[WSMDiscuss] China and the Geopolitics of Rare Earths

[Sajai Jose]

https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5


<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5>
also see
https://www.project-syndicate.org/commentary/china-critical-minerals-new-geopolitics-by-sophia-kalantzakos-2020-10

How China Came to Dominate the Rare Earth IndustrySophia Kalantzakos
DOI:10.1093/oso/9780190670931.003.0005
Abstract and Keywords

Once a leader in the production and trading of rare earths, the United
States relinquished the reins to China in the 1990s. The People’s Republic
of China declared rare earths “protected and strategic materials” and
proceeded to control production and processing, introduced export quotas,
and sought to dominate the supply chain for crucial applications. It also
made investments in mines worldwide. The 2010 crisis caused a parabolic
rise in prices, leading the United States, the European Union, and Japan to
file a complaint against China at the World Trade Organization, in 2012,
and to launch trilateral cooperation workshops, starting in 2011, to
promote recycling, substitution, and innovation. China lost its WTO appeal
and removed the export quotas in May 2015. The market corrected itself, and
it may seem today that China lost an initial battle; but closer examination
indicates that it may not have lost the war.

*Keywords:*   rare earths
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=rare%20earths>
, WTO
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=WTO>,
quotas
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=quotas>
, trilateral workshops
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=trilateral%20workshops>
, magnets
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=magnets>
, recycling
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=recycling>
, substitution
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=substitution>
, innovation
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=innovation>
, mines
<https://www.universitypressscholarship.com/search?f_0=keywords&q_0=mines>

Improve the development and application of rare earth, and change the
resource advantage into economic superiority.

—CHINA’S PRESIDENT JIANG ZEMIN, 19991
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The United States was initially the leader in producing and trading rare
earths, and in finding ever advanced technological uses for them. The
discovery of rare earths at Mountain Pass, California, in 1949, had been an
important event for the US science community. Russia and the United States,
the two world superpowers, were in the process of creating a balance of
fear through the threat of nuclear weapons. To achieve this, however, both
countries needed uranium. It was a radioactive signature associated with a
mountain outcrop that led to the discovery of Mountain Pass. Prospectors
thought they had “struck” uranium, and after analyzing the materials, laid
claim to the deposit. The ore they had discovered was identified as
flourocarbonate bastnaesite, and the radioactive material was thorium (in
small amounts) with only very minor traces of uranium.2
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By
1953, the mine had come to be owned by the Molybdenum Corporation of
America, which had begun producing bastnaesite. It was initially designed
for the separation of europium, which quickly became an important element
in making color televisions.3
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Molycorp,
as it was known, also extracted lanthanum, cerium, neodymium, and
praseodymium, and scientists quickly began to (p.118) discover new uses for
these additional materials. The Molycorp mine dominated rare-earth
production and exports for the next few decades, until China began to
discover the full potential of its own resources.

New applications that required rare earths led to a growth of demand. One
such application was the use of rare earths in mischmetal (alloy of rare
earths) used extensively for the Alaskan oil pipeline. In the late
seventies, prices for the elements increased significantly in line with
inflationary pressures in the United States. Double-digit inflation after
1978 in combination with high energy prices pushed rare-earth prices
upward, in line with operational-cost increases that impacted the mining
industry.

Prices stabilized as a result of the US economic recovery. One curious
exception at the time was the price of scandium, which was mainly produced
in the Soviet Union. In 1984, the USSR ceased exports of scandium on
account of “laser research.” Its price, according to a US Geological Survey
report by James B. Hedrick, skyrocketed to $75,000 per kilogram.4
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This
anomaly ended when US production of scandium was brought online.

Other exogenous factors also impacted the rare-earth market. New
environmental legislation that reduced the lead content in gasoline
dampened the demand for the elements in petroleum fluid-cracking catalysts,
where rare earths were used extensively. The result was a sharp decline in
prices. Production in the United States was cut to offset the price
decline, which resulted in supply shortages and caused prices to rebound.
Overall, rare-earth prices were volatile in the 1980s and 1990s. They
became dependent on the type of rare-earth element that was in demand.
High-purity products, such as neodymium and dysprosium, began to see price
increases because there was a growing demand for neodymium iron boron
magnets in which the two elements were used.5
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The
next impact on rare-earth prices was caused by China’s dynamic entry into
the market.
China Realizes the Importance of Its Rare Earth Resources

Ding Daoheng, a well-known Chinese geologist, discovered a wealth of
rare-earth deposits in Bayan Obo, in inner Mongolia, in 1927.6
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A
few years (p.119) later, it was confirmed that the deposits contained
bastnaesite and monazite. The Chinese built a mine in the 1950s and began
recovering rare earths in the process of producing iron and steel.7
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In
the 1960s, China also discovered bastnaesite deposits in Weishan County,
Shandon, and in the 1980s, more basnaesite in Mianning County, Sichuan. The
recovery of rare earths, especially from Bayan Obo, became a major priority
for the Chinese, and they hired technical personnel to help develop and
advance their methods of recovery. They invested heavily in the research
and development of rare-earth technologies. Production levels increased
with growing demand. Between 1978 and 1989, China averaged an increase of
40 percent annual production, thus becoming one of the world’s largest
producers.8
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During
the 1990s, its exports grew rapidly, causing prices to plummet, a strategy
that either put competing companies out of business or drove them to
greatly curtail operations.

Bayan Obo is the world’s largest REE resource.9
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It
is estimated that the total reserve of iron in that region stands at 1.5
billion metric tons, with an average grade of 35 percent. The same deposit
is estimated to include 48 million tons of rare-earth oxides, with an
average grade of 6 percent. It contains close to one million tons of
niobium, with an average grade of .13 percent. Considered the most valuable
rare-earth production site in the world, in 2005, it accounted for 47
percent of the total rare-earth production of China, and 45 percent of that
of the world. In addition, the rare earths in Bayan Obo occur primarily in
monazite and bastnaesite, and contain very high REE content (6%) and
extremely high LREE to HREE ratios.10
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In 1990, the Chinese government declared rare earths a “protected and
strategic mineral.”11
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This
was clearly a strategic move on the part of a state that had begun to
understand the potential that the rare-earth industry had for China. Since
then, China has sought effective ways to increase centralized control over
the industry, create a higher market value for the elements, build supply
chains inside China, develop technical knowhow, and attract high-tech
companies using rare earths to manufacture final products inside the PRC.

>From the moment China declared rare earths to be a “protected strategic
material,” it meant that foreign investors could participate in rare-earth
(p.120) smelting and separation only as part of a joint venture with
Chinese firms. Foreign investors were also prohibited from mining rare
earths. Smelting and separation projects similarly required Chinese state
approval. Joint ventures, moreover, needed the approval of the Chinese
State Development and Planning Commission as well as that of the Ministry
of Commerce.12
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China First Captures the Magnet Industry

With regard to the supply chain, China sought first to capture the magnet
market—as samarium became a key ingredient for supermagnets made of
samarium cobalt. Today, magnetic technology is perhaps one of the most
important uses of rare earths both commercially and militarily. Permanent
magnets that utilize rare earths not only provide greater magnetic power,
but they also can be much smaller in size. The issue of size is critical in
applications like computers. The samarium cobalt (SmCo) magnet and the
neodymium-iron-boron (NdFeB) magnet are the two leading REE magnets on the
market. They are particularly useful for military applications such as
missile-guided systems because of their thermo-stability.13
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The neodymium-iron-boron (NdFeB) magnet was introduced in the 1980s. The
story behind the NdFeB magnet is revealing of the Chinese modus operandi
with respect to controlling the REE industry and an important indication
that China attempted to corner the market for rare earths by design. When
these magnets were created, two companies, General Motors and Hitachi,
acquired patents. GM patented the “rapidly solidified” magnets, and Hitachi
the “sintered” magnets. GM then proceeded to establish a company to produce
the magnets for its vehicles. It was named Magnequench. In 1995, two
Chinese groups14
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joined
forces with a US investment firm and attempted to acquire Magnequench. The
US government approved the acquisition after a review, and the deal was
allowed on condition that the Chinese agree to keep the company in the
United States for at least five years. The day after the deal expired, the
company shut down its US operations; employees were laid off, and the
entire business was relocated to China.

