Untrustworthy China vs The World

Rare Earths Row Continues to Build


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.

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.

 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.