In the fall of 2009 in the South China Sea a maritime territorial dispute involving Japan’s arrest of a Chinese trawler captain prompted China, in retaliation, to suspend export of rare earths to Japan. Rare earths are metallic ores whose unique magnetic properties are vital features of wind turbines, hybrid engines, computers and many other products with both energy and non-energy applications in the commercial and defense sectors of the economy. Although reserves are widespread, China currently produces close to 100 percent of global rare earth output.
At the time of the Japan-China confrontation, the nature of rare earths—though familiar to geologists and related specialists—was not widely known among the general public. It would have been surreal to think that within little more than a couple of years President Obama would make rare earths a prominent topic of remarks in the White House Rose Garden. But on March 13, the President announced action alleging Chinese violations of provisions of the World Trade Organization (WTO). The U.S. claims that China’s “harmful policies….including export duties, export quotas, export pricing requirements as well as related export procedures and requirements…artificially increase prices for the inputs outside of China while lowering prices in China. This price dynamic creates significant advantages for China’s producers when competing against U.S. producers—both in China’s market and in other markets around the world.” The EU and Japan joined the action.
WTO rules generally forbid export quotas. Last year, the WTO ruled that Chinese export quotas on other raw materials were illegal, agreeing with the US and other complaining nations that such policies cause higher prices “in global markets [and] provide Chinese domestic industry with a significant advantage by way of a sufficient supply.” The rules do allow for some leniency when export controls are imposed for environmental-protection objectives, which China claims as the motivating rationale for its rare earths policy. Critics claim this is a smokescreen, and that policy is part of a strategy to increase domestic supply in order to parlay the rare earths endowment into added value products, like turbines.
To fully appreciate the persistent and growing concern over manipulative trade practices by the Chinese—and, by “Chinese,” one is frequently talking about Chinese state-controlled entities—one needs to keep in mind the importance of rare earths commodities in the renewable energy area, particularly for advanced wind turbines. In the United States, the Obama administration has been keen to underscore the development of alternative energy systems for a robust and green economy. As the president observed during his Rose Garden remarks, “We want our companies building these products right here in America. But to do that, American manufacturers need to have access to rare earth materials which China supplies.” In other words, without a level playing field ensuring fair access to required commodity inputs and an ability to compete in finished rare earths-derived products, the country could be at a significant competitive disadvantage.
In time, global rare earths output should compete away China’s prevailing economic advantage. Even now, an American firm, Molycorp, is in the process of reviving production at a shuttered California mine. But the export-control issue is not the only impediment to smoother U.S.-Chinese commercial relations. Leaving aside the broad matter of Chinese exchange-rate practices, there have been recurrent irritants (at least from the U.S. perspective) not far removed from the rare-earth trade dilemma.
Rare earths are merely a building block in a physical supply chain that ends with the fabrication of magnets and wind turbines. That there are benefits in sharing in that high value-added segment of the industry is therefore clear. Yet the evidence—some well documented, some anecdotal—points to obstruction and distortion in the investment component of the rare earths business that is not all that different from that in the trade area.
For example, U.S. and other foreign firms seeking to acquire a stake in the country’s wind-turbine sector have faced barriers arising from China’s joint-venture arrangements and domestic-content requirements. Even though complaints about such practices have been voiced over a number of years, Georgetown University Professor Joanna Lewis, in a recent assessment, states that Chinese firms continue “to benefit from a…policy and business environment that awards them the majority of domestic projects.”
In short, the new WTO case may resolve one contentious issue, but China will still be able to give its domestic industries important advantages. Disputes will likely continue.