(p.121) The deal was a strategic mistake on the part of the United States,
because when the business left, so did the technology. In 1998, 90 percent
of the world’s magnet production was in the United States, Europe, and
Japan. Within a decade, the bulk of the magnet industry had moved to China.
Today, China continues to try to corner the magnet industry. Chinese
producers have turned their attention to Japanese companies, which hold the
majority of the rare-earth magnet patents when China is in fact the
producer of nearly 90 percent of the global supply. In 2014, for example,
seven Chinese rare-earth companies took Hitachi Metals to court in the
United States, claiming that after its patent expired Hitachi was creating
unfair market barriers preventing them from exporting independently and had
violated international patent law.15
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This
is another indication that China seeks to add value to its economy in line
with the “Made in China 2025” targets that the government has set in motion
to comprehensively upgrade Chinese industry. The plan as it has been
described by the State Council aims to raise domestic content of core
components and materials to 40 percent by 2020 and 70 percent by 2025. It
calls for an emphasis on green development and the use of innovation,
emphasizing quality over quantity.16
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Seeking to Buy into Other Rare Earths outside China

By the same token, China has consistently attempted to monopolize REE
resources worldwide. It ventured to acquire Molycorp and the Mountain Pass
Mine. From 1978 onward, the company was owned by Union Oil Company of
California (UNOCAL), a major American petroleum explorer and marketer. In
2005, the China National Offshore Oil Corporation (CNOOC) submitted a bid
of $18.5 billion cash to purchase UNOCAL. The Chinese company outbid
Chevron by a half-billion dollars.

The CNOOC bid raised concern in the United States about energy security and
the deal did not go through.17
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During
the heated political debate over the issue, arguments for the need to
defend national security (p.122) prevailed. James Woolsey, former director
of the Central Intelligence Agency under President Clinton, weighed in at a
hearing of the House Armed Services Committee stating emphatically, “This
is a national security issue. China is pursuing a national strategy of
domination of the energy markets and strategic dominance of the Western
Pacific.”18
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Little
attention was paid to the fact that had the deal gone through, the Chinese
would have acquired Mountain Pass as well, solidifying their monopoly over
REEs worldwide.

China also attempted, in 2009, to acquire a 51 percent stake in the Lynas
Corporation, which is in possession of the Mount Weld mine in Western
Australia, considered the richest deposit of rare earths outside China. The
Chinese company attempting the purchase, China Nonferrous Metal Mining
Company (CNMC), terminated its $505 million bid for a controlling stake in
Lynas, citing the stringent demands of Australia’s Foreign Investment
Review Board, which had stipulated that the CNMC reduce its ownership share
to below 50 percent and hold a minority of seats on Lynas’s board.19
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The
Chinese did not welcome the decision. “For a long time, China has had an
open policy when it comes to foreign companies investing here. We hope
other governments can take the same position when it comes to Chinese
firms,” Foreign Ministry spokeswoman Jiang Yu said in September 2009.20
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Once
again, had this deal materialized, the world’s dependence on China would
have been nearly complete.

The minutes from the review board meeting, on September 23, 2009, gave
voice to these strategic concerns. The sale of a controlling stake in Lynas
was considered to be against Australian national interest.21
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“We
have concluded that they would not be able to exclude the possibility that
Lynas’s production could be controlled to the detriment of non-Chinese end
users,” the minutes show. That would have been “inconsistent with the
government’s policy of maintaining Australia’s position as a reliable
supplier to all our trading partners and hence potentially contrary to
national interest.”22
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The
Jiangsu Eastern China Non-Ferrous Metals Investment Holding Co., however,
did acquire a 25 percent stake in Arafura Resources, which owns the Nolans
Bore mine in Northern Australia.23
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(p.123) Nonetheless, China continued to consolidate and strengthen its
dominance over the rare-earth industry, a strategy that progressively led
to the production of permanent magnets, oxides, and alloys moving there as
well. This relocation of production to China resulted in the United States
giving up its position as the leading researcher in the field of REEs.24
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The
erosion of technical expertise is viewed as even more serious than the
question of resumption of production in the United States, because China
dominates all the rest of the steps in the rare-earth supply chain.

Though China made efforts to strategically control its power over the REEs
and their applications, it thought that prices were too low and failed to
reflect the scarcity of the resources and the damage their extraction and
processing caused to the environment. Furthermore, in the first decade of
the twenty-first century, the PRC emphasized the goal of developing
downstream industries within the country and also promoted the goal of
high-tech manufacturing by the Chinese. These targets were reflected in the
twelfth five-year plan. Announced in May 2011, the list included such
downstream industries as magnets, phosphors, hydrogen storage materials,
and abrasive polishing materials. This twelfth five-year plan contained
ambitious targets for not only improving energy efficiency and reducing
carbon emissions, but also for investing and transforming China into the
leading producer of renewable energy. Given the Chinese decision to
diversify the country’s energy mix by including vast amounts of renewables,
rare earths have now become a key ingredient for the success of their
green-energy applications. “Rare earths are the vitamins of modern industry
and they are China’s 21st century treasure trove of new materials,”25
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Wang
Min, vice minister at the Ministry of Land and Resources said in 2011.

Even now, after the rare-earth crisis, the most recent thirteenth five-year
plan continued to build on these priorities—that is, conservation,
environmental governance, protection and restoration of ecosystems,
emissions control, the accelerated shift to renewable energy, and a further
emphasis on an innovation economy.26
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According
to the 2017 REN21 (Renewable Energy Policy Network for the 21st Century)
report, China was already the global leader for new wind power
installations in 2016. (p.124) Asia overall represented about half of the
added wind capacity. Moreover, while wind power installation expanded to
new markets globally, Europe and North America accounted for most of the
rest of installed capacity in 2016.27
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Already,
China is the global leader in the solar sector.28
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In
fact, it also now boasts the top capacity of power generation from wind as
well.29
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An
earlier report by the Chinese Renewable Energy Industries Association
(CREIA), the Chinese Wind Energy Association (CWEA), and the Global Wind
Energy Council (GWEC), clearly indicated the rapid growth of wind power
installation over the last several years in China.

The Chinese wind industry installed 16,089 MW in 2013, an increase of 3,130
MW over 2012, for annual market growth of 24%. At the end of 2013, the
cumulative installed capacity in China was 91,413 MW, an annual market
growth rate of 21%. In 2013, wind power generated 134.9TWh of electricity,
making wind the third largest power generation source in China after
thermal power and hydropower, providing 2.5% of China’s electricity. This
is less than the EU’s 8%, but an increase of 25% from 2.0% in 2012.30
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In 2016, the total installed wind-power capacity in gigawatts for China was
168.7 (GW), compared to a total of 153.7 GW for the EU and 82.1 GW for the
United States.31
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China’s
solar capacity at the end of 2016 stood at 77.4 gigawatts (GW). The new
domestic priorities of the PRC’s five-year plans for the future speak to
concerted government intervention in the rare-earth industry to build the
particular high-growth economic sector of renewables and high-tech
applications.32
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China Seeks to Add Value to Its Rare-Earth Industry: Quotas, Taxes, and the
Supply Chain

Already, in August 2009, there was a draft report from China’s Ministry of
Industry and Information Technology indicating that exports would be banned
within the next five years. This alarmed those in both military (p.125) and
commercial industries that were dependent on the Chinese. Given the
potential resource scarcity that suddenly reared its head in the
international rare-earth industry, there was renewed interest in exploring
new REE supplies in other areas of the world. A handful of Canadian mining
companies began doing just that in South Africa, Brazil, and the United
States while also moving forward with existing projects.

“There has been increased interest to look into ways to mine rare earth out
of China, especially given the protectionism China is applying to its
resources,” said Frederic Bastien, an analyst at Raymond James in answer to
a question asked by the *New York Times* in September 2009.33
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Canadian
companies looking for rare-earth resources outside China included Great
Western Minerals Group, Rare Element Resources, Avalon Rare Metals, and Neo
Material Technologies. Though the signs of China’s intentions were clear in
2008, it was in July 2010, after China drastically reduced exports and was
accused of withholding shipments to Japan over the two countries’
geopolitical dispute in September, that the surprise over the extent of the
disruption fully registered. This reaction then shook the rare earths
industry and triggered an unanticipated and exorbitant rise in REE prices
through 2011.

On July 9, 2010, Bloomberg News, for example, raised an alarm, “China, the
world’s largest rare-earths producer, cut export quotas for the minerals
needed to make hybrid cars and televisions by 72 percent for the second
half of the year, raising the possibility of a trade dispute with the U.S.”
34
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Looking
more specifically at the figures, the overall reduction of quotas of rare
earths from 2005 to 2010 were over 50 percent (see Table 4.1
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).

Table 4.1. Export Quotas 2005–2010a

Year

Tons of Rare Earth Oxides

Annual change

2005

65,580

–

2006

61,070

−6.9%

2007

59,643

−2.3%

2008

49,990

−16.2%

2009

48,155

−3.7%

2010

30,259

−37.2%

aSOURCE: USGS

The abrupt reduction in the allowed quotas of REEs from China also
accelerated changes by the entire chain of the REE industry and gave rise
to concerns that had political implications encompassing issues of national
security.

