China's Rare Earth Bravado

11/03/2010 04:23 pm ET | Updated May 25, 2011
  • Daniel Wagner CEO of Country Risk Solutions / co-author of the forthcoming book "Global Risk Agility and Decision Making" (Macmillan, 2Q/2016)

In spite of strangely coincidental timing, China's recent cessation of exports of rare earth minerals (REMs) to Japan should not, the Chinese say, be perceived as retaliation for its dispute over the Senkaku Islands and Japan's recent detention of the captain of a Chinese fishing boat. China has, after all, also suspended its exports of REMs to the U.S. and Europe, and China has been steadily reducing its exports of REMs since 2005.

China produces 93 percent of the world's known REM supply, although only about a third of the world's reserves are located there. The Chinese government claims it possesses just 15 to 20 years worth of medium and heavy minerals, and must preserve its supply. The export quotas apply only to the raw REMs, not the processed minerals. Its most recent reduction will cut an additional 30 percent of supply to the rest of the world in 2011.

Given that three to five years are generally required to make new mines operational, substantial alternative sources of REMs are years away. A number of countries, Japan among them, have already arranged to replace Chinese-sourced REMs with that of other countries, such as Vietnam, Mongolia, Kazakhstan, Greenland, and India. Other countries, such as the United States -- which has the second largest known reserves of REMs after China -- are ramping up their production efforts. Given America's own dependence on Chinese REMs, the U.S. General Accountability Office produced a report in April 2010 that calculated it will take up to 15 years for a domestic REM industry sufficient to meet its needs to be re-established.

China's declared motives for implementing the restrictions appear simple enough; as its economy continues to grow at a blistering pace, its needs for increasing amounts of REMs to support the country's economy and export production machine will only grow, and it wants to increase its downstream minerals processing industry. In that regard, China's government is doing nothing different than most any other government would do -- protect the country's long-term interests. The fact that REMs are in limited supply and are used to produce a wide array of products that are either in high demand, critical to green technology, or have military applications does complicate things, however.

In spite of U.S. and Japanese protestations, China's action has not apparently alarmed the WTO, which has announced that it will not immediately consider whether China's actions are in violation of WTO guidelines. America's United Steelworkers Union has brought a suit against China stating the when China joined the WTO it committed to eliminate export quotas and taxes on all but a select list of products, and that REMs were not included on that list. As a result, China is violating WTO rules, the Union claims.

Here is the problem: It may take up to 5 years for the WTO to hear the case and produce a ruling. Even if it rules against China sooner, China will then be given a specified period of time to rectify the situation. The only thing recipient countries can do in the interim is find alternative sources, or produce REMs themselves. China has been challenged numerous times at the WTO, and has lost numerous cases, but, like any other member of the organization, it knows very well how to push the system to its limit, to its own advantage. Here again, China is no different than many other countries in being a clever member of international organizations that plays within the rules, but up to the very limit.

China cannot really be blamed for wanting to protect its interests. It did not, after all, simply stop shipping REMs all at once, or without notice. China has become masterful at using international organizations to its own maximum advantage. In that regard, it should not really be criticized for doing what other countries, including the United States and Japan, do. Perhaps, instead, the rest of the world should be criticized for allowing itself to become so dependent on China for REMs -- even in the face of an increasingly assertive China that is rising on the global stage. If there was any doubt about whether every country should similarly look out for its own interests and incorporate foresight and common sense into its future strategic planning, that doubt has now been removed.

Daniel Wagner is managing director of Country Risk Solutions, a political risk consulting firm based in Connecticut, USA. Joseph Tam is a graduate of the London School of Economics in Comparative Chinese Politics and is based in London.