Two Blows to China’s Rare Earth Monopoly

I’m just getting my feet back under me here in Beijing after a two-week business trip to the US.  In coming days, I’ll be posting a link to the video of my speech on the “Beijing Consensus” (once it’s up) and sharing some thoughts about the troubling consequences of China’s awkward approach to monetary tightening, as well as offering some perspective into the complex nature of inflation.  But in the meantime, two news stories caught my eye, related to China’s efforts to gain political and economic leverage from its near-monopoly on rare earth minerals, which I highlighted last year.

Story #1:  On Tuesday, the World Trade Organization (WTO) ruled that China had “violated global rules by restricting exports of nine raw materials used in the manufacturing of high technology products.”  The petition — filed by the US, EU, and Mexico in 2009 — did not cover rare earth minerals, but the restrictions that were struck down are nearly identical to the rules Beijing later applied to rare earths.  In particular, the WTO rejected the central Chinese claim that “its [export] restrictions were motivated by a desire to protect the environment and prevent a critical shortage of the materials” (presumably because the proper, non-discriminatory approach to such concerns would be to restrict production, not exports; export restraints appear to favor domestic industry to the disadvantage of foreign users).  Since that is precisely the rationale given for Chinese restrictions on rare earth exports, the decision is expected to pave the way for a successful European challenge to those rules.  If China has legitimate environmental or conservation goals in respect to rare earth mining, the ruling suggests, cutting off foreign buyers and supplying only Chinese users is NOT an acceptable approach.

Story #2:  Alarmed by China’s cut-off of rare earth supplies last Fall, the Japanese responded by doing exactly what I predicted they would do:  search for alternative sources of supply.  According to a British scientific journal, it appears they have found one.  The Japanese say they have found vast — and readily accessible — deposits of at least some rare earth minerals on the seabed in international waters in the Pacific Ocean, near Hawaii and Tahiti (I say at least some because there are 17 rare earth elements, each with distinct applications and processing methods, and all “rare earth deposits” are not created equal in terms of the distribution of these various minerals).  Of course, mining the seabed raises its own environmental dilemmas, but the point is, rare earth minerals aren’t really that rare, it’s just that China offered such a cheap source that nobody bothered to go looking for any.  But that cheap source was only attractive so long as it was reliable; when that reliability was called into question, buyers were willing to pay a bit more to hunt around for a steady alternative.

The two stories, combined, appear to deflate concerns (or hopes, as the case may be) that China would be able to exercise a “stranglehold” over the market for these critical industrial ingredients.  And it shows how fleeting — and ultimately futile — efforts to engineer a monopoly in any dynamic marketplace must prove to be.