In 2011, exploration projects continued to multiply, as did investment and
interest in rare-earth projects. According to the US Geological Survey,35
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in
2012, economic assessments were ongoing in North America at Bear Lodge in
Wyoming; Diamond Creek in Idaho; Elk Creek in Nebraska; Hoidas Lake in
Saskatchewan, Canada; Kipawa in Quebec, Canada; Lemhi Pass (p.126) in
Idaho-Montana; and Nechalacho (Thor Lake) in Northwest Territories, Canada.
In other locations globally, economic assessments took place at Dubbo
Zirconia in New South Wales, Australia; Kangankunde in Malawi; Mount Weld
in Western Australia, Australia; Nolans Project in Northern Territory,
Australia; and Steenkampskraal in Western Cape, South Africa.36
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The three quota systems that China implemented vis-à-vis the rare-earth
industry included the production quota issued from 2006 by the Ministry of
Land and Resources, the smelting and separating quota issued by the
Ministry of Industry and Information Technology that went into effect in
2010, and the export quota issued by the Ministry of Commerce. The latter
was removed in 2015 in compliance with the WTO ruling (see below in section
China and the WTO).
Quotas, Allocations, and Their Repercussions across the Board

On December 27, 2011, the Chinese Ministry of Commerce announced its first
set of rare-earth export quotas for 2012. This first round of quotas was
set at 24,904 tons.37
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The
Ministry issued separate quota allocations for light rare earths and
medium/heavy rare-earth products. For the first time, rare-earth companies
were separated into two groups, one made up of those with confirmed
allocations and the second group with provisional (p.127) allocations. The
criterion for being placed in the first group was being able to demonstrate
progress toward implementing new pollution control regulations. Those with
provisional quotas would receive them only if they met various requirements
by July 2012. Failure to do so would mean that their quotas would be
reallocated to compliant companies. The quota of 24,904 tons of rare earths
announced by the government was revised in May 17, 2012 to 25,150 tons and
represented 80 percent of the allocations for 2012. This was an indication
that the total for 2012 would be only slightly higher than the 2011 quotas,
which had stood at approximately 30,996 tons. It is worth underscoring that
87.5 percent of the 2012 quota was made up by light rare earths, which are
the most abundant elements and considerably lower in price.

“On December 27, 2012, the Foreign Trade Division of the Chinese Ministry
of Commerce (MOFCOM) announced the first round of allocations of rare-earth
export quotas for 2013. A total of 15,499 t of export quotas was allocated
in this first round, comprising 13,561 t of light rare-earth (LRE) products
and 1,938 t of medium/heavy rare-earth (M/HRE) products.”38
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This
was the second time that the allocations had been broken into the
categories of light and medium/heavy rare earths. The first round of
announced quotas for 2013 was considerably smaller than that of 2012 but
the final allocation ended up being approximately 30,999 tons. One
interpretation of this was that China would adjust its final quota in a way
that would maintain stable price levels and control over the global supply.
Moreover, in 2014, the proportion of M/HRE to total allocations was 11.8
percent. This compares to 11.7 percent for 2013 and 12.5 percent for 2012,
the first year that the quotas were split in this way.

Furthermore, discussions were underway for the initiation of a
central-government policy to attract processing plants to China, creating a
more profitable downstream processing sector by reaping added value and by
gaining technological expertise in the process. Consolidation,39
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moreover,
became a critical goal in order for the Chinese government to restrict
rare-earth mining operations to state-owned enterprises. The Baotou Mine
has been the center of the consolidation scheme, and the plan was for
Baotou Steel40
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to
have exclusive rights to mine in the region. At the (p.128) time, *China
Daily* wrote that the central government has been planning to reduce
rare-earth mines from 123 to fewer than 10; and processing firms, from 73
to 20.41
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In
the most recent announcements, of 2015, it was reported by the Xinhua News
Agency that China’s natural resource ministry had declared that “plans
consolidating the rare industry into six firms have been approved . . . The
plans involve miners and processors in the industry consolidating under six
firms—China Aluminum Corporation, Xiamen Tungsten Co Ltd, Inner Mongolia
BaoTou Steel Union Co Ltd, China Minmetals Corporation, Ganzhou Rare Earth
Group Co Ltd and Guangdong Rare Earth Industrial Group Co Ltd.”42
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-454>

The first batch of mining quota announced for 2016 was a combined 52,500
metric tons of rare earths of which medium/heavy rare-earth minerals
amounted to 8,950 metric tons.43
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The
six Chinese companies that are owned by the state produced 99.9 percent of
China’s rare-earth production quota for the first half of 2016 according to
the Ministry of Industry and Information Technology.44
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Five of these Chinese companies are listed and have produced 74 percent of
the production quota for the first half of 2016. While their market value
is estimated at approximately US $23.4 billion, this number does not
accurately reflect the market value for the rare-earth industry because
these companies do not produce rare earths exclusively but other materials
and products as well (such as steel and aluminum). Moreover, the value of
the other ten global rare-earth companies combined stood at $409 million.
Given that both Molycorp and the Great Western Minerals Group have now gone
bankrupt, this estimate should be readjusted downward. Lynas, which
continues to operate, had a market cap of $145.6 million in October 2016.45
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-457>
Arafura,
the second mine in Australia in which the Chinese have a large stake had a
market cap of approximately $25.1 million, also in October 2016.46
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-458>

These figures may not seem significant enough to warrant such focus on rare
earths. Nonetheless, the companies for which rare earths are indispensable,
such as Apple and Samsung, boast a market capitalization of $614.6 billion
and $216.2 billion respectively. Even Xiaomi, the Chinese smartphone
producer, is now estimated to be worth $50 billion.47
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-459>

(p.129) China’s plans for the rare-earth industry also included the
implementation of a unified pricing mechanism. This action was aimed at
cracking down on illegal mining and at stabilizing the market. China began
requiring separator companies to produce documentation that they were
buying legal feed. Illegal feeds48
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-460>
may
be bought at much lower prices, but companies with high standing in China
would not risk their positions and would only dare to buy rare earths
legally.49
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Finally,
China is said to have created a large stockpile of strategic reserves in
the north of the country.50
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More
specifically, on August 5, 2014, Bloomberg reported that China had in fact
“bought 10,000 metric tons of rare earths” for its stockpile.51
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According
to Peng Bo, an analyst at China Merchants Securities, whom Bloomberg
quotes, “China is facing imminent pressure to abolish the export quota, so
stockpiling is part of the policy reaction to help prop up prices and keep
more of the resources at home for future use.”52
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According
to Huan Chen, an analyst at Beijing Antaike Information Development Co.,
the government bought the rare earths at higher-than-market prices and are
holding onto them in anticipation of increases in internal demand from
domestic industry in the future.53
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-465>

In 2012, Mark A. Smith, then the CEO of Molycorp, made some interesting
observations on his blog about the 2012 REE quota announcement by the
Chinese. In his view,

China’s consolidation of its rare earth separations companies enables it to
exercise much tighter control on what ultimately gets produced, consumed
internally and exported . . . and allows for more effective control of what
it considers “illegal” production. All this points to future constraints on
global rare earth supply out of China.54
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He also underscored the fact that, by withholding quotas to twenty
companies until they complied with the new environmental regulations, China
demonstrated its seriousness about cleaning up the environment. He did,
however, add that the new requirements would increase production costs in
China while also putting “pressure on China’s ability to increase its own
production in line with increasing rare earth demand in China.”55
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-467>

(p.130) Additionally, Mark Smith pointed out that the novelty of the
announcement lay in the way the Chinese government categorized REEs into
“light” versus “medium/heavy” for purposes of the split in export quotas.
This was particularly interesting since, if an REE changes category from
light to medium/heavy, it means that it will be in smaller supply, given
that quotas in the heavy category were always lower.

Smith used didymium, which is a combination of neodymium and praseodymium,
and itself a critical element in the production of high-powered, permanent
rare-earth magnets, to illustrate the point. If didymium were to be placed
in the new middle/heavy category with tighter quotas, it could result in
supply constraints. According to Smith, “Processors in northern China will
use their heavies export quotas for didymium exports, while processors in
the South will not have enough heavy quotas and will need to seek to
purchase those from the North.”56
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Finally,
he indicated that supplies of terbium and dysprosium would be tight.
Because of these developments, Molycorp, according to Mark Smith, would be
focusing on substitution in downstream technologies that rely less on these
scarcer rare earths. For companies such as Molycorp those higher prices
initially provided space in which to grow and to look for ways to remain
competitive in the rare-earth industry while China turned its attention
inward. What initially looked like a hopeful scenario has today been proven
an illusion inasmuch as Molycorp has gone bankrupt.

China’s goals in mapping out this strategic approach to its rare-earth
industry can be viewed as twofold, with the underlying aim of adding value
to this important resource. First, it can be argued that China sought to
ensure that it could service its domestic REE needs and Chinese consumers
at prices lower than those exported. Second, that it also aimed to continue
to provide access to international companies that would move and maintain
their manufacturing facilities in China. These companies would be required
to pay more than Chinese consumers, but prices would still be lower for
them than for the rest of the world. With such focused domestic priorities,
international consumers would need to find other sources for purchasing
rare earths.57
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(p.131) In 2011, prices for rare earths went through a correction. From
2012 and the beginning of 2013, there has been a period of market
fluctuation following the initial period of alarm. Reasons for this include
the economic downturn, the promise of new projects, and the continued high
smuggling rates of rare earths from China. Nonetheless, prices remain
substantially higher than they were before the crisis and China began
adjusting its output to stabilize them.

