For a couple of years now, politicians and business leaders have worried about the fact that China controls 97 percent of production of materials known as rare earth oxides. This near-monopoly has made it possible for China to raise prices and potentially extort countries and companies that require access to these rare earth minerals. Peter Robison and Gopal Ratnam report, "The term 'rare earths' refers to a group of 17 chemically similar metallic elements, including lanthanum, cerium, neodymium, europium and yttrium. While they’re actually relatively abundant in the earth’s crust, finding deposits significant enough to mine is less common, the U.S. Geological Survey says. China, the countries that made up the former Soviet Union and the U.S. have the largest reserves." ["China's Control of Metals for U.S. Smart Bombs Prompts Calls for Hearings," Bloomberg, 14 April 2010] Not only are these minerals not found in easily mineable deposits, they have been difficult to extract in an environmentally safe way. That's one reason countries and companies have been willing to let China assume the environmental burden associated with extracting rare earths. However, back in 2010 the Chinese government demonstrated that it was willing to manipulate access to rare earths to achieve political aims. That's when the outcries really increased in volume.
Once China made it clear that rare earths could be used as a political and/or economic tool, Nobel laureate Paul Krugman asked, "What are the lessons of the rare earth fracas?" ["Rare and Foolish," New York Times, 17 October 2010] He continued:
"First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: 'urban mining,' aka recycling of rare earths and other materials from used electronic devices. Second, China, ... the world's newest economic superpower, isn't prepared to assume the responsibilities that go with that status. Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation. ... Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it."
The answer to Krugman's question took a while, but in this week "the US, European Union and Japan ... teamed up to bring a rare joint case at the World Trade Organisation against China over its export controls on rare earths." ["US, EU, Japan fight China on rare earths," by Leslie Hook, Joshua Chaffin, and Alan Beattie, Financial Times, 13 March 2012] Hook and her colleagues report:
"Karel De Gucht, the EU trade commissioner, said Chinese restrictions on exporting the metals – 17 elements used to manufacture everything from weapons to BlackBerrys – were hurting European manufacturers and 'must be removed'. ... Mr De Gucht expressed frustration that China had not addressed concerns about its rare earths policy after losing a recent WTO case on raw materials. That dispute was considered a litmus test for how the trade body might approach a case over rare earths."
China, of course, disagrees that it is doing anything wrong and "explains its export restrictions as part of a domestic crackdown on illegal rare earths mines. To help clean up the industry, Beijing has tightened controls on domestic mining and announced a production cap, although enforcement of these measures varies from province to province." Detractors see a more nefarious explanation. Hook et al. report, "EU officials estimate that the Chinese restrictions force European manufacturers to pay double the price of their Chinese competitors for rare earths. ... The price of rare earths in China skyrocketed last year as Chinese traders started stockpiling and as state-owned mining groups began building rare earths reserves, although prices have since come down due to weak global demand."
U.S. decision makers see the situation in same light as their European counterparts. In a released statement, U.S. Trade Representative Ron Kirk said, “America's workers and manufacturers are being hurt in both established and budding industrial sectors by these policies. China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace.” ["U.S. to challenge China’s curbs on mineral exports; China says it will push back," by William Wan, Keith B. Richburg and David Nakamura, Washington Post, 12 March 2012] Wan and company continue:
"Global buyers were rattled in 2009 when the Beijing government announced it was setting a quota on rare-earths exports, ostensibly to protect the environment and stop over-mining. Critics saw the move as an attempt by Beijing to flex its economic muscle, aiding Chinese companies that use rare earths while driving up the costs of the metals to the U.S. and other countries. Beijing has also stopped issuing any new licenses for mining of rare earths, closed some illegal mines and set production caps for the metals. In recent years, China’s stance on trade of rare earths has prompted some countries to start ramping up their future production. The Obama administration argues that China’s export restrictions give Chinese companies an unfair advantage. The action against China comes amid a U.S. election year in which Obama’s potential Republican opponents are lodging pointed accusations of unfair trade practices by China. The president has vowed in recent weeks to level the economic playing field."
The story is much the same coming out of Japan. According to Keith Bradsher, this "case represents the first time that Japan has started a formal trade case against China at the World Trade Organization since the creation of the agency in 1995, although Japan has played a supporting role in a dozen cases filed by other countries against China." ["Trade Issues With China Flare Anew," New York Times, 12 March 2012] Bradsher continues:
"Japan had been reluctant until now to bring any trade cases against China, where memories of World War II atrocities by Japanese soldiers still rankle. Japan decided to proceed with the case after China halted shipments of rare earths to Japan for two months in the fall of 2010 during a dispute over contested islands in the East China Sea."
Although the rare earths dispute is garnering the most attention, Bradsher indicates that other trade issues are also on the table. He reports:
"A month after Vice President Xi Jinping’s visit to the United States and Europe, the brief trade policy détente between China and its two biggest export markets is about to end. Five separate issues — involving auto parts, cars, solar panels, anti-subsidy laws and rare earth metals — are the subject of separate initiatives by U.S. officials, European officials or both."
If that's not enough to raise tensions between China and its trading partners, Bradsher reports that there is also "the prospect of revived frictions over China’s currency policies." He explains:
"After rising fairly consistently against the dollar for nearly two years, helping quiet Western criticism that Beijing has kept the renminbi artificially low, the currency has begun to weaken again, making Chinese exports more competitive on the global market. ... The Chinese currency fell further against the dollar, after China’s central bank lowered its daily target for the currency. It has now fallen 0.5 percent against the dollar so far this year, after rising 4.7 percent last year."
Bradsher goes on to describe the four other trade issues (in addition to rare earths) that are "likely to move to center stage":
"AUTO PARTS About 150 members of the House and Senate are preparing to send a letter to President Obama this week asking him to investigate whether China has violated American trade laws by helping its auto parts manufacturers become big suppliers to the United States market. The president is expected to refer the letter to the new interagency trade enforcement task force he announced in January during his State of the Union address.
"CARS After promising late last year not to discriminate against foreign products in government procurement, China unexpectedly released this month a draft list of automobiles that government officials may buy. All of the more than 140 models are Chinese brands, with no foreign nameplates — even though most foreign brands are now made in China, including the Audis and Buicks popular with Chinese officials. Federal procurement practices in the United States allow the purchase of foreign brands, including imports as well as foreign brands produced in the United States, although critics contend that American government agencies tend to show an informal preference for Detroit brands anyway.
"SOLAR PANELS The United States Commerce Department is scheduled to release on March 20 an initial decision on whether China has illegally subsidized solar panel shipments to the United States. The department is widely expected to impose retroactive tariffs on the Chinese products.
"ANTI-SUBSIDY CASES Congress has just passed, and President Obama [signed], a law that would retroactively revise some American trade laws to 2006. The move would help American companies and labor unions bring anti-subsidy cases against companies in nonmarket economies like China."
Trade wars are never good for the global economy, but neither are unfair trade practices. Regardless of the outcomes of the current disputes, they are sure to increase tensions between China and its trading partners.