China's Rare-Earth Power-Play

The United States, Europe, and Japan have recently joined forces to challenge China's restrictions on exports of rare-earth metals, escalating a trade row over access to some of the most important raw materials  used in advanced technologies.  All three trade powers accused China of trying to hold down prices for its domestic manufacturers while pressuring international firms to move operations to China.  As demand of rare-earth material is on the rise, the USA and China now are locked in a trade battle over China's monopoly when it comes to the production of said materials.

The U.S. and its allies are complaining to the World Trade Organization (WTO) about what they say are unfair Chinese controls over exports.  Rare-earths are crucial for the defense, electronics, and renewable-energy industries and are used in a range of electronic consumer products such as smartphones, disk drives, and wind turbines.

China accounts for 95% of the global output of seventeen little-known metallic elements used in a wide range of high-tech products.  China has steadily developed policies that ensure its dominance of the international trade of industrial raw materials as well as rapid industrialization of the state, which heavily depends on the availability of raw materials.  In 1990, the Chinese government declared rare-earths to be a protected and strategic mineral.  As a result, foreign investors were prohibited from mining rare-earths and restricted from participating in rare-earth smelting and separation projects, except in joint ventures with Chinese firms.  All projects for rare-earth mining, regardless of their size, required approval from the State Development and Planning Commission.

China's current dominance of rare-earth exports is giving the country considerable trade leverage over its neighbors and the West.  In the year 2010, Chinese dominance of rare-earth elements critical to many high-value products first attracted attention worldwide.  China as a country has vast rare-earth resources that have propelled the country into the number-one position in the industry, which began in 1990s.  Academic research on rare-earth elements in China has grown tremendously; members of academia were encouraged to study rare-earths as the domestic market continued to grow.  In line with state policy, China has set out on an extensive effort to increase its overall technological innovation -- an effort which demanded usage of rare-earth elements more than ever before.  The country's domestic economic growth created a huge demand of rare-earths to support the growth of the manufacturing industries.  The low wages of labor coupled with government policy of undervaluing China's own currency and constraining foreign mining companies to mine valuable raw materials in China are responsible for the rise of external demand of rare-earth elements.  

The allegations of a politically motivated Chinese embargo on rare-earth exports have far-reaching implications.  The issue of rare-earth materials has also created tension between China and its neighbors.  There was an incident where Japan detained a Chinese trawler captain over a skirmish in the East China Sea, and then Japanese companies reported weeks of delayed shipments of rare-earths from China.  This may sound like a minor trade dispute, but China currently controls production of about 95 percent of the world's rare-earths.  This control gives China strategic leverage over the rest of the world.

Furthermore, China recently reduced its export quotas for these minerals.  The government contends that its plans to reduce exports simply reflect the need to meet growing domestic demand for rare-earths and address environmental concerns.  Overall demand of rare-earth materials has soared.  According to U.S. Defense Department estimates, prices of rare-earth have surged between four and 49 times compared with their values in current U.S. dollars in 2001.  However, prices have come down in recent months as a number of companies look for ways to reduce or eliminate use of rare-earths.

China's dominance of rare-earths is making others rethink their industrial strategies.  Companies worldwide view this as evidence of the need to diversify supply sources of rare-earths, while international efforts to find new supplies have gathered steam.  The increased wariness over China's monopoly on rare-earths has reinvigorated financial support for new rare-earth mines outside China, including efforts by entrepreneurs in the United States to obtain financing to reopen the Mountain Pass mine, and by efforts in Japan to fund new mining ventures in Australia, Kazakhstan, Mongolia, and Vietnam.

The USA, not so long ago, was the leader in both the innovation and trade of rare-earth elements.  The discovery of rare-earth elements at California during the late 1940s was the beginning of U.S. dominance.  According to the U.S. Geological Survey, there are sufficient reserves of rare-earth elements to sustain global consumption needs for many years.  Mining and processing present environmental risks, and the U.S. has strict environmental policies on mining activities.  Safety is a major concern surrounding China's practice of mining in recent years, along with the negative impact it has on the environment due to lax practices in mining.

Unfortunately, because of the revenue potential, many rare-earth mines have been operating illegally, or with little supervision and little to no regulation, causing severe environmental hazards.  The environmental concerns in the USA and high safety standards in mines, high wages, and sluggish economic growth are preventing the USA from exploiting raw material the way China does.  In the USA, the defense industry, consumer electronics giants, and aeronautical industries are among of the first ones who will feel the pinch if China's monopoly continues to grow.