The issue of price volatility was immediately addressed by industry
leaders. In 2011, the Lynas CEO at the time, Nicholas Curtis, spoke at the
company’s general meeting in Australia saying that the 2010–2011 price
explosion for rare earths had given rise to extraordinary media attention.
The high prices, he conceded, helped to create investor interest in the
sector. Nonetheless, he had to admit that these prices could not have been
sustained by the industry. He went on to explain the correction, its
aftereffects, and the industry’s prospects.

Since August 2011 there has been a substantial retracement in Rare Earths
prices and a consequent readjustment of equity market valuations in line
with a much more sober global economic outlook. We believe this price
retracement is healthy for the industry. Prices are still very satisfactory
but much more sustainable for our customers. Our job is to grow the overall
market for Rare Earths. This is difficult at unreasonably high prices. In
fact, earlier in the year a number of upstream industrial recycling
processes were implemented and this has led to a one-time reduction in
demand for Rare Earths. However, with these process changes now in place,
the industry is now poised for renewed growth in demand and we are
committed to growing with our customers by providing Rare Earths at prices
that are sustainable for both customers and suppliers alike.58
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-470>

Figures 4.1
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, 4.2
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and 4.3
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show
the price fluctuation of a number of rare earths and rare earth oxides.

[image: How China Came to Dominate the Rare Earth Industry]

Figure 4.1 Price changes of select rare earth oxides 2008–2016

SOURCE: Rare Earths Prices, January 31, 2008–January 31, 2016, via
Bloomberg LP, accessed September 28, 2016

[image: How China Came to Dominate the Rare Earth Industry]

Figure 4.2 Price changes of select rare earth oxides 2008–2016

SOURCE: Rare Earths Prices, January 31, 2008–January 31, 2016, via
Bloomberg LP, accessed September 28, 2016

[image: How China Came to Dominate the Rare Earth Industry]

Figure 4.3 Price changes for neodymium oxide and neodymium 2008–2016

SOURCE: Rare Earths Prices, January 31, 2008–January 31, 2016, via
Bloomberg LP, accessed September 28, 2016

The steep price hikes gave both industry and the government59
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much
cause for concern, especially given the numerous reports that (p.132)
(p.133) raised alarms for at least five of the elements that were vital for
clean-energy applications—dysprosium, neodymium, terbium, europium, and
yttrium.60
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These
five elements are used in magnets for wind turbines and electric vehicles,
as well as phosphors, in energy-efficient lighting.

China attempted to address international concerns. While conceding that
prices had significantly increased, a white paper published by the
government in 2012 argued that there had been, for many years, a “severe
divergence between price and value.”61
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It
stood by its assertion that it was time for China to protect its reserves
and enforce strict environmental regulations for extraction and processing.
The World Reacts to the Realization of the Growing Scarcity of REEs

It took an aggressive move on the part of the Chinese for the international
community and world industry to fully grasp what dependence on one supplier
of rare earths might mean in the high-tech race. As Cindy Hurst (p.134) put
it, “The world was seemingly asleep as China grew to become a goliath in
the rare-earth industry. It took the rest of the world nearly 20 years to
suddenly wake up to the realization that the future of high technology
could be in the hands of this one supplier.”62
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One
might find particularly surprising the extent to which the world seemed to
have been unprepared for these developments and unable to see their stark
dependency. In hindsight, closer scrutiny of Chinese policies should have
made China’s intentions and goals more readily apparent.

In the initial critical period in 2010, the United States, the EU, and
Japan—all primarily dependent on accessible and affordable rare-earth
supplies—joined efforts to address the situation. Each of these industrial
powers designed and implemented a number of internal domestic strategies
and policies to respond and adjust to the challenges caused by the supply
disruption and the realization of China’s inordinate market power. Two
significant initiatives, however, stood out from the rest. First, the US,
the EU and Japan filed a complaint against China with the WTO; second, they
began joint collaborations through a series of trilateral workshops63
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to
work on substitution, diversification, conservation, reuse, and recycling
as a way to lessen their dependence on Chinese rare earths.

Both initiatives, however, were undertaken with considerable delay. The
first of three trilateral workshops took place one year after the crisis
had erupted, starting in October 2011. The case against China at the WTO
was filed in 2012, almost two years after the height of the crisis. The
case brought against China with the WTO raises questions about the timing,
intent, and efficacy of the complaint itself, when it is a well-known fact
that WTO disputes require from one to three years to be settled. Why did
the United States, the EU, and Japan resort to tools of economic statecraft
so long after the fact? In 2012, when the affected parties decided on this
plan of action, prices had already dropped significantly from their
all-time high in 2011. Dysprosium oxide, for example, which had reached
$1,903/kilogram64
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in
July 2011 was being sold for approximately $627/kilogram in February 2012,
and even for less than $400/kilogram by December 2012.65
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What
kind of message did the big industrial powers intend to send China by
proceeding in unison and with such fanfare if the problem was (p.135)
short-lived?
As expected, the WTO case produced a final verdict in 2014, four years
after the beginning of the crisis. It was only on May 1, 2015 that China
eliminated the controversial export duties to comply with the verdict.66
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Ahead
of that date, in April 2015, the Ministry of Finance announced a resource
tax on rare earths based on “sales value instead of production quantity.”67
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Accordingly,
taxes on light rare earths were set at “11.5%, 9.5%, and 7.5%, respectively
in Inner Mongolia Autonomous Region, Sichuan Province, and Shandong
Province, while for medium and heavy rare earths it is generally set at
27%.”68
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Before taking a closer look at the most prominent, but delayed initiatives
taken against China by the United States, the EU, and Japan, it might be
helpful to give an overview of how each of these major industrial actors
responded internally vis-à-vis the rare earths crunch. They clearly chose
from a predictable array of options that were at their disposal attempting
to weather the storm, vocalize their dissent, and develop a level of
resilience. Looking back more closely, however, it becomes apparent that
many of the initiatives either fizzled out or never came to pass. Part of
this can be explained by the different regulatory traditions that impacted
the focus of their strategies vis-à-vis the formulation of a critical
minerals policy. Nonetheless, this shortsightedness may seem all the more
perplexing since all three powers remain particularly dependent on rare
earths for their high-tech, defense, and green applications.

Europe’s twenty-first-century ambition, for instance, has been to complete
its transformation into a knowledge society, an innovation society, and an
inclusive low-carbon economy. To achieve these objectives, Europe has
identified specific targets for diversifying its energy mix with renewables
and has increasingly invested in new green technologies. These goals have
been in line with a political decision to lead the fight against climate
change through international cooperation and to exchange best technological
solutions and best practices, as well as to champion the development of
legally binding agreements.

These objectives have allowed Europe to deliver a new paradigm for growth
in a zone that has seen its economy contract since the 2008 global economic
downturn and the prolonged debt crisis that has ensued. The (p.136) “green
economy” has provided Europe with an area for new growth that is also
aligned with the desires of its citizens for climate action. Manuel
Barroso, the president of the EU Commission in 2010 had argued, “The crisis
wiped out years of economic and social progress and exposed structural
weaknesses in Europe’s economy. In the meantime, the world is moving fast
and long-term challenges—globalization, pressure on resources,
ageing—intensify. The EU must now take charge of its future. We need a
strategy to help us come out stronger from the crisis and turn the EU into
a smart, sustainable and inclusive economy delivering high levels of
employment, productivity and social cohesion.”69
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To achieve this vision and develop its high-tech sector, however, Europe
has had to increasingly rely on imports of many critical raw materials.
Sustained availability of these minerals and metals is critical for its
economy, and when the rare-earth crisis erupted, this issue became a
pronounced concern. In the words of Antonio Tajani, commissioner for
industry and entrepreneurship in 2011, “Without assured access to critical
materials, the deployment of European cutting-edge technologies will not be
possible. European companies need to have a secure, affordable and
undistorted access to raw materials. This is essential for industrial
competitiveness, innovation and jobs in Europe.”70
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European output of metallic minerals has been low, making Europe
particularly vulnerable to disruptions and increasingly reliant on a global
matrix of supply chains. According to the EU Critical Raw Material Report
of 2014, Germany’s contribution to the global critical raw materials supply
was 1 percent, while for France and Italy the contribution was 0 percent.71
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Already
in 1975, the European Economic Community (EEC), as it was then called, had
begun to address the need for uninterrupted access to important materials
and it had drafted a raw materials report. This report pointed out the many
vulnerabilities, such as insufficient diversification of supply, political
instability in supplier countries, and insufficient knowledge of the
current and future outlook of material usage. The report put forward a
series of policy suggestions, including propositions meant to tackle
bottlenecks and price volatility through long-term contracts, stockpiles,
and international agreements.

