An ongoing China v. Japan/US row is getting interesting, and probably not in a good way. Readers may recall that we took note of a ban on shipments of rare earths raw materials to Japan, which in many ways was also a shot across the US bow. Even though so-called rare earths are not that hard to find, they are nasty to mine, and it would take years to gear up production to replace Chinese output. Developed economies have allowed China to obtain a 93% share of this market, and many of these elements are important for production of advanced technology goods. The New York Times noted that China was trying to use this stranglehold to force its way into the production of higher-value-added end products:
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.
China had denied that a ban was underway (the New York Times had mentioned that in its initial report; they clearly didn’t buy it, and got confirmation from executives in a separate story).
The proximate cause was the detention of the captain of a fishing trawler in disputed waters; the Japanese agreed to release him, which if this was really the main bone of contention, things should be back to normal. But tensions appear to be rising rather than diffusing. As Bloomberg noted yesterday:
China and Japan continue to wrangle over islets in a gas-rich part of the East China Sea, three days after the release of a trawler captain who sparked the worst deterioration in their relations in five years.
Japan rejected China’s demand it apologize and pay compensation for the seizure of the trawler and its crew, with both nations claiming sovereignty over the uninhabited islands, known as Diaoyu in Chinese and Senkaku in Japanese. China and Japan have yet to implement an agreement signed in 2008 to jointly develop the natural gas fields.
This also occurs against a backdrop of China trying to forge stronger ties with traditional US allies in the region. For instance, even though Canberra had called China Australia’s biggest strategic threat last year, Australia participated in Chinese naval war games this week (hat tip reader Skippy).
During the eurozone crisis last May, a remarkable number of senior statesmen and respected policy makers weighted in the Financial Times, with the paper serving the odd role of a forum for posturing and floating trial balloons. The FT is a much less likely venue for that sort of thing in a Asian row, but a wee bit of that seems to be happening again. Yesterday, an FT comment from Jonathan Holslag, “China’s muscle-flexing is a sign of weakness,” noted:
Similar concerns exist about China’s economic nationalism, which feeds on a strong historical sense of vulnerability….excess capacity and reliance on foreign consumer markets impelled Beijing to strive to make its national champions truly global and to back them with an assertive trade policy.
While industrialised nations see this as unfair competition and try to straitjacket China into large regional organisations, developing countries are alarmed about Beijing’s attempts to buy and bully itself into their markets. They are determined to keep China’s champions at bay…. Central Asian countries have refused a free trade zone with China, while south-east Asian nations have demanded further concessions for a trade accord that came into force this year. China looks increasingly like a trapped giant.
In the past 30 years, the People’s Republic has mainly sought to regain its leading status in the international community by becoming a part of it. But, today, its economic model has become unsustainable: in spite of six years of bold declarations and experiments, it has got only more addicted to export-led manufacturing and investment in fixed assets. Unrest from Xinjiang to the factory halls of Shenzhen has cast a shadow over the harmonious society doctrine of Mr Wen and President Hu Jintao. Beleaguered by ambitious oligarchs on the right and a revival of communist patriotism on the left, the leadership is weakened. This reduces Mr Hu and Mr Wen’s scope for making compromises and raises the question of how the next generation of leaders will reinvent Chinese nationalism.
We have seen outbursts of assertiveness before, but this episode is the product of a bottleneck in China’s domestic transition, which, if not managed well, could lead to a return of destabilising patriotism. China flexes its muscle at a moment when other powers feel less confident about their future and are under pressure to stand strong. In such a climate, distrust could turn into a self-fulfilling prophesy, because it weakens the position of moderate leaders, stirs mutual fear of aggression and, above all, strengthens the belief that shifts in the balance of power inevitably lead to greater global rivalry.
Today, in an interview in the Financial Times, Japan’s new economics and fiscal policy minister, Banri Kaieda, said the ban was still on and Japan would look for other sources of materials:
China’s de facto ban on rare-earth exports to Japan imposed during the two countries’ diplomatic feud will propel Tokyo to seek new sources of the strategic minerals, according to Japan’s new economics and fiscal policy minister.
In an interview with the Financial Times, minister of state Banri Kaieda called on China to lift export restrictions “as soon as possible”.
Mr Kaieda added that Japan would try to develop substitutes for their use in high-tech products….
He said that Japan was willing to continue to be a major buyer of rare earths from China, which accounts for more than 90 per cent of global supply.
However, Mr Kaieda noted that Japan had been ill-prepared for what he called the “surprise attack” of Chinese export curbs.
“[It seems] there’s a need to put effort into developing substitute products,” that could play the same role as rare earths in high-tech products, he added.
Tokyo would also look to develop alternative sources of supply for rare earths, Mr Kaieda said. Such a policy could prove “effective” in helping reduce upward pressure on the exchange rate of the yen.
Yves here. The last remark is code for “we are prepared to throw a ton of money at this initiative.”
Even if China wins this round, this is an extraordinarily heavy-handed and short-sighted move. China is telling the world loud and clear that it is an unreliable partner. China is conducting this ban apparently without issuing formal regulations, which would subject it to WTO sanctions. But for it to think this action won’t lead to retaliation is naive, when political pressures abroad make China an easy target.