposed North American trade tax.That doesn’t mean that the policy is wrong in its own right. It does mean that the risk/reward proposition is high.At face value, 25% of one trillion dollars is a big figure.But that’s not how it works. When tariffs—particularly big tariffs of the sort that Trump has proposed—take effect, prices go up. When prices go up, spending goes down. When spending goes down, jobs are often lost.There’s a reason the phrase “trade war,” often comes up in the same conversation as tariffs.That’s not to say that tariffs are always a disaster. In 2018, while Trump was in office for the first time, the United States placed a <a href="https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/september/ustr-finalizes-tariffs-200" target="_blank" rel="noopener noreferrer">25% tariff on Chinese steel.</a> The stated reason was “national security.” China stood accused of overproducing low-quality metal products, which subsequently flooded U.S. markets.Consequently, United States manufacturers ramped up production of steel creating more jobs, and domestic revenue.<figure><img src="https://images.unsplash.com/photo-1613970351372-9804e380bd09?crop=entropy&amp;cs=tinysrgb&amp;fit=max&amp;fm=jpg&amp;ixid=M3wzMDc1NjV8MHwxfHNlYXJjaHwxfHxzdGVlbCUyMHByb2R1Y3Rpb258ZW58MHx8fHwxNzMzOTI4NjA1fDA&amp;ixlib=rb-4.0.3&amp;q=80&amp;w=1080" alt="Increased steel production at U.S. Steel after chinese tariff"><figcaption>Increased steel production at U.S. Steel</figcaption></figure>Granted, this also made the price of steel go up, a cost that was inevitably passed onto the consumer in the form of more expensive cars, homes, etc. Still, the 2018 steel tariff is generally viewed as a success.That’s not always how it goes though.<a href="https://www.cnbc.com/2021/06/15/us-and-eu-truce-boeing-airbus-dispute.html" target="_blank" rel="noopener noreferrer">In 2019,</a> also during Trump’s first term, the United States was at odds with the EU concerning the Boeing Airbus subsidy. The specifics of the disagreement are complicated, and not pertinent in this context.Here’s what happened: The U.S. placed a <a href="https://fr.usembassy.gov/united-states-modifies-tariffs-on-eu-products-in-large-civil-aircraft-dispute/" target="_blank" rel="noopener noreferrer">25% tariff on EU exports</a>—particularly wine, cheeses and liquor. Granted, these are specialty products that fall into the discretionary or luxury spending. Still, the tariff resulted in higher costs for U.S. businesses. Expenses went up and no significant benefits were realized.None of this is to say that tariffs could not be leveraged effectively on software products in theory. However, there are laws specific to digital technology that may interfere with any effort to impose significant trade taxes on tech products.<h4>Overview: The State of Trade with Software</h4>To date, there have never been any major trade tariffs that focused on software. This owes to several factors:Software products are generally viewed as intellectual property. Like a book or a song—any monetized idea rather. Prior to the digital era of software distribution, back when you could buy Microsoft Word on discs, the conversation was slightly different. Even back then, software tended to be classified as media from a trade perspective. Like a DVD or a CD, the value was not on the physical item itself, but the licensing fees.<figure><img src="https://insights-assets.kyzon.com/microsoft-word-97-oem-english-cd.webp"><figcaption>Microsoft Word 97 on a CD</figcaption></figure>WTO’s IT Agreement In 1996, the World Trade Organization <a href="https://www.wto.org/english/tratop_e/dtt_e/dtt-ita_e.htm#:~:text=The%20Information%20Technology%20Agreement%20(ITA,cover%20over%20200%20more%20products." target="_blank" rel="noopener noreferrer">signed an agreement to eliminate trade tariffs on many tech products, including software.</a>  That agreement was expanded in 2015 to be even more comprehensive.The goal of the WTO agreement was to make global trade more expansive. World trade agreements are legally binding, but that’s not to say they are strictly followed. Countries are constantly modifying their trade policies, and often these modifications bump up against agreements established by the WTO.That said, it is not likely that any major global economies will be introducing trade policies that blatantly disregard the 1996 agreement.That doesn’t mean countries can’t modify their tax law to generate more software-related revenue.<h4>The Digital Service Tax</h4>A digital service tax (DST) is pretty much what it sounds like. Tax revenue generated by the trade of digital products. There are many examples of this throughout the world, one of the most notable currently taking place in France.At the time of writing, France has a <a href="https://www.vatcalc.com/france/france-dst-rise-to-6-proposal/#:~:text=The%20tax%20was%20introduced%20as,digital%20services%20within%20its%20borders." target="_blank" rel="noopener noreferrer">3% digital service tax</a> on the use of digital services within its border—though there is a proposal to increase that figure to 5%.How does this tax differ from a trade tariff? A DST will focus on use over providence. It functions more like a sales tax—though it does still target the manufacturer. For example, let’s say Hypothetical Software Company (HSC) provides its product at a fee of $100 per year.The French government would take 3% of that action resulting in $3 out of every sale. In theory, it’s revenue taken from the business. In practice, the costs are often passed onto the consumer.The thinking behind a DST is that people/businesses spend a lot of money on software (e.g. <a href="https://kyzonsolutions.com/insights/video-conferencing" rel="noopener noreferrer">video </a><a href="https://kyzonsolutions.com/insights/video-conferencing" rel="noopener noreferrer">conferencing</a>)—revenue that floats beyond borders as if on a (pun-intended) cloud. With this specialized tax, the French can keep more of their money within its borders.DSTs are not exactly a tariff, but they do generate trade revenue in a similar way.<h4>Looking forward</h4>Should countries consider implementing tariffs on software? Violating WTO agreements—though not unheard of, is a bad idea. Still, with software products being a global enterprise, legislation like the French DST policies could be attractive for countries all over the world.Software generates a lot of money. Tax strategies designed to circulate that cash within a nation’s domestic borders could make a lot of sense.The devil lies in the details. A heavy-handed 25% tax—regardless of how or why it is applied—would be incredibly disruptive and expensive for consumers. The gentler policy currently leveraged by the French offers a moderate alternative.

Donald Trump is already talking about his Trump Tariff Plan following his victory in the 2024 U.S. presidential election. To date, no major tariff has ever focused specifically on software products. Should that change?

Paul Durante