(p.137) The shock of the rare-earth crisis made these vulnerabilities
particularly apparent. These minerals were critical inputs for the
realization of Europe’s energy-technology policy launched in 2008. The
SET-plan (Strategic Energy Technology Plan), as it is known, was designed
to help accelerate knowledge development and technology transfer and
uptake, maintain EU industrial leadership on low-carbon energy
technologies, foster science for transforming energy technologies to
achieve the 2020 Energy and Climate Change goals, and contribute to the
worldwide transition to a low-carbon economy by 2050.72
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The SET-Plan is meant to work in tandem with the European Industrial
Initiatives (EIIs)73
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to
quickly develop key energy technologies at a European level. The European
Energy Research Alliance (EERA) has sought to align R & D activities across
Europe to the priorities of the SET-Plan and to establish a
joint-programming framework across the continent. The SET-Plan, with an
estimated budget of approximately €71.5 billion,74
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provides
the framework from which Europe’s 2030 climate and energy policy goals are
to be realized.75
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These
goals reflect the EU’s intention to reduce greenhouse-gas emissions by 80
to 95 percent below 1990 levels by 2050.

With so much at stake, the EU first responded to the rare-earth crisis
through the EU Raw Materials Initiative in 2010. The report was intended to
help industry prepare for all eventualities by identifying the most
critical materials having a high economic importance, yet also increasingly
facing potential supply risks. Rare earths were prominent on the list.76
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This
was not the only initiative, however. It was coupled with the launch of a
“rare earths diplomatic offensive”77
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to
restore access to these valuable minerals. Germany was the most vocal of
European countries, speaking up repeatedly about the shortage of these
critical elements. Germany raised the issue at the G20 talks in October
2010.78
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Although
not publicly released, a letter to the G20 was written by a broad coalition
of businesses from North America, Europe and Asia underlining the
repercussions of potential rare-earth shortages and asking that China not
impose further restrictions on their export.79
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In
fall 2010, both the EU and the WTO had stated that they were addressing
Germany’s concern over Chinese restrictions on rare-earth exports. The EU,
furthermore, had that same year (p.138) weighed the possibility of taking
legal action against China’s policy. In the end, however, it chose to join
the United States and Japan in filing the joint complaint with the WTO in
2012.

Andrea Maresi, the press officer to Antonio Tajani, the EU industry
commissioner at the time, reported that Europe had begun to stockpile rare
earths, in order “to better profit from the material that we have in the
EU.” Maresi added, “We are trying to improve our sourcing and reduce our
dependence on China.”80
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Later,
in November 2011, he stated that “European companies need to have a secure,
affordable and undistorted access to raw materials. This is essential for
industrial competitiveness, innovation and jobs in Europe. Today’s report
(i.e.: on critical raw materials 2010) highlights that we are on the right
track with our raw materials strategy.”81
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In fact, following the commission’s report on critical materials in 2010,
the Joint Research Center82
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scientists
found that five metals essential for manufacturing low-carbon technologies
were at risk of serious shortages. The JRC scientists produced a list of
recommended actions that would allow the SET-Plan to move forward smoothly
to deploy and develop low-carbon applications.83
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The
metals identified were neodymium, dysprosium, indium, tellurium, and
gallium. The recommendations in the JRC report included reuse, recycling,
and, whenever possible, substitution with less critical materials,
alternative technologies, and increasing Europe’s primary production by
opening new or dormant mines.84
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In October 2010, Germany’s economy minister, Rainer Bruederle, reiterated,
“The most important domestic source of raw materials is more recycling. We
need to utilize the valuable potential of our own residual waste.”85
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At
present, Germany has the highest commitment to a low-carbon economy of the
EU industrial nations. Germany imports raw materials worth about 80 billion
euros each year. Recycling is being widely talked about and discussed,
especially among industrial nations that are wary of rare-earth shortages.
But such a tactic faces many challenges, both technological and in terms of
cost-efficiency. If prices are high, then recycling becomes a financially
attractive alternative. If prices are low, the cost of recycling is
prohibitive. Nonetheless, recycling figures remain very low, (p.139) and
that is why the issue continues to be a top EU priority. Germany, for
example, recycles only 1 percent of its natural resources. If that
percentage were to rise to 10 percent in the next five years “that would be
a very good achievement,” said Harald Elsner, a senior geologist at the
Federal Institute for Geosciences and Natural Resources.86
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Taking a further proactive approach to the crisis, the German government
signed an agreement with Kazakhstan, on February 7, 2012, to form a
“partnership in the raw materials, industrial and technological spheres,”
focusing on rare earths.87
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The
drive to secure uninterrupted access to rare earths in response to price
hikes has led countries like Germany to look for opportunities to invest in
prospecting, in the acquisition of mining rights, in the construction of
processing plants and to extend credit guarantees. These agreements for
“priority access” were accompanied by technology-transfer arrangements that
are vital for developing countries like Kazakhstan. This particular
agreement, furthermore, represented a public-private partnership endeavor
for the Germans. When industry initiated the negotiations with twelve of
Germany’s largest industrial concerns, forming the Alliance for Raw
Material Supply Security, the government stepped in to assist. Economic
relations between the two countries have been growing in recent years.
Today, Kazakhstan is Germany’s third largest crude-oil supplier. Agreements
totaling approximately $4 billion came after Germany had also signed an
agreement with Mongolia, another nation with untapped rare-earth reserves.
Clearly, Germany has taken a leadership role within the EU to avoid China’s
restrictions hampering its own economic and industrial objectives.88
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As Manuel Barroso pointed out, in 2010, when he described how Europe was
planning to proceed to fulfill the Union’s strategic objectives in the
aftermath of the economic crisis plaguing its members, “The crisis is a
wake-up call, the moment where we recognize that “business as usual” would
consign us to a gradual decline, to the second rank of the new global
order. This is Europe’s moment of truth. It is the time to be bold and
ambitious.”89
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The
emphasis on mineral diplomacy, efficiency in production, and
waste-management policies and initiatives reflected the new thinking that
has entered the equation since the rare earths crisis.

(p.140) Sustainability is a key goal in Europe’s vision in the
Anthropocene, and it means more than just diversifying its energy mix. It
also marks a transition to an innovative knowledge-based, low-carbon
economy that supports the EU’s growth strategy. It means job creation
heralded by politicians as a win-win proposition for the Union. “Solar,
wind and biomass technologies have progressed most rapidly . . . Europe’s
renewable energy sector added 320,000 jobs between 2005 and 2009 . . . In
all, the employment potential from developing the renewable energy sector
is estimated at three million jobs by 2020 [and] . . . in Germany alone,
employment in the renewable energy sector is forecast to rise from 400,000
today to 600,000 by 2020,”90
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said
Connie Hedegaard (former EU Commissioner) in 2012. According to the 2016
renewable energy and jobs review published by International Renewable
Energy Agency (IRENA), the total number of green jobs across the EU was
estimated at 1.17 million in 2014.91
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According
to the same review, the wind industry accounted for the majority of these
jobs, with Germany, the United Kingdom, Denmark, Sweden, Greece, and
Austria making the most significant contributions in this area.
Uninterrupted access to critical minerals is, therefore, essential if the
EU is to continue to achieve these goals.

The rare-earth crisis, therefore, prompted a long overdue examination of
how to weather supply disruptions of valuable materials for its economy,
especially given its transition to a low-carbon future. The 2014 EU Report
on Critical Raw Materials indicated that China was in fact the most
influential country in terms of the supply of the twenty most critical
minerals. Included on this list of imports from China are antimony (87%),
coking coal (51%), fluorspar (56%), gallium (69%), germanium (59%), indium
(58%), magnesite (69%), magnesium (86%), natural graphite (69%), phosphate
rock (38%), (heavy) REEs (87%), silicon metal (56%), and tungsten (85%).

The continent’s resource poverty in the past was offset by expansion and
colonialism, which ensured the acquisition of vital materials. Today,
Europe relies on international trade. The EU’s initial consensual style of
looking for the most effective means of addressing the rare earths crisis
has not been strong enough, however, because it has left more practical
(p.141) matters and new exploratory projects to its member states.
Seemingly, the prevailing attitude is that industry is largely responsible
for ensuring access to raw materials and for finding solutions to
supply-chain vulnerabilities. In fact, the most recent Report on Critical
Raw Materials for the EU,92
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gives
evidence that the few national strategies of member states that were
included, in large part, reflected this notion of industry and individual
member state responsibility.

France (2010), Finland (2010), Germany (2010), the Netherlands (2011), the
United Kingdom (2012), and Sweden (2010) were among the countries that
produced reports on their raw material strategies. Sweden and Finland, for
example, aimed at strengthening their mining positions and incorporating
sustainability into the management of their resources. The others focused
mainly on resource risk strategies; the United Kingdom emphasized “a
framework for business action to address resource risk,” something that
Germany also underscored. The EU has mainly focused on providing the
regulatory framework to help avoid bottlenecks, level the playing field,
and help to maintain fair market conditions.

