A US-China Trade War on Rare Earths?

Late last month, the World Trade Organization (WTO) reversed its past finding and ruled in China’s favor on countervailing duty and anti−dumping measures in U.S.−China trade. The decision rankled the United States and validated the view among some Chinese that international rules can work in their favor. But it also points to the need for Washington to be more strategic about taking China to the WTO on trade disputes in the future and to think critically about the best approach to use.

One future U.S.−China trade battleground to ponder about is rare earths, a group of 17 elements scattered across the Earth’s crust that are essential components of important technologies like cell phones, precision−guided missiles and hybrid cars. China, which accounts for 97 percent of global rare earth production and 60 percent of consumption, has slashed export quotas over the last few years and imposed a de facto ban on all rare−earth exports to Japan in 2010. Some argue that Beijing is deliberately attempting to hoard the strategic resources for political reasons, but China retorts that it needs to regulate rare earths both because it is a finite substance and because it contributes to environmental degradation. The Office of the U.S. Trade Representative has repeatedly threatened to seek a WTO dispute settlement.

While Article XI of the General Agreement on Trade and Tariffs (GATT) does prohibit quantitative restrictions on products, Article XX(g) provides that it is acceptable for a state to use export restrictions if the quota relates to the conservation of exhaustible natural resources and is adopted in conjunction with a domestic program that imposes similar restrictions on domestic producers.

China could make a convincing case that the export quota is designed to conserve a finite resource. Since some industry forecasts already project that rising demand may cause a 40,000−ton annual global shortfall by 2015, China may wish to control its exports lest it be forced to import rare earths in a few years. And with Beijing powering 97 percent of the world’s output with just 36 percent of global rare earth reserves, one could argue that China is currently supplying far too much rare earth elements. Furthermore, Beijing could reasonably assert that such conservation is required to regulate the environmental degradation that results from rare earth mining, including instances of water pollution and deforestation that are well−documented in China.

On the issue of equal international−domestic treatment, however, Beijing appears to be on thin ice. In a speech at the Fletcher School of Law and Diplomacy last month, Mr. Gu Bin, a Fulbright visiting scholar at Harvard Law School and a research fellow at the Chinese Ministry of Commerce, argued that the Chinese government’s attempts to encourage mergers and acquisitions in the rare earth sector to slash the number of firms involved constitutes a domestic restriction. But it is hard to see how one could equate quantitative international restrictions on the one hand with the domestic reorganization of China’s rare earth sector on the other. Government−backed mergers and acquisitions may represent repackaging or even reform, but they are not direct restrictions in the same way that quotas are. The crux of any U.S. case against China on rare earths should thus be on this point.

Mr. Gu was quite adamant in suggesting that “the solution of mineral trade disputes is beyond the WTO.” But given the WTO’s recent reversal and the fact that a strong case exists, an increasingly protectionist U.S. Congress may be itching for another fight. If Washington chooses to take Beijing on in another round, it should make sure it understands the nuances of both sides in order to deliver the legal knock−out punch. For as Chinese military strategist Sun Tzu once averred, “If you know the enemy and know yourself, you need not fear the results of a hundred battles.”

This article was first published in the Tufts Daily here.

The Future of Rare Earth Elements

Amidst the brouhaha surrounding Sino-Japanese relations over the past few weeks, I’ve written a piece on rare earth elements that appeared in World Politics Review earlier this week. A few points are worth noting regarding these resources.

The 17 elements, which are scattered across the Earth’s crust, are essential components in important technologies such as cellphones, televisions, precision-guided missiles and hybrid cars. Approximately 130,000 tons of rare earths are produced worldwide each year, and some industry forecasts project that rising demand may cause a 40,000-ton annual global shortfall by as early as 2015.

Much of the focus has been on China, and that is understandable to a certain extent given that Beijing accounts for 97% of global rare earth production and 60% of consumption. China has also slashed export quotas over the last few years, while Chinese companies have tried to pursue stakes in large Australian and American mining firms such as Lynas and Molycorp Inc. (via UNOCAL in 2005). Some see this as a deliberate and coordinated effort by China to hoard strategic resources, while others argue that the mining companies in China are actually much more autonomous than one would think.

But the more interesting trend we should be paying attention to is the feverish rush for alternatives that this rare earth scare has produced. In the United States, Colorado-based Molycorp Inc. (which used to be a rare earth leader) is reopening a mine closed down in 2002, while the U.S. Congress passed the Rare Earths and Critical Materials Revitalization Act of 2010 last month to restore Washington’s status as the world’s lead rare earths producer. Japan, which depends on China for 90 percent of its rare earths, is now signing joint venture deals with countries such as Vietnam and Kazakhstan and recently announced it had developed a hybrid vehicle motor that contains no rare earths. Other mines are also being opened in Australia and South Africa.

The key is whether these alternatives will mature quickly enough to prevent chronic shortages. Extracting, processing and producing rare earths could cost hundreds of millions of dollars and up to 10 years, but some expect annual demand to pass 200,000 tons in 2014 — with almost all of that consumed by China.

Picture: New York Times