In our escalating currency (really trade) dispute with China, many people argue that China holds the whip hand because it would quit buying US bonds. As we’ve explained repeatedly, that’s the last thing China would do, since stopping buying US debt (or more accurately, US dollars which it then moves into higher yielding assets than cash, typically Treasuries) would lead the renminbi to rise, which is the thing China is fighting to have not happen.
But we’ve foolishly and unnecessarily made ourselves vulnerable on other fronts. Certain rare earths are necessary for many advanced technology components. Even though China is not the only place were deposits exist, we’ve allowed it to become the dominant provider, and it would take years to get other sources to the point where they could replace Chinese production. (However, the article notes that China is willing to ship rare earths if they are in intermediary or end products, in other words, forcing Japan to cede operations to Chinese companies).
Even though it is Japan, rather than the, which is on the wrong side of Chinese action, given the close relationship between Japan and the US (Japan is, after all, a military protectorate of the US), and heavy use of Japanese products made from these materials in the US, one has to assume this is also intended as a shot across our bow. It seems an over the top response to the matter at hand, the detention of a Chinese fisherman caught in disputed waters.
In other words, this could get ugly fast.
From the New York Times:
Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports to Japan of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles.
Chinese customs officials are halting shipments to Japan of so-called rare earth elements, preventing them from being loading aboard ships at Chinese ports, industry officials said on Thursday….
A Chinese Commerce Ministry spokesman declined on Thursday morning to discuss the country’s trade policy on rare earths….News agencies later reported that Chen Rongkai, another ministry spokesman, had denied that any embargo had been imposed.
Any publication of government regulations or other official pronouncements barring exports would allow Japan to file an immediate complaint with the World Trade Organization, alleging a violation of free trade rules. But an administrative halt to exports, by preventing the loading of rare earths on ships bound for Japan, is much harder to challenge at the W.T.O.
The United States, the European Union and Mexico brought W.T.O. complaints against China last November after it issued regulations limiting the export of yellow phosphorus and eight other industrial materials….
China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths, which sell for several hundred dollars a pound.
Dudley Kingsnorth, the executive director of the Industrial Minerals Company of Australia, a rare earth consulting company, said that several executives in the rare earths industry had already expressed worries to him about the export ban. The executives have been told that the initial ban lasts through the end of the month, and that the Chinese government will reassess then whether to extend the ban if the fishing captain still has not been released, Mr. Kingsnorth said….
Industry officials said that mainland China’s customs agency had notified companies that they were not allowed to ship to Japan any rare earth oxides, rare earth salts or pure rare earth metals, although these shipments are still allowed to go to Hong Kong, Singapore and other destinations. But no ban has been imposed on the export to Japan of semi-processed alloys that combine rare earths with other materials, the officials said. China has been trying to expand its alloy industry so as to create higher-paying jobs in mining areas, instead of exporting raw materials for initial processing.
Japan has been the main buyer of Chinese rare earths for many years, using them for a wide range of industrial purposes, like making glass for solar panels. They are also used in small steering control motors in conventional gasoline-powered cars as well as in motors that help propel hybrid cars like the Toyota Prius.
American companies now rely mostly on Japan for magnets and other components using rare earth elements, as the United States’ manufacturing capacity in the industry became uncompetitive and mostly closed over the last two decades.
The Chinese halt to exports is likely to have immediate repercussions in Washington. The House Committee on Science and Technology is scheduled on Thursday morning to review a detailed bill to subsidize the revival of the American rare earths industry. The main American rare earths mine, in Mountain Pass, Calif., closed in 2002, but efforts are under way to reopen it.
The House Armed Services Committee has scheduled a hearing on Oct. 5 to review the American military dependence on Chinese rare earth elements….
Despite the name, rare earths are actually fairly common; they are expensive and seldom mined elsewhere because the processing equipment to separate them from the ore is expensive and because rare earths almost always occur naturally in deposits mixed with radioactive thorium and uranium. Processing runs the risk of radiation leaks, — a small leak was one reason the last American mine was unable to renew its operating license and closed in 2002 — and disposing of the radioactive thorium is difficult and costly.