Throughout this period, Europe tried to maintain a balance in its
relationship with China. The PRC provides a strong export market for
Europe’s goods, invests in Europe, and holds significant amounts of
European debt. Unlike the United States, as we shall soon see, though
Europe desires to maintain a powerful say on the global playing field,
engaging actively in how the world works, it is not positioning itself as
the rival power to China. Furthermore, in the case of the EU, the question
of access to rare earths has not been so strongly linked to the
vulnerabilities in the defense industry; instead, the emphasis has been on
high-tech and renewable applications overall.93
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Nonetheless,
if the crisis once again becomes as intense as it was in 2010 and 2011,
Europe will not have set up an effective centralized plan that is
sufficient to disentangle itself and its industries from China’s powerful
hold on rare earths.

When it became clear, in 2009, that the supply or rare earths would begin
to be problematic, Japan, a major importer of rare earths, began to take
steps to prevent shortages in their industries. Yukio Edano, Japan’s trade
minister in 2012 said, “It is important that the consuming countries
(p.142) and supplying countries . . . develop a global supply chain so that
we are not dependent on one source, . . . If we cannot access these
resources, it will slow the transition to renewables. This is not
acceptable.”94
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While
Japan’s imports from China were particularly high it was believed—and
strongly alleged by China—that perhaps up to a fifth of the REEs entering
Japan came from a black market network95
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that
had been thriving in China.

The Japanese government was thus forced into action because of the resource
crunch and complicated geopolitical tensions. As a highly industrialized
economy, Japan’s different product supply chains are spread all over the
world. This fragmentation, characteristic of the global industrial economy,
in combination with its own resource poverty and an increasingly tense
geopolitical environment, put Japan in an extremely vulnerable position.
This is why, even though Japan’s industries are expected to address and
manage supply disruptions and ensure uninterrupted access to vital inputs,
the state also takes an active role by working with businesses to help
offset adverse impacts on the supply chain from regional rivalries.

Japan’s REE industry is intrinsically linked to China. Forty percent of
China’s REE exports go to Japan, in comparison with 18 percent to the
United States. Japan, which boasts an exceptional high-tech industrial
base, uses REEs in polishing (20%), metal alloys (18%), magnets (14%), and
catalysts (12%). In 2011, 82% of its REEs originated from China.96
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During the escalation of the rare earths crisis, Japan’s strategy included
increased support for mining development in foreign countries and
infrastructure development in surrounding areas. Japan also promoted active
technology transfer and environmental conservation. Although Japan has been
energetic in the area of urban recycling of metals from compact
electronics, such as cell phones and digital cameras because of their
significant rare-earth content, it understands the limited viability of
this effort when rare-earth prices are low. “Recycling can’t be implemented
immediately as it takes time for it to be a viable business. But there is
no doubt it has to be done,” said Naohiro Niimura, a partner at Tokyo-based
research and consulting firm Market Risk Advisory Co.97
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(p.143) Given Japan’s acute supply vulnerabilities, in February 2004 the
government integrated two agencies, Japan National Oil Corporation (JNOC)
and Metallic Minerals Exploration Financing Agency of Japan (MMAJ) to
establish the Japan Oil, Gas and Metals National Corporation (JOGMEC). It
assumed its predecessors’ respective roles as independent administrative
institutions in order to secure a stable supply of oil and natural gas and
of nonferrous metal and mineral resources. JOGMEC manages Japan’s
stockpiles of petroleum and liquid petroleum gas. It also manages the
country’s national stockpiles of rare metals to ensure stable economic
conditions. In addition, JOGMEC periodically reviews Japan’s commodities in
reserve and stockpiles rare metals to ensure stable economic conditions;
rare-earth elements have been designated as meriting close observation.98
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JOGMEC has agreed to partner with India to more actively explore for new
rare-earth resources and to establish a processing facility. This includes
exploration of seabed minerals, which constitutes a new high-tech frontier
for mining. The model by which Japan pursues these kinds of partnerships is
by backing the endeavors of Japanese firms in these regions. India and
Japan have embarked on a larger strategic partnership, in addition to their
September 2014 agreement, on the commercial contract between Indian Rare
Earths Limited and Toyota Tsusho Corporation for the exploration and
production of rare earths.99
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Japanese
firms are particularly interested in the raw stage of rare earths, so they
seek mining projects outside China in which to invest. Examples of such
projects include the collaboration between Sumitomo Corporation and
Kazakhstan’s National Mining Company—Kazatomprom—which have formed a joint
venture to produce LREEs. Toyota Tsusho and Sojitz partnered with Vietnam’s
Dong Pao project to produce LREEs.

JOGMEC also invested in the Lynas Corporation of Australia100
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in
2011. Specifically, Sojitz Corporation and JOGMEC provided a total of
US$250 million101
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-513>—through
loans and equity—to receive over a period of ten years 8,500 tons of
rare-earth products for Japan. The Foreign Investment Review Board in
Australia approved the investment in April of 2011. Japan’s proactive
investment has helped to keep Lynas operational. (p.144) The mine, one of
only two significant rare-earth mines outside of China, has faced many
challenges in trying to stay afloat since the rare-earth crisis. Its
counterpart in the United States, Molycorp, has already gone bankrupt.

Japan clearly recognizes the geostrategic implications the rare-earth
crisis signifies given its growing and increasingly heated rivalry with
China especially because of how it has itself been impacted. This is why
its strategy reflects a sense of urgency as it seeks concrete and practical
ways of weathering another possible crisis and shortage. Relying on
imports, Japan’s primary focus is to ensure that it does not become
dependent on one supplier, and especially not China. Its emphasis, as we
have seen, has been on research, recycling, and substitution as responses
to the problem, in addition to seeking investments in other viable foreign
projects. These endeavors have produced some positive results for Japan.
Since the rare-earth crisis, Japan has been able to somewhat increase its
rare-earth imports from other sources, but its imports of rare earths from
China have also increased. According to figures from the Japanese Finance
Ministry, (see Figure 4.4
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-chapter-5-figureGroup-9>),
in 2008 Japan imported 31,097 tons of rare earths from China representing
approximately 91 percent of its imports. In 2010, it imported 23,311 tons,
which represented 81.6 percent of its imports. By 2014, Chinese imports
stood at 13,303 tons, representing 59.6 percent of its imports. Still, the
imports from China were significantly up from 9,084 tons in 2013. Increases
in supply from elsewhere helped offset Japan’s dependency, but the 2014
increase of rare earths coming from China indicates that though the overall
percentage may be lower, imports from China are again growing, as are the
total imports of rare earths into Japan. Earlier, low overall imports of
rare earths may have been attributable to the recession, the illegal feed
of rare earths coming into Japan, stockpiling during the crisis, and also
technological improvements in substitution and efficiency. The data also
indicates that breaking away from China’s stranglehold will not be an easy
task in the future.102
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[image: How China Came to Dominate the Rare Earth Industry]

Figure 4.4 Japanese rare earth imports from China and worldwide

SOURCE: Trade Statistics of Japan, Ministry of Finance

In the United States reactions to the perceived rare-earth crisis took
place at many levels, but mainly within the context of the growing
geopolitical rivalry between the two powers and their economies. The
climate (p.145) at the time was riddled with alarmist and bold statements
over Chinese intentions. According to Clyde Prestowitz, former US trade
negotiator,

The mantra in the US ever since the late 1990s has been that globalization
will make everybody rich. By being rich, they will all become democratic.
By being democratic, they will all be peaceful. Well, globalization is
working in a somewhat different way. China is getting rich and India is
getting rich. But China’s not getting democratic. We’ve seen in the recent
case of China embargoing the export of rare earths that it’s a kind of a
mercantilist economy. The economy is being run for strategic purposes in
ways that we didn’t anticipate.103
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Similarly, then US Representative Ed Markey stated, “I am troubled by this
recent turn of events and concerned that the world’s reliance on Chinese
rare-earth materials, in combination with China’s apparent (p.146) willingness
to use this reliance for leverage in wider international affairs, poses a
potential threat to American economic and national security interests.”104
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Nonetheless, during the rare-earth crisis, the United States, like the EU
and Japan, kept its responses within a limited range of options. US
disquiet was first expressed at a high level in 2010 during Secretary
Clinton’s seven-nation tour of the Asia-Pacific region in November 2010.
Clinton discussed the United States’ growing apprehension over Chinese
restrictions of rare-earth exports with her Australian counterpart Kevin
Rudd and also with Japanese foreign minister Seiji Maehara. She described
the rare-earth crisis as a “wake up call” for the United States and its
allies to diversify their sourcing.105
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The United States joined the other industrial nations in seeking solutions
to resource scarcity, emphasizing the need for research, development, and
education in rare earths to help facilitate investment in domestic
production facilities and to promote international collaboration in the
field.106
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The
difference between Europe, Japan, and the United States, however, was that
the United States has considerable rare-earth reserves in its territory and
could therefore underscore the possibilities of developing its own
resources instead of actively seeking mining opportunities abroad.

