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Rare Earths Row Continues to Build

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Bloomberg reported on a rather peculiar announcement from the Chinese officialdom, which comes off as a rather lame rationalization of its ban on rare earths exports.

If you are late to this cause celebre, rare earths confusingly really aren’t rare, but they are found only in fairly low concentrations and are nasty to mine. They are used in high technology products, particularly high energy density batteries. China has become the dominant provider in recent years.

As part of a heavy-handed retaliation for the detention by Japan of a trawler captain operating in disputed waters, China imposes a de facto export ban on rare earths shipments. Note that a formal ban would violate WRO rules, but China is, contrary to evidence otherwise, maintaining this is not official policy, merely a spontaneous outburst of sentiment. As Paul Krugman points out in the New York Times today:

Oh, and Chinese officials have not improved matters by insulting our intelligence, claiming that there was no official embargo. All of China’s rare earth exporters, they say — some of them foreign-owned — simultaneously decided to halt shipments because of their personal feelings toward Japan. Right.

Two aspects of the ban that don’t get the mention they warrant. First is that most US rare earth purchase go through Japan (Japan produces intermediary and finished goods using Chinese rare earths). Second, the ban is not across the board, but merely on raw materials. China is willing to sell manufactured goods with rare earths as significant content. Thus this change is also designed to try to use the rare earths near monopolies to force foreign buyers to more manufactured products from China, rather than simply raw materials.

One has to wonder whether the restriction was something China planned to do regardless, and the diplomatic dispute provided a useful cover.

The remarks reported by Bloomberg look like a clumsy effort to provide cover. I’m at a loss to understand the logic; saying nothing would have been better than this argument:

China’s medium and heavy rare earths reserves may last 15 years to 20 years at the current rate of production, possibly requiring imports, the Ministry of Commerce said today.

Domestic rare earths deposits dropped to 27 million metric tons by the end of 2009, or just 30 percent of the world’s total known reserves, from 43 million tons, or 43 percent of the world total, in 1996, Chao Ning, section chief of foreign trade at the ministry said at a Beijing conference….

“China cannot afford to continue to carry the burden of supplying the world, from a strategic, environment and economic point of view,” Chao said…

“China is not the only country that has these deposits, but it has been carrying the lion’s share of the supply in more than a decade, at the cost of quickly depleting its own resources and hurting its environment,” Chao said.

Yves here. Let’s parse this. First, the depletion argument may have some validity, but given the Middle Kingdom’s famously unreliable official statistics, one can’t put too much trust in these figures. But if the concern really were too rapid depletion, there’s a simple solution: raise prices. Second, China has also no displayed much concern for environmental degradation, although this is become a bigger issue with the public, to the extent that the officialdom now feels compelled to address it. But it seems awfully convenient that a strategically important produce was singled out for special concern.

Krugman is not sympathetic with the Chinese position, but points out the US and other advanced economies were stupid to have put themselves in the position of depending on China. He notes that Japan has started recycling rare earths; another response is to start working on designs that don’t use rare earths (short summary: it can be done, but usually involves tradeoffs, like greater size and weight of replacement component:

And even before the trawler incident, China showed itself willing to exploit that monopoly to the fullest. The United Steelworkers recently filed a complaint against Chinese trade practices, stepping in where U.S. businesses fear to tread because they fear Chinese retaliation. The union put China’s imposition of export restrictions and taxes on rare earths — restrictions that give Chinese production in a number of industries an important competitive advantage — at the top of the list.

Then came the trawler event. Chinese restrictions on rare earth exports were already in violation of agreements China made before joining the World Trade Organization. But the embargo on rare earth exports to Japan was an even more blatant violation of international trade law.

Yves here. These moves go well beyond normal trade jockeying. Many systems of law and international agreements tolerate a certain amount of minor cheating; it’s just too costly to enforce strict compliance. But there’s a thumb in the eye quality to the Chinese rare earths gambit. It isn’t clear yet how quickly China’s trade partners will regroup and reorient, and that will determine whether it is worth it for them to retaliate.

