China Power

China’s Rare Earth Own Goal

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China Power

China’s Rare Earth Own Goal

The decision by China to restrict exports of rare earth metals looks like a diplomatic and economic mistake.

Last night I was invited to appear as a guest on CCTV’s World Insight current affairs show along with John Seaman, a research fellow with the French Institute of International Relations in Paris and Prof. Huo Deming of the China Center for Economic Research at Peking University.

The subject we were discussing was the importance of rare earth metals and particularly the ongoing debate over China’s recent moves to limit exports of these elements, which are crucial to a range of day-to-day electronic devices like cell phones and laptops as well as defence systems such as radar and missile guidance systems.

China currently supplies more than 95 percent of the world’s output of these 17 metals, despite only having about a third of the world’s reserves. This hadn’t really seemed like a big issue to most commentators until China decided to halt exports to Japan at the height of the spat in September over a detained Chinese trawler captain.

Chinese officials at the time denied that an official embargo had been put in place, although as Paul Krugman noted in a column entitled ‘Rare and Foolish’ that outraged Chinese netizens and commentators, it’s difficult to believe that dozens of Chinese exporters all simultaneously took it upon themselves to halt exports to Japan.

All of us agreed that, in principle, China does have the right to exploit its own natural resource as it sees fit, much as OPEC member nations do with oil. But there’s an important caveat. If China is, as it claims, tightening regulations and exports as it toughens up environmental standards (and the effects of the country’s extraction of these metals has had a devastating effect on the environment) then I have some sympathy for the Chinese position.

However, as former WTO judge James Bacchus has noted, China may find it difficult to defend its restraints if the US files a complaint. Bloomberg quoted Bacchus as saying last month: ‘What makes China vulnerable is the accession agreement it signed’ to join the WTO.

The Diplomat will be running an in-depth feature on the rare earth issue later this week, so I won’t go into too much detail about possible responses on the part of countries like the United States and Japan. But one point I made last night was that regardless of China’s ‘right’ to decide how it exports its own resources, it has scored a diplomatic and potentially economic own goal with its itchy diplomatic trigger finger.

By squeezing Japan so quickly and with such overwhelming force, China played into the developing narrative of its being a regional bully. One of the other panellists suggested that the exports issue is being unfairly conflated with the territorial issue by the media—that it was all just bad timing. But as I pointed out, perceptions matter, and it showed a remarkable naiveté on the part of the Chinese government if they couldn’t see this.

It also may well prove an economic tactical error. By turning to exports to pressure a major importer, China has set alarm bells ringing around the world, and governments everywhere are now scurrying to strike deals with alternative suppliers. Japan’s government and companies have already been talking with Canada, India and Kazakhstan among other countries, and a number of bills have appeared in the US Congress pressing for action to reduce US dependence on China.

Indeed, the Indian pledge to work more closely with Japan on this and other issues—made last month at a summit-level meeting between Indian Prime Minister Manmohan Singh and his Japanese counterpart Naoto Kan—must surely concern Chinese officials, who presumably won't have wanted to push China's two many regional rivals closer together.

Of course, there’s no quick solution for most nations hoping to bring their own supplies of these (actually not so rare) elements online, so in the short term at least, China’s monopoly is here to stay. But China has managed to shift an issue getting little attention outside specialist circles to one that has grabbed headlines and the attention of policymakers the world over.