Moreover, and in line with the United States’ tradition of innovation,
researchers in private and public industries have been pursuing the
development of alternative solutions.107
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In
spring 2010, the US Government Accountability Office108
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submitted
a report to the Committees of the Armed Services and the Senate and House
of Representatives on rare earths used in the defense industry and its
supply chain. The fact that rare earths became associated with matters of
defense added a level of urgency to dealing with the crisis and piqued the
interest of legislators in Washington.109
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Through
the report, it became abundantly clear that rare-earth materials must go
through a number of processing stages before they can be used in an
application. Because the US Department of Defense uses rare earths in
critical defense systems, the report mapped out the steps needed to mine
and produce rare earths, showing that the process is long and arduous, time
consuming, and capital intensive. It became evident (p.147) that the
production of rare earths could not effectively be established overnight.110
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Following the flurry of reports and the alarm over resource scarcity and
its impact on defense and security, a number of legislative bills were
introduced in Congress. Congressional gridlock, however, ensured that none
of them were ever voted into law. On March 13, 2012, Senator Lisa Murkowski
(R-AK), in her keynote address at the Technology and Rare Earth Metals
(TREM) Center’s 12th Annual Conference, highlighted both the urgency of the
situation, congressional efforts, and the frustration that she, too, had
experienced having introduced the Critical Minerals Policy Act.

Minerals are the building blocks of our nation’s economy. From rare earths
to molybdenum, we rely on minerals for everything from the smallest
computer chips to the tallest skyscrapers. Minerals make it possible for us
to innovate and invent—and in the process they shape our daily lives, our
standard of living, and our ability to prosper . . .

There is no question that a stable and affordable supply of minerals is
critical to America’s future competitiveness. And yet—despite that—our
mineral-related capabilities have been slipping for decades. Rare earths
garner most of the headlines, but we are 100 percent dependent on foreign
sources for 17 other minerals and more than 50 percent dependent on foreign
sources for some 25 more. For years, the government has been content to
report on those facts—without doing much to change them.111
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Murkowski, along with nineteen bipartisan cosponsors, had introduced the
Critical Minerals Policy Act (S. 1113) in 2011. According to Murkowski’s
statements during the conference, “The Senate Energy and Natural Resources
Committee still has not allowed the bill to be marked up, in part due to
misperceptions about its permitting and resource assessment provisions.”

The Senator went on to say that while the problem had drawn the attention
of legislators, none of the bills introduced at the time had even come
(p.148) close to becoming the law of the land. “In the Senate alone,
twenty-four different Senators—nearly a quarter of those serving—are
supporting legislation to address some aspect of this problem . . . So far,
those efforts have fallen victim to the new normal in Congress: they’ve
gone nowhere. Not one bill on this topic has been reported from a Senate
committee—even when the votes are likely there to do so.” The following is
a list of legislative initiatives that drew attention but did not become
law, highlighting the inconsistency between declared objectives and the
realities on the ground.


   -

   • On March 17, 2010, the RESTART Act (H.R. 4866) was introduced by
   Representative Mike Coffman (R-CO) regarding the stockpiling of rare earths
   and the establishment of rare earths production facilities in the United
   States. According to the 2011 Department of Energy report on critical
   materials,112
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the
   goal of this bill was to “reestablish a competitive domestic RE minerals
   production industry; a domestic RE processing, refining, purification and
   metals production industry; a domestic RE metals alloying industry and a
   domestic RE-based magnet production industry and supply chain in the
   Defense Logistics Agency of DOD.” No further legislative action has been
   taken since November 28, 2011. In effect, this bill, too, “died” by being
   referred to committee.113
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   -

   • In the Senate, the Rare Earths Supply Technology and Resources
   Transformation Act of 2010 (S.3521) was introduced by Senator Murkowski.
   The Senator herself pointed out that this piece of legislature has gone
   nowhere.114
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   -

   • In September 2010, the House of Representatives passed H.R. 6160, a
   bill that directed the Department of Energy to support new rare-earth
   technology through public- and private-sector collaboration and
   coordination with the European Union. The same bill called for loan
   guarantees for rare-earth-related investment. The bill was introduced to
   the House by Representative Kathleen Dahlkemper (D-PA). The bill died
   because it was never passed by the Senate.115
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    (p.149)
   -

   • On March 8, 2011, Representative Brad Miller (D-NC) introduced
   H.R.952, Energy Critical Elements Renewal Act of 2011, to develop a rare
   earths material program, to amend the National Materials and Mineral
   Policy, Research and Development Act of 1980, and other purposes.116
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The
   bill was never enacted.

The rare-earth crisis may have died out in the news, but individual members
of Congress keep trying to draw attention to the inability of the US to
devise a long-term solution. From the point of view of the legislative
process, nothing has come of these efforts except an indication that the
particular problem has not been resolved satisfactorily. In 2014, Steve
Stockman of the House of Representatives introduced Bill HR 4883 that
sought to establish a “Thorium-Bearing Rare Earth Refinery Cooperative as a
federal charter to provide for the domestic processing of thorium-bearing
rare-earth concentrates as residual unprocessed and unrefined ores.” The
bill further required the “Cooperative’s Board to establish a refinery and
a Thorium Storage, Energy, and Industrial Products Corporation to develop
uses and markets for thorium, including energy.” It also “directed the
Secretary of Defense (DOD) to coordinate with other federal agencies to
advance and protect domestic rare-earth mining, the refining of rare-earth
elements, basic rare-earth metals production, and the development and
commercialization of thorium.” The bill went on to mandate that “beginning
in January 2020, all purchased or procured weapon systems to contain only
U.S. or North Atlantic Treaty Organization (NATO) member nation produced
and sourced rare-earth materials, metals, magnets, parts, and components.”
It also called for the prohibition of “any rare earth materials that
originate or pass through a non-NATO member nation and barred any waivers
from being granted unless the lead contractor can demonstrate that it has
pursued all possible corrective actions, including direct investment into
the supply chain.”117
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The
bill would need to pass by both the House and Senate in identical form to
then be signed by the president to become law. It was never enacted.

The list of legislative initiatives included H.R.761 National Strategic
Minerals Production Act of 2013 that was received, read twice, and
(p.150) referred
to the Committee on Energy and Natural Resources.118
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It
too was never passed by the Senate. H.R 1937: National Strategic and
Critical Minerals Production Act of 2015 passed the House on October 22,
2015, but was never passed by the Senate.119
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Moreover,
the White House issued a statement in which it expressed the
administration’s opposition to the bill arguing that while it “strongly
supports the development of rare earth elements and other critical
minerals, [it] rejects the notion that their development is incompatible
with existing safeguards regarding uses of public lands, environmental
protection, and public involvement in agency decision-making.”120
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In
summary, repeated attempts at legislative action to respond to United
States’ dependence on rare-earth imports from China have yet to produce any
concrete results.

In searching for the appropriate domestic response to the crisis, the
Department of Energy put together a report for the development of a
Critical Materials Strategy in 2010. The main objectives were threefold.
First, to mitigate supply risk, the United States would need to diversify
its global supply chains. Second, it would have to develop both material
and technology substitutes. Third, it would need to promote recycling,
reuse, and efficiency of use in order to lower dependence on critical
materials. Although the report included other critical materials as well,
it was prompted by the rare-earth crisis. The Department of Energy updated
its report, publishing its Critical Materials Strategy in December 2011
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.121
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In
the strategy itself, it became clear that the department was particularly
concerned about how rare-earth shortages could impact clean-energy
technologies. There was acknowledgment throughout the report that while
demand for critical materials had increased over a decade, there were
factors that had prevented the supply from catching up. Capital
constraints, long lead times, trade policies, the complexities of
coproduction and byproduction, as well as the market’s lack of transparency
and size, were contributing factors to its lack of efficiency.