The Chinese posture on rare earths looks true to its recent form of being tactically clever where it chooses to pick a fight, but strategically foolhardy. The more China confirms suspicions that it will behave badly when opportunities arise, the less attractive a place it becomes to do business. And if China is perceived to be untrustworthy, that means that business partners will insist on tougher contract terms or devise other forms of protection.

Unless China returns to operating with more finesse, its efforts to pursue its own interests will backfire. Its policymakers seem unable to recognize that its intransigence is uniting much of the world against China.

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49 comments

  1. Rhino

    Well, I for one have stopped buying Chinese products. I think the world has to rethink its stance on China. I don’t think the country is ready to be part of the global economy. I agree with the author that the rest of the world was a bit naive, if not stupid, to bank on China so much in recent years.

      1. Koshem Bos

        Extremely difficult to do unless all you buy is food. Even with the limited shopping in my family encountering Chinese products is very high.

        1. Dave Schuler

          For practical purposes avoidance of Chinese products is impossible. Unless you grow your own food the odds that the food you eat contains Chinese ingredients is very high. If it’s colored, vitamin enriched, texture enhanced, or flavored, it probably has Chinese ingredients in it. China is the dominant producer of food additives.

          However, let’s not lose track of a basic point. “Rare earths” aren’t rare. The U. S., previously the largest producer, has all but ceased production not due to lack of availability but because of higher production costs. China is the low cost producer for two reasons: lower labor costs and environmental regulations that are, in effect, non-existent.

          A bit of economic tweaking, e.g. subsidies, quotas, or tariffs, and U. S. production would resume. That’s probably in our interest for strategic reasons.

          1. optimader

            AN effort to be aware of imported goods and minimize purchases is certainly a practically executable exercise, if not wholly possible- if desired. As being bound ot Chinenes food additives, that is the least difficult to aspect of such a personal initiative. Just avoid food in a bag or a box and at a highrst level you will be doing yourself (and all consumers) a favor.

    1. curiouslurk

      Not really easy to do that. Checking out a few PC-related things I see a Logitech mouse, a Seagate hard disk, a Hewlett-Packard flatbed scanner. Guess what: all of them are made in China. Getting down to printed circuit boards and chips the percentage of made-in-China components rises even more. Plus… inside your hard disk there are 1-2 strong rare earth magnets.

  2. guru chand

    this is nonsense. every country has the right to restrict exporting its natural resources. this is bigotry to think that usa can do it but china cannot. there is nothing like free trade on this planet. wake up! by the way, intellectual property is also a commodity and who likes to export it? usa? ha!

    1. alex

      “every country has the right to restrict exporting its natural resources”

      Standard China apologist line – China is only exercising its “sovereign rights” (which are defined as anything that’s convenient at the moment).

      Ok, then the US is only exercising its sovereign rights by imposing 40% tariffs on Chinese imports, withdrawing Chinese PNTR, or refusing to recognize any treasuries held by the PBoC.

      1. todd

        the u.s can never reject those chinese resistance.whatever views you expressed..40% tariffs etc all that,where the hell would you gonna get those products unless you’re living in a cave etc.i’d have to agree with this guy sayin’ those computers n components are made in china.refusing to recognize treasuries held by BoC would only make china hates the us so much more.and remember,they already have diversified they’re holdings to euros etc..

    1. Yves Smith Post author

      Ted,

      This post and another one from ZH tonight that was sent to me (on Wells Fargo operational procedures on putbacks) are embarrassing. They are both the sort of thing that support banks’ claims that critics are hysterical and misguided.

      On this link: we explained that servicer ratings by rating agencies mean….close to nothing. Servicers don’t issue bonds. This is a servicer rating, it means nada in terms of the overall corp bond rating (we mentioned that apropos a proposed Fitch downgrade of GMAC’s servicing ops).

