Trade tension between the United States and China is on the rise. When the United States announced it was seeking a World Trade Organization investigation into China’s clean energy export subsidies, China responded strongly. This past week, China took a bold step by delaying shipments of what are known as rare earths to the United States and much of the world including Japan and Europe. Rare earths encompass seventeen essential elements which have unique phosphorescent and magnetic qualities. They are valuable elements with extensive use in high technology and military industries. China chose to heavily invest in rare earths during the 1980’s. Deng Xioping said it would be China’s oil. Meanwhile, the United States cut production due to cheaper products available overseas and environmental concerns.
Nevertheless, the conflict’s true global depth is debatable. On the one hand, China provides 95% of the world’s rare earth materials. As such, one argument is that Chinese control over rare earths poses a national security risk to the United States. Furthermore, it could be an economic problem because rare earth demand is expected to grow by 125,000 tons as the electronics industry grows. On the other hand, this is likely a brief exercise of muscle and China’s strength in the market is arguably less pervasive. China controls only 35% of the globe’s rare earth. Recently, India and Vietnam have been expanding their capacity and are likely to shrink China’s market share by 15% in the near future. Additionally, the United States could start up production within three to five years by reopening closed mines.
Either way, concern reaches beyond the United States. Germany, a nation with a strong technology industry, is sponsoring a conference which will focus primarily on the rare earth issue. German Chancellor Angela Merkel has stated that Europe needs to increase its rare earth mining capacity. While the current tensions would be wrongly described as a trade war, it is certain that China’s economic clout is showing.
It seems odd that the U.S. and the rest of the world have been willing to rely almost exclusively on China for such an important product, when countries besides China have the capacity to supply rare earth themselves. In fact, a rare earth mine operated in Mountain Pass, California until 2002. While it was operational, the mine was causing pollution in the form of hundreds of gallons of wastewater per minute. In 2002 the U.S. realized it could obtain rare earth from China for a much cheaper price, in part because of China’s more lenient environmental enforcement. Thus, the U.S. obtained the precious commodity and was able to prevent harm to its environment, while expecting China to continue to damage its environment in order to provide cheap products. Perhaps the real problem here is that the U.S. is not willing to invest in alternative methods of procuring rare earth for itself. If Congress provided funding, for example, to companies willing to research and develop new and environmentally friendly methods of obtaining rare earth, the U.S. would not have to rely on China. It would certainly be more expensive for the U.S. to procure its own rare earth. However, if rare earth is so important, we must find an alternative to obtaining it from China.
I support Liz’s sentiments with regard to China’s stronghold on the market for rare earth elements. It is disconcerting that the world relies almost exclusively on China for these exports. The United States can and should reopen mines such as that in Mountain Pass, CA. Having at least 15% of the Earth’s known rare earth minerals within the American border should be reason enough to cease its dependence on China’s export. I am more interested to hear what Germany is going to say at G-20. German companies held their end of the bargain in China’s quid-pro-quo pressures to invest and increase investments, while China is actually stopping, reducing, or delaying exports there. Germany plans to raise alarm over this situation at the Group 20 talks, scheduled for November 11. Let’s see what everyone has to say.
While the concerns of relying solely on China have been discussed above, I don’t think it’s that clear cut of an issue for two reasons. First, as the post mentions the imbalance could be corrected fairly easily. Secondly, there is major environmental degradation associated with the extraction of these elements. While the Mountain Pass mine mentioned above was operational, it had major harmful impacts on the surrounding environment and numerous violations of environmental statutes. A viable argument could be made that it was better to get the minerals cheaper from China and protect our own environment. The situation with China has prompted Congress to respond with legislation to find and develop these resources domestically, but I would be interested to see if industry will be able to operate within the bounds of the United State’s environmental regulations or if they will be disregarded for the “security concerns.”
I hate to say it, but it appears as if the decision to cut off global rare earth shipments is win-win move for China. Among other applications, rare earths are used in hybrid cars, wind turbines, and advanced weaponry – three industries in which the country would love to expand it’s influence. What better way to establish your presence in these growing markets than to make sure you’re the only country with access to the needed supplies.
If our world operated more like an economics text book, such a move might prove disastrous. Other countries, sensing a threat to global trade, could effectively pressure China by cutting off their own exports. In a text book trade war, everyone loses. The problem in the real world, however, is that China holds a distinct upper hand should this game of chicken escalate into something more. As a net exporter, and a country with still-untapped, potentially massive demand for the products it is currently making, China is in a much better position to weather a prolonged global trade battle should one break out. Of course, the West would like China to play by rules mapped out in the text books we’ve written. Such hope may be naive. China has always taken a more calculated approach to running its economy – the free hand wears a glove – and it may just have calculated that limiting rare earth shipments makes short and long term economic sense. Sure, it may suffer a few scrapes when the inevitable trade war erupts, but it knows the wounds will run much deeper on the other side.