A serious simmering dispute involves China versus the rest of the world on rare earths. As most readers know, rare earths are essential to the manufacture of many high tech, defense, and “green energy” products, such as smartphones, lasers, and hybrid batteries. Even though rare earths are not rare, their extraction is an environmentally nasty business, and China, which has less than 30% of world reserves, now accounts for over 90% of global production. That is a stranglehold that China has decided to exploit. Per Wikipedia:
On September 1, 2009, China announced plans to reduce its export quota to 35,000 tons per year in 2010–2015, ostensibly to conserve scarce resources and protect the environment. On October 19, 2010 China Daily, citing an unnamed Ministry of Commerce official, reported that China will “further reduce quotas for rare earth exports by 30 percent at most next year to protect the precious metals from over-exploitation”. At the end of 2010 China announced that the first round of export quotas in 2011 for rare earths would be 14,446 tons which was a 35% decrease from the previous first round of quotas in 2010. China announced further export quotas on 14 July 2011 for the second half of the year with total allocation at 30,184 tons with total production capped at 93,800 tonnes. In September 2011 China announced the halt in production of three of its eight major rare earth mines, responsible for almost 40% of China’s total rare earth production.
We’ve followed this story because it is a colossal example of short-sightedness of military planners and corporate executives. I recall in my youth (the 1970s) concern about the vulnerability of the US military to the fact that certain strategic materials had limited supplies outside Rhodesia (now Zimbabwe) which even then looked pretty unstable (note that outside meddlers seemed to have trouble figuring which horse to back. For instance, Lonhro started backing black nationalist parties in Rhodesia before international businesses abandoned the National Party in neighboring South Africa). One assumes that (at a minimum) military planners are aware of these vulnerabilities and do what they can to reduce their impact (e.g., stockpiling, developing alternative technologies to minimize or end their use, recycling).
By contrast, letting China gain control of rare earths production was a self inflicted wound. And China was unusually aggressive in letting its customers know it held the whip hand. It implemented an unannounced export embargo in 2010 which targeted Japan above all others. Our reaction when China lifted the ban after consternation ensued:
There are two different ways to read this little contretemps, and readers can no doubt come up with other interpretations:
1. This was a successful shot across the bow of the US (the initial Japan freeze was in many ways directed at the US as well because the US consumes far more of Chinese rare earths via Japanese intermediate and end products than via direct purchases from China, even if the immediate impact on Japan was more pronounced). The Treasury has backed off its pressure on China to have the renminbi appreciate more quickly and is now supporting the idea of China coming up with longer term goals to rein in its trade surplus
2. This was a shot across the bow that failed. China only banned raw materials exports; it wanted to force encourage its trade partners to buy products manufactured in China with rare earths content. But instead, Japan immediately started to focus on recycling rare earths and redesigning products to use less of them; the Eurozone similarly started to consider accelerated development of alternative sources, rather than buying higher value added goods from China. This seems consistent with the fact that Secretary Clinton was set to make remarks about the ban; it was dropped literally hours before her speech, but the State Department has not gotten confirmation.
Note these readings may not be inconsistent. China may be preoccupied with gaining short-term advantage (particularly given continuing trade tensions; the hermit kingdom made it clear in 2010 it wanted a quid pro quo for restoring supplies) and may be willing to risk getting more competition down the road. Put it another way: what good is being a monopolist if you can’t abuse your power?
The US, the EU, and Japan jointly filed a WTO case in 2012 against China over its export curbs, China looks more and more likely to gain from pressing its advantage. The US and other countries can’t ramp up production quickly, particularly given the environmental hazards involved. China is using its chokehold on supplies to reward companies that locate more higher-value-added manufacturing in China, allowing them to move up the skill chain.
The latest salvo took place today, apparently in response to the March WTO lawsuit. The parties have met in late April as part of a formal dispute resolution process. If no agreement is reached within 60 days, the case will then go to a panel for a ruling. Given the timing, this move appears to signal that the negotiations are at an impasse (quelle surprise!) and China is taking its case public in case the talks fail. China is now claiming that its supplies are falling (peak rare earths, or at least in China). From the BBC:
China has warned that the decline in its rare earth reserves in major mining areas is “accelerating”, as most of the original resources are depleted.
In a policy paper, China’s cabinet blamed excessive exploitation and illegal mining for the decline…
“After more than 50 years of excessive mining, China’s rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing,” China’s cabinet said in the paper on the rare earth industry published by the official Xinhua news agency.
China is also talking up the environmental damage associated with rare earths production. Since China has been remarkably unconcerned about this issue on numerous other fronts, this sort of talk seems a bit disingenuous. From the Associated Press:
China on Wednesday defended its export curbs on rare earths used in high-tech products as an environmental measure and rejected a World Trade Organization challenge by the United States, Europe and Japan.
A Cabinet official rejected complaints Beijing is using the environment as an excuse to support fledgling Chinese producers of lightweight magnets and other rare earths products by limiting supplies to foreign rivals in violation of its free-trade pledges.
“The protection of the environment is never a pretext for gaining advantage or increasing economic returns,” said Su Bo, a deputy industry minister, at a news conference.
This is not a great argument to push, since it works far more to the advantage of Western countries than China. It has been a sore point that China’s price advantages are based in part on environmental degradation. This sort of “we need to think of the planet” talk would also argue for importers to impose tariffs or import restrictions against countries with low environmental standards (note that idea does not fit well within the WTO framework; environmental and consumer protections are often characterized as restraints on trade, but rules change as prevailing concerns change).
Bottom line: this row does not look like it will be resolved soon and it will take years for litigation to play out. And China will win even it it loses if it gets enough manufacturers to relocate in the meantime. Nicely played.
This post originally appeared at naked capitalism and is posted with permission.
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