      On the Wells one, ZH appears not to understand that the memo relates to Freddie/Fannie putbacks, which have been underway for some time. Chris Whalen pointed out they would be significant at least six months ago. So the general story is old hat, and the operational part by itself is a non-event.

      1. Ted K

        Yves,
        Fair enough. I’m not eager to quarrel on that, and I don’t doubt that you and Whalen are way ahead of the curve on this. But I would say on my limited knowledge on it, a ratings downgrade would still be a noteworthy event. Although maybe the market has already priced it in?? I don’t know. I also think that most people think of Metlife as an insurance company and although it might be a small piece of the overall business there, many investors might not be aware that Home Loan Servicing is part of their business.

        Anyway I can assure you my intentions were good.

  3. jbmoore

    Yes, American trade policy is dumb or worse. Chinese bullying using trade makes them look bad and heavy handed. But compared to the US, Britain, and Europe, are they any worse, or did they learn economic warfare from us? If they are as good with economic warfare as they were with psychological warfare and diplomacy during the Korean War, then the Japanese trawler/rare earths incident is just the opening salvo of a very long and intricate trade war for keeps.

    1. alex

      “But compared to the US, Britain, and Europe, are they any worse …”

      Would you care to cite some examples of how the US, Britain, and Europe are as bad? Preferably examples from within the lifetimes of most readers (and no I’m not that young).

  4. mp

    Guru Chand wrote:

    “intellectual property is also a commodity”

    Do you mean intellectual property like aerial refueling technology?

    Do you work for the Chinese trade ministry?

  5. Swedish Lex

    Despite Krugman’s criticism of U.S. outsorcing of production and, apparently, also mining, his column remains very U.S.-centric.

    China is simly pursuing its own interests which are reflected in its foreign policy actions, like them or not. No surprises there. If Krugman truly believes that the U.S. somehow could claim the world-leader-and-not-a-global-bully-moral-high-ground vs. China, he should at least understand that that view is not necessarily widely shared outside the U.S..

    1. Koshem Bos

      China, like North Korea and Russia, are bully states. Remember the speed with which the Russians imposed an oil pipeline embargo on former East Bloc countries. It is Chamberlain-like to describe China as tending to its interest. We are talking about tiny dispute over very little.

      The European and the US behaved like the TBTF banks and, the US way more than the European, developing the non-existent information industry in which 40% of the market is gambling by banks. Now we have to go back to basics.

      1. todd

        yep.as if the us is not a bully.china doesn’t share the us views and they never will.and fortunately,those guys up there doesn’t share the plight of krugman

  6. Zarathustra

    Policy makers of every country act to protect their country’s own interests, let’s face it.

    China wants to take those islands in the East China sea from Japan’s control because of the oil underneath the sea. In military terms they probably can’t win, so they play an economic card, which they are more likely to win.

    In that case, what is the difference of the motives between this embargo of rare earth and Invasion of Iraq? Let’s face it

    Also sprach Analyst

    1. alex

      “In that case, what is the difference of the motives between this embargo of rare earth and Invasion of Iraq?”

      That China, however misguidedly, hopes to gain some economic advantage? Ok, maybe I’m giving them too much credit. As for the US, I don’t buy that the US wanted to get control of Iraqi oil fields or some such. However imperialistic, at least that would have served some purpose. Instead I think it was no more than idiotic adventurism by the likes of draft dodger Cheney and his puppet W.

  7. Kevin de Bruxelles

    I would guess that the Chinese are presenting the West with a “Horns of Dilemma” and want to maintain the freedom of action to counteract either move the West makes.

    First a quote from Basil Liddell Hart’s Strategy explaining how Gen. Sherman used this concept on his March to the Sea after capturing Atlanta:

    Moreover, in this march, Sherman developed a new strategic practise. In the Atlanta campaign he had been handicapped, as he realized, by having a single geographical objective, thus simplifying the opponent’s task in trying to parry his thrusts. This limitation Sherman now ingeniously planned to avoid by placing the opponent repeatedly “on the horns of a dilemma” – the phrase he used to express his aim. He took a line of advance which kept the Confederates in doubt, first whether Macon or Augusta, and then whether Augusta or Savannah was his objective. And while Sherman had his preference, he was ready to take the alternative objective, if conditions favoured the change. The need did not arise, thanks to the uncertainty caused by his deceptive direction. My emphasis.

    With China it seems clear their strategic objective is a monopoly on manufactured goods contain rare earths. They weakly cover this real intention with two rather clever propaganda lines that are sure to gain them lots of international support. One is basically a “Peak Rare Earths” argument and the other that the evil West is pushing all their dirty work on the backs of poor third world peasants. Both of these arguments are winners in international forums.

    But that is all just presentation. In order to create the “Horns of a Dilemma” problem (a choice of two equally bad choices), China has invited the West to accept the fact that of this Chinese monopoly on rare earth manufactured products or the West must undergo all the expense and environmental issues involved to start producing these materials themselves.

    But China has to maintain strategic flexibility to combat to eventuality of the West picking door number two. So they need to keep rare earth prices down and keep the export ban as ambiguous as possible. For once the West did start taking serious steps to start their own production of rare earths, China would just quickly stop the ban on exporting and perhaps lower the price even more so as to make the West’s new mines even more uneconomical, thus breaking the moral will of the West to break out of the monopoly situation.

    I can only hope this cleverness will hurt them on a larger stage. What I’ve seen up to now is the Chinese have co-opted Western elites to such an extent that it is going to be very hard to unwind this whole Chimerica as well as the less mentioned Chiuropa mess.

    1. Glen

      Lucky for China, default US economic policy for the last thirty years has been how to trash the worlds strongest economy for a quick buck:

      Sell you knowledge to the highest bidder and your jobs to the lowest bidder.

      I’m pretty sure rare earth elements isn’t the only instance where the US sold China the rope they will use to hang us.

  8. a

    “Krugman is not sympathetic with the Chinese position, but points out the US and other advanced economies were stupid to have put themselves in the position of depending on China.”

    Let it be remembered that Krugman was a big free-trade cheerleader all during the period when the West got themselves dependent. Now he is sometimes against free trade only because we’re in a liquidity trap and economic laws are, according to PK, suspended in a liquidity trap. (Liquidity traps are to economics, apparently, what black holes are to physics.) Sure it was stupid of the West to become dependent, but was stupid back then to follow free-trade rules, when there was no liquidity-trap.

    1. kevin de bruxelles

      Tack för länken!

      I would have liked for the author to bring up Europe as well. Everyone concentrates on this being a US / Chinese standoff but in fact Europe is a bigger market for Chinese goods than the US is. So this at least is a triangular game and if we take the oil producers into account maybe even a four-way battle.

      My feeling is that the Fed is bluffing and they will not go ahead with a massive QE program.

      But what if they really are serious about this? I’m no expert on these things but I would have to think that China’s risk is hedged to some extend because the Euro would skyrocket if QE2 went ahead and since this is China’s largest export market, it would more than offset any minor adjustments the Chinese may eventually have to make to the dollar / yuan rates. Europe already has a huge trade deficit with China (although it makes up for this by having a more or less equally huge trade surplus with the rest of the world). If the Euro skyrockets then there are going to be some very serious problems on the old continent as more and more European jobs get shipped east to China.

      I hope European policy makers are aware of this danger and are taking appropriate steps to keep the Euro around or below the $1.40 mark. But this is where the oil producers come in. If the price of oil skyrockets with an eventual QE2 then Europe is going to be stuck in their own little horns of a dilemma. On the one hand if they debase the Euro they can keep jobs but only at the cost of inflation in oil and many other commodities.

      1. Swedish Lex

        Axel Oxenstierna to his son Johan, ahead of the peace negotiations in Westphalia:

        An nescis, mi fili, quantilla prudentia mundus regatur (Vet du inte, min son, med hur litet förstånd världen styrs)

        Kevin – I think that you may reading too much wisdom into what the FED is doing and is about to do. They are largely guessing and hoping that the QE II will fly and not drown us all (or at least not the Americans) in an ocean of poorly printed money.