In any event, and as David Sandolow, assistant secretary for policy and
international affairs at the Department of Energy, underscored, on March
17, 2010, at the Technology and Rare Earth Metals Conference in Washington
DC, “Supply constraints aren’t static. Strategies for addressing
(p.151) shortages
of strategic resources are available, if we act wisely. We can invest in
additional sources of supply. We can develop substitutes. We can re-use
materials and find ways to use them more efficiently. We can consider use
of stockpiles and strategic reserves.”122
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Domestically, the United States once again turned its attention and focus
toward research and innovation, which is why it also decided to fund an
Energy Innovation Hub that could produce solutions to domestic shortages of
critical materials such as rare earths should these ever occur again.123
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The
Critical Materials Institute limits its focus to “research and development
efforts leading to technologies that can diversify the sources of critical
materials; provide substitutes for materials that are in short supply; or
improve the utilization of existing resources through enhanced efficiency
in manufacturing and improved recycling . . . We measure our progress by
the advancement of the relevant technologies, and our success by the
adoption of our technologies by the commercial sector.”124
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Correspondingly, although there was considerable hand-waving at the
Department of Defense very little progress in addressing possible shortages
has materialized. The United States created the first National Defense
Stockpile in 1939. The stockpile was meant for use during situations of
national emergency, and the goal was to maintain and manage strategic and
critical materials for just such an eventuality.125
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According
to the “Reconfiguration of the National Defense Stockpile (NDS) Report to
Congress” (2009),126
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the
Department of Defense determined that its stockpile was in excess of its
needs. Congress authorized disposing of more than 99 percent of the
stockpile’s material and earmarked the money from the sales for various
defense programs, primarily military health and retirement benefits. The
stockpile did not contain rare earths, and revenue from the sales amounting
to more than $5.9 billion between 1993 and 2005 have also been used as a
tool to strengthen relations with countries with which the United States
was seeking to build relationships.127
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In its 2008 report, the Department of Defense defined what “criticality”
means for its mission. “The “criticality” of a material is a function of
its importance in DOD applications, the extent to which DOD actions are
required to shape and sustain the market, and the impact and likelihood of
supply (p.152) disruption.”128
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In
a report to Congress, in April 2012, entitled “Rare Earth Elements in
National Defense: Background, Oversight Issues, and Options for Congress,”
Valerie Bailey Grasso, a specialist in defense acquisition, proposed that
“Congress could require a strategic rare earth elements stockpile.
Stockpiles might possibly increase the security of the domestic U.S. supply
for rare earths.”129
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In
its 2013 Strategic and Critical Materials Report on Stockpile Requirements,
the Department of Defense recommended stockpiling $120.43 million of HREEs.
The Strategic Materials Advisory Council went one step further to urge the
Department of Defense to “create and nurture a U.S. based rare earth supply
chain.”130
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According
to the US Geological Survey report of 2016, the United States did not
stockpile rare earths.131
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In February 2016, the US Government Accountability Office submitted a
report to congressional committees about rare-earth materials. It found
that six years after the crisis, the Department of Defense had not yet
developed a “comprehensive approach for ensuring a sufficient supply of
rare earths for national security needs—one that can establish criticality,
assess supply risks, and identify mitigating actions—[that] would better
position DOD (Department of Defense) to help ensure continued functionality
in weapon system components should a disruption occur, even though supply
disruptions in rare earths have not occurred over the last several years.”
132
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Furthermore,
and according to the same report, the Department of Defense had not reached
an agreement on what in fact “constitutes ‘critical’ rare earths. While
various organizations’ definitions of critical may be similar, DOD has
identified 15 of the 17 rare earths as critical over the last 5 years.”133
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The Obama Administration was slow to respond as well. Two years after the
crisis and just three days after announcing the decision to take China to
the WTO, President Obama, acting in his capacity as Commander in Chief of
the Armed Forces, went on to sign an executive order on resources
preparedness. The order included a substantial section on the expansion of
productive capacity and of supply, and it called for loans, loan
guarantees, subsidies, and more. There was a particular focus on critical
and strategic minerals.

*Sec*. *306*. *Strategic and Critical Materials*. The Secretary of Defense,
and the Secretary of the Interior in consultation with the Secretary
(p.153) of Defense as the National Defense Stockpile Manager, are each
delegated the authority of the President under section 303(a)(1)(B) of the
Act, 50 U.S.C. App. 2093(a)(1)(B), to encourage the exploration,
development, and mining of strategic and critical materials and other
materials.

*Sec*. *307*. *Substitutes*. The head of each agency engaged in procurement
for the national defense is delegated the authority of the President under
section 303(g) of the Act, 50 U.S.C. App. 2093(g), to make provision for
the development of substitutes for strategic and critical materials,
critical components, critical technology items, and other resources to aid
the national defense.134
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After the initial crisis erupted, analysts tried to explain the timing of
these decisions. Many attributed them to tensions with Iran that could
potentially lead to an all-out conflict, and this was seen as a way for the
administration to put China on notice. Others interpreted the decision as a
tacit acknowledgement that the US military was in fact vulnerable to
China’s monopoly of rare earths, including its control of the supply chain.

That same month, the US government moved even more aggressively with two
targeted decisions with economic repercussions. The United States, on March
21, 2012, ruled to add a customs tax on China’s solar panels. The decision
followed a long investigation into Chinese state subsidization of the solar
industry, which had brought prices down by approximately 30 percent since
the PRC began to move robustly into their manufacture. In 2011, the United
States imported $3.1 billion in solar panels from the Chinese. The United
States’ taxation of Chinese solar companies would be determined by the
level of subsidy thought to have been given by the PRC government. Examples
of the tax levels imposed were a 2.9 percent tax on China Suntech; whereas
Changzhou Tina was taxed at 4.73 percent. Other companies were taxed at
3.61 percent. The EU followed suit with more modest taxation. These
consecutive actions were aimed at putting pressure on China to desist from
trying to control the renewables industry in which both the EU and the
United States had a growing stake.

(p.154) The Chinese side, of course, did not remain silent as US reactions
escalated. Chinese companies argued that the United States also offers
subsidization for its companies. The Chinese government counteracted US
actions by declaring that it would launch its own investigation into the
United States’ renewable energy practices. In retaliation, the PRC decided
to tax polysilicon, the main ingredient in solar production, which the
United States exports to China.135
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These vocal and forceful initiatives, undertaken by the United States
within a single month, were meant to signal two things. First, they fired a
number of warning shots to encourage the Chinese government to curtail or
rethink its strategic designs at not only an economic but also a
geostrategic level. It also reflected a growing US interest in having a
role in the production and deployment of renewables. President Obama made
that plain in his State of the Union Address in 2013
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when
he declared, “As long as countries like China keep going all in on clean
energy, so must we.”136
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Having accepted that the United States was lagging behind in the
green-growth race in which China was investing heavily, the Obama
administration turned its attention to deploying these technologies. In
point of fact, however, as much as rare earths have figured into policy
discussions and the geostrategic conversation, securing unobstructed access
to these materials was largely left to the industries themselves, in the
same manner that both the EU and Japan had largely done as well.

In the end, two government initiatives stood out as the most solid and
targeted responses to the rare-earth crisis. The first was the trilateral
cooperation between the United States, the EU, and Japan, and the second
was the filing of the case against China at the WTO. Both garnered much
attention and publicity, but a closer examination will reveal their limited
scope and effectiveness.
Trilateral Cooperation

When Japan, the EU, and the United States joined forces to find mutually
beneficial solutions to the rare-earth crisis, they were attempting to
address (p.155) a number of wider problems. Clean-energy options required a
large quantity of rare earths and other less common materials. These
materials were supplied by a potential rival and as markets continued to
grow, supplies could become even tighter and costs more prohibitive. These
facts, then, raised the following questions: How could the EU, Japan, and
the United States find new or enhanced recycling technologies to increase
the available supplies of rare earths? Is substitution possible, and are
there alternate device designs that might perform as efficiently at a
comparable cost? How can changes in design and technological innovation
impact the amount of rare earths necessary to give the optimal result of an
application?

The first workshop was organized by the European Commission, the US
Department of Energy, and the Japanese Ministry of Economy Trade and
Industry, as well as the New Energy and Industrial Technology Development
Organization. It was held in Washington, on October 4 and 5, 2011. The main
issues addressed were the policy and strategic implications of shortages,
and these were followed by two parallel technical workshops. One workshop
explored techniques of extraction, separation, and processing in a
sustainable manner, and the other focused on efficient uses and
substitutes. These themes carried into the second, third, and fourth
conferences, held in Tokyo in 2012, Brussels in 2013, and at the Ames
Laboratory in the United States in September 2014, respectively.

The dialogue that the trilateral workshops initiated facilitated the
exchange of best practices and common approaches to potential shortages of
critical metals. In the beginning, they drew considerable media and
government attention, but since the end of the rare-earth crisis, they seem
to have faded to the background.
China and the WTO

China became a member of the WTO in December 11, 2001. This was thought of
as an historic event. China’s population size, its rapidly expanding
economy and its one-party system in which the state maintained a
significant role vis-à-vis resource allocation – all made it a formidable
rising (p.156) international power.. The fear of other WTO members was
whether or not China’s economy would blend in with theirs, which were
primarily market oriented. As noted by economist Robert Lawrence,137
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when
China joined the organization, there were worries that it “would not
participate constructively in the WTO. It would throw its weight around,
try quickly to obtain disproportionate influence and use its influence to
fundamentally change the WTO system. China was also seen as a potentially
powerful addition to the ranks of developing countries, and many in the
developed world worried that it would seek to limit the obligations
required of developing countries.” The logic that prevailed, however, was
that it would be far better to have China engaged in the operations of the
world system through its participation in international organizations than
to have it remain isolated at the edges of that system, where it could
threaten and challenge international order and stability as the other
actors understood those to be.

For China, too, the process of accession held significance.138
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Accession
had never been straightforward because there were many voices in China that
opposed such an opening of the economy. Membership was a complex
commitment, and China’s internal debate reflected considerable hesitation.
There were those who argued that China (ever since it began opening its
economy to the world) had been relying rather heavily on foreign
investment, and that it was now time for it to develop the national
domestic economy. The contagion of the 1997 Asian financial crisis seemed
to strengthen these anxieties. Nonetheless, China “needed the rules-based
WTO system to secure rights to market access for exports and rights against
protectionist measures of its trading partners, