March 14, 2012

China and Rare Earths

Yesterday, the United States, the European Union and Japan filed a formal complaint with the World Trade Organization (WTO) challenging China’s export restrictions on rare earth metals. Rare earth metals are critical components to advanced technologies like solar voltaic cells, hybrid electric batteries, smartphones as well as some defense systems. “We want our companies building those products right here in America. But to do that, American manufacturers need to have access to rare earth materials – which China supplies,” President Obama said of the formal complaint. “Now, if China would simply let the market work on its own, we’d have no objections. But their policies currently are preventing that from happening.  And they go against the very rules that China agreed to follow.” Beijing fired back against the WTO complaint. According to The Wall Street Journal, China’s Ministry of Commerce said that the export restrictions are intended “‘to protect resources and the environment,’ not distort industry.”

The WTO complaint comes on the heels of several years of angst with respect to China’s monopoly on rare earth metals. China currently produces about 95 percent of the world’s rare earths supply, but holds only about 50 percent of global reserves. In 2010, China suspended exports of rare earth metals to Japan following a months-long diplomatic row over a territorial dispute in the East China Sea. Meanwhile, Europe is dependent on Chinese supplies. According to Reuters, “The EU directly imports 350 million euros worth of rare earths from China each year…The damage done to European manufacturing runs into billions of euros, the official said, because it was nearly impossible to diversify away from Chinese supply.”

Rare earths will continue to be a hot topic, especially within the security community. For a well-rounded understanding of the supply chain challenges and the implications for U.S. national security, Christine Parthemore’s 2011 report Elements of Security is a must read. Christine also testified before Capitol Hill in September, noting that the situations with rare earths “tend to be rather predictable, and the federal government just being more vigilant in watching for the warning signs can go a long way.” There are various ways to do this, Christine noted, including:

integrating minerals supply disruptions or embargoes into war games, supporting recycling programs, funding R&D for substitutes, and just promoting interagency information sharing can help ensure that the U.S. government minimizes the strategic importance of mineral resources and prevents other countries or companies from exerting political leverage over the United States through simple market dominance

We’ll continue to track this story as events unfold at the WTO. Experts suggest that a formal ruling is unlikely to be made until the end of the year.