  9. renter@heaven

    ‘Thus this change is also designed to try to use the rare earths near monopolies to force foreign buyers to more manufactured products from China, rather than simply raw materials.’
    No way – the communists in China have now figured out how to get ahead as capitalists? – by using their capital to create manufactured goods to sell, instead of providing raw materials to those capitalists who then resell the manufactured goods to the raw material supplier?

  10. John Puma

    Oh goodness, what savages!

    What next for China, starting wars with completely bogus justification merely to steal other countries’ oil and natural gas?

    That would REALLY make us Americans feel righteous in our condemnation!!!

  11. floyd

    For one thing, it’s not that easy to rise the price, unlike iron ore or bronze ore which are controled mainly by big monopoly suppliers such as Rio Tinto or Billiton (hope I got that right), The rare earth in china is a industry in nearly full competition. Without export rationing, those small suppliers would sell as much as possible with very poor profit margin, and of cause the envrionmental cost will NOT be included.

  12. Muffler

    China is not the United States or even Great Britain. The truth is they are more like the Roman empire’s approach to world affairs then the old style western view. Combines with our corporations giving the Chinese the means of industry and the west providing the markets freely as an overall means for our companies to make more money.. the end is the wholesale sellout of our economic and strategic power. All for the sake of cheap toys.

    1. emca

      China, Japan, Korea and many others have found value in selling trinkets to the natives, a.k.a the U.S. Coupled with easy-credit, which the Chinese (or others, again) didn’t invent but merely capitalized on, this has been the successful blueprint for respective national economic development.

      The bigger problem may be the idea that you can have whatever you want, when you want it, at a very low immediate cost; an overall minimum of inconvenience and effort. The notion that there are long term costs in pursuing short-sighted gains is foreign (sic) to internal propaganda deluge of conventional political/media inspired wisdom of a consumer democracy.

  13. emca

    I hesitant to state the obvious, but the ‘rare earth’ dispute is between Japan and China. The U.S. is not a party in this dispute. Whether China intends to also target the U.S. with its embargo in open to speculation, but I seriously doubt it.

    U.S. dependency on Japanese advanced electronic products is a function of decisions made long ago, of which China had no part. It may be in their interest to exploit this phenomena in an instance, but I see little gained by creating friction with a importing country already so wholly committed to (and dependent on) purchases of China’s productive capacities.

    Whether we buy possessed items from Japan or China (which will most likely be more ‘competitive’ from China) is immaterial, unless the U.S. is determined to reverse current trade imbalance with China per say.

    I doubt again this is the case.

    As to China’s current aggressive mercantile policies, well what can I say. When push comes to shove, nations will always behave within their own perceived advantage and argue details later. If the outcome is less than tenets of Free Trade, especially with heavy weights such as China with its unified apparatus of self-interest (or the U.S. with its decidedly un=unified individualized profit schematics) then the question remains – what do you in response?

  14. hjungb

    Yves, I notice that you bashed China in every post you made about China so far. Is there a prejudice here? Just curious.

    1. alex

      “China bashing” is a meaningless if inflammatory term often used by those without substantive rebuttals. How is criticizing specific policies of the Chinese government “bashing”? By that thinking, Yves and most of the people who post here are far more guilty of “America bashing”.

  15. Jim

    I’m American. I’m frustrated with the currency situation with China and also frustrated with how China is bullying Japan. However, I think it is important and healthy for the rest of the world to get the message out forth by China. TO ME the MESSAGE China is sending loud and clear.

    The message seems to be China is going to bully any country it can with its imperialistic/communistic style. Eventually China, with all its people, would bully the whole world if allowed. China wants to pilfer all the technogy it can, and the US obliges in that(with our dysfunctional political system)

    So the writing is on the wall, China has it vision for how the world should be. The western world and US has its vision. Which LIFESTYLE does the rest of the world want to live? One is Chinese repressive style? Or more of a democratic and western style?

