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China Using Its Rare Earth Minerals For Eco-Political Leverage

This week China announced it is reducing the amount of rare earths it will export in 2011 by more than 10 per cent.  Since rare earth minerals (REE or REM) are vital for the manufacturing of high-tech products this has caused concern among other countries.

China supplies 97 per cent of the global production of REMs, which are needed to produce devices such as cellphones, computer drives and hybrid cars.  High-tech producing countries were alarmed when Beijing blocked shipments of REMs to Japan earlier this year citing a geopolitical debate.

China’s grip and manipulation of the supply of REMs has driven countries to look for alternative sources.  In North America, a number of companies, such as Molycorp Inc. in the U.S. and Thompson Creek Metals Co. in Canada are hurrying to open or re-open rare earth mines.  In Australia two companies are also preparing to mine rare earths. 

However, the process takes time and meanwhile China is using its grip on the supply of REMs to force them into a better competitive manufacturing position by passing export tarifs to make foreign manufacturers less competitive.  In effect, by making it more expensive to manufacture high-tech products outside China, it is making possible to supply the same products (though their quality is always questionable) cheaper in China.  That will result in distributors and retailers sourcing more of their products from China, thereby creating more jobs in China and the loss of jobs in Europe and North America. 

Wait a second, don’t we have an international trade agreement that forbids that?  Since when has any government been able to stop the Chinese from dumping excess steel production into their economies and thereby causing their local steel mills to close down?  China is still allowing knock offs to be exported, so why would we expect them to behave any differently with REMs?

As an indication of this, I point to Chinese state media earlier this month reporting that China plans to raise duties on some REMs for export beginning next year.  Furthermore, China has been reducing export quotas of rare earths over the past several years due to domestic demand.  On the other hand, a Chinese Commerce Ministry spokesman has stated that China is cutting its exploration, production and exports out of environmental concerns.

An even stronger indication of China’s eco-political motives is the fact that China has announced it is preparing to set up a REMs association that will include nearly all of China’s leading REM companies ad would help them to co-ordinate their negotiating positions.  That to me defines a cartel and international monopoly.  The announcement was posted on the Sina Corp. portal confirming that the association would be set up in May 2011.

Referring back to the whole international rules thing, the United States last week threatened to go to the World Trade Organization with its concerns over China and REMs. Last Tuesday during a regular press briefing, China Foreign Ministry spokeswoman Jiang Yu declined to answer.  What do they say about silence again?

Yet, Wen Jiabao, China’s top economic official, told a China-European Union business summit in Brussels in October that “China is not using rare earth as a bargaining chip.”  You have to hand to Wen Jiabao, it takes quite nerve to make a statement that is contrary to one’s behaviour and actually expect others to believe it.

I don’t know where this is heading, but I hope it’s not heading in the direction that it seems to be heading in.  If in fact China is playing eco-politics the ultimate result will be nationalization within other countries.  This is often the precedent for military war.  We certainly are living in interesting times.

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