BRUSSELS – For more than two years, the world’s industrialized countries have been locking horns with China over the supply of rare earth elements, a critical component of many high-tech products. Now, these tensions may be reaching a breaking point, after the United States, the European Union, and Japan recently filed a complaint with the World Trade Organization against China’s export restrictions on a number of critical minerals, including rare earths. But a WTO case against, should it succeed, might be at best a Pyrrhic victory, and, at worst, a strategic blunder.
In fact, the US-EU-Japanese troika does have a case. China’s multitude of export taxes and duties has forced Western companies to pay almost twice as much as their Chinese counterparts, creating a powerful incentive for Western manufacturers to set up shop in the Middle Kingdom to gain cheaper access to these indispensable resources.
And, while China’s repeated reduction of export quotas for rare earths may not be contrary to WTO rules per se, particularly because the WTO recognizes environmental considerations as a basis for restricting supply (China’s own justification), it remains doubtful whether China’s export regime is really in line with the WTO accession protocol to which it agreed.
Nevertheless, the decision to lodge a complaint with the WTO must be questioned on three counts.
First, it endangers new mines and refineries outside of China that are being planned in the coming years – and that would help to loosen China’s iron grip on supply. Were China to open the gates and cast aside its export restrictions, effectively flooding the market with rare earths, depressed prices would ruin many mines. Such steep price drops forced America’s rare-earths phoenix, the mining corporation Molycorp, to shut down operations in 2002. No wonder its representatives discouraged any WTO action at a high-level conference organized by the EU last year.
Second, the timing of the complaint is all wrong. It might have been expedient for US President Barack Obama to take a tough stance on China on the same day as Republican primary elections, but it was counterproductive in terms of the rare earths market.
At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
After all, the market has already adapted to some extent to China’s export regime. Last year, a combination of substitution efforts, inventory drawdowns, reduced usage, and illegal Chinese exports meant that up to 8,000 tons of China’s export quotas were left unused. Having just won a WTO case against China on nine other raw materials in January, the troika seems to have rushed headlong into this case without considering current circumstances.
Third, and most importantly, the troika’s move fails to take into account the advantages of cooperating with China on rare earths. China today largely controls the entire value chain of rare earths from mine to magnet. Although this is changing, the country will continue to dominate this field for the next decade. Pushing China into a corner could force it to undertake more intractable, WTO-compliant ways to keep a lid on exports – for example, by vertically integrating Chinese producers and consumers, or by establishing long-term supply contracts. China’s rare earth sector is in the throes of a major restructuring, which could create a favorable environment for such a strategy.
The troika should have given itself more time between the successful outcome of the last raw-materials case and the initiation of a new one, allowing China to draw the necessary conclusions after losing the first case. The troika could then have pressed the flesh with China’s leaders and made an offer that they would have found difficult to refuse – including, for example, sustainable mining technologies to address the environmental costs of extraction, or the development of a certification scheme to help prevent the illegal smuggling of rare earths.
By marching off to the WTO instead, the US, the EU, and Japan have thrown caution to the wind, dismissing a rare opportunity to promote dialogue with China from a position of strength, and narrowing the strategic options to deal with the rare-earth conundrum. The troika might be in the right and yet still have it wrong.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
By choosing to side with the aggressor in the Ukraine war, President Donald Trump’s administration has effectively driven the final nail into the coffin of US global leadership. Unless Europe fills the void – first and foremost by supporting Ukraine – it faces the prospect of more chaos and conflict in the years to come.
For most of human history, economic scarcity was a constant – the condition that had to be escaped, mitigated, or rationalized. Why, then, is scarcity's opposite regarded as a problem?
asks why the absence of economic scarcity is viewed as a problem rather than a cause for celebration.
BRUSSELS – For more than two years, the world’s industrialized countries have been locking horns with China over the supply of rare earth elements, a critical component of many high-tech products. Now, these tensions may be reaching a breaking point, after the United States, the European Union, and Japan recently filed a complaint with the World Trade Organization against China’s export restrictions on a number of critical minerals, including rare earths. But a WTO case against, should it succeed, might be at best a Pyrrhic victory, and, at worst, a strategic blunder.
In fact, the US-EU-Japanese troika does have a case. China’s multitude of export taxes and duties has forced Western companies to pay almost twice as much as their Chinese counterparts, creating a powerful incentive for Western manufacturers to set up shop in the Middle Kingdom to gain cheaper access to these indispensable resources.
And, while China’s repeated reduction of export quotas for rare earths may not be contrary to WTO rules per se, particularly because the WTO recognizes environmental considerations as a basis for restricting supply (China’s own justification), it remains doubtful whether China’s export regime is really in line with the WTO accession protocol to which it agreed.
Nevertheless, the decision to lodge a complaint with the WTO must be questioned on three counts.
First, it endangers new mines and refineries outside of China that are being planned in the coming years – and that would help to loosen China’s iron grip on supply. Were China to open the gates and cast aside its export restrictions, effectively flooding the market with rare earths, depressed prices would ruin many mines. Such steep price drops forced America’s rare-earths phoenix, the mining corporation Molycorp, to shut down operations in 2002. No wonder its representatives discouraged any WTO action at a high-level conference organized by the EU last year.
Second, the timing of the complaint is all wrong. It might have been expedient for US President Barack Obama to take a tough stance on China on the same day as Republican primary elections, but it was counterproductive in terms of the rare earths market.
Winter Sale: Save 40% on a new PS subscription
At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
After all, the market has already adapted to some extent to China’s export regime. Last year, a combination of substitution efforts, inventory drawdowns, reduced usage, and illegal Chinese exports meant that up to 8,000 tons of China’s export quotas were left unused. Having just won a WTO case against China on nine other raw materials in January, the troika seems to have rushed headlong into this case without considering current circumstances.
Third, and most importantly, the troika’s move fails to take into account the advantages of cooperating with China on rare earths. China today largely controls the entire value chain of rare earths from mine to magnet. Although this is changing, the country will continue to dominate this field for the next decade. Pushing China into a corner could force it to undertake more intractable, WTO-compliant ways to keep a lid on exports – for example, by vertically integrating Chinese producers and consumers, or by establishing long-term supply contracts. China’s rare earth sector is in the throes of a major restructuring, which could create a favorable environment for such a strategy.
The troika should have given itself more time between the successful outcome of the last raw-materials case and the initiation of a new one, allowing China to draw the necessary conclusions after losing the first case. The troika could then have pressed the flesh with China’s leaders and made an offer that they would have found difficult to refuse – including, for example, sustainable mining technologies to address the environmental costs of extraction, or the development of a certification scheme to help prevent the illegal smuggling of rare earths.
By marching off to the WTO instead, the US, the EU, and Japan have thrown caution to the wind, dismissing a rare opportunity to promote dialogue with China from a position of strength, and narrowing the strategic options to deal with the rare-earth conundrum. The troika might be in the right and yet still have it wrong.