    I think the answer is obvious and what China is doing is helping the western world(and potential allies) unite and begin makign hard choices.

    So forget trying to make China do something. They aren’t going to do anything, other than give lip service. Time for the western world to do what is in its best interest.

    1. cindy6

      Funny the Africans have been offered exactly the “democratic and western” vision and the “Chinese repressive style” to choose from. Guess which one they prefer?

      1. alex

        Which Africans are those? The average African citizen or the leaders of various corrupt and oppressive regimes? Amongst the African countries where China has the greatest investment and influence are Sudan and Zimbabwe. Closer to home, China is also “popular” in Burma.

        By no means would I defend the entire US history of involvement in Africa, but China is also far from saintly. While they do give some aid and so forth to better run countries, one of the biggest reasons for their success is their “no strings attached” approach to investment (except of course you’ve got to support the “One China” policy). Genocide in Darfur? Hey, must be a domestic issue and the People’s Republic of China will not interfere due to their respect for Sudan’s sovereignty.

        Bottom line is that saying “Africans prefer China” is hopelessly simplistic and naive.

        1. taco

          As far as I know, China is in whole of Africa…so much so that the US is having a compaign to discredit China in order to slow it down… whatever they do there.

    2. taco

      China just aint going to kowtow to US or Japan, even after American 7th fleet having numerous war games outside the shores of China just in the last few months alone, showing off its military muscles…talikng about bullying

  16. cindy6

    China bashing in this blog is getting to a silly level now. Yves, you act like Americans have a god given right to the world’s resources. Chinese rare earth are…Chinese to have. They are under no obligation to provide the US…ahem…the world with cheap resources. Luckily they do have a decent army, or they might end up like the Iraqis!

    Besides, since rare earth “are found only in fairly low concentrations and are nasty to mine”, you are demanding the Chinese to degrade their environment to provide you with cheap resources. Talk about hypocrisy!

    Yes, they have not cared much about their environment in the past, but that doesn’t forbid them the right to take care it now. So what if the Chinese have ulterior motives besides depletion and environment. It doesn’t hurt to kill several birds with one stone. It’s still their right to conserve valuable resources for future generations. If Americans don’t like it, switch to something else or reopen the Californian mine.

    1. alex

      “The term China bashing in this blog is getting to a silly level now.”

      Right, and so is “America bashing”. How dare anyone criticize specific policies of any government.

      “you act like Americans have a god given right to the world’s resources. Chinese rare earth are…Chinese to have.”

      Ok, but if China wants to impose export embargoes it should withdraw from the WTO, as the WTO requires violation of the sort of “sovereignty” you champion.

      “you are demanding the Chinese to degrade their environment”

      I don’t recall anyone here opposing having the Chinese government create and enforce stricter environmental regulations.

      1. taco

        “Ok, but if China wants to impose export embargoes it should withdraw from the WTO, as the WTO requires violation of the sort of “sovereignty” you champion.”

        As I could see, US is having quite a lot of embargo on foreign countries, on China for high tech products(for which China’s rare earth are used) and investment on “security concerns”, economic embargo on Cuba for at least 40 years,..
        May be US should leave WTO

        1. todd

          taco,you’re right.i just didn’t see any right reason sayin’ all of that crap the us being bullied by china etc while they themselves didn’t see their shortcomings

  17. Hillary

    It’s interesting to see rare earths and solar panels linked – did you know that the duty rate on solar panels increased last year (from duty free to 2.6%)? A Spanish company requested a ruling from NY Customs as part of a bid proposal for a large project that they didn’t get and Customs reclassified most solar panels because of increased technology since the last time a ruling had been requested. Theoretically the rulings are apolotical – the ruling is published at http://rulings.cbp.gov/index.asp?ru=n047162&qu=solar+panel&vw=detail. As China moves up the value chain in terms of manufacturing they’re also going to run into higher US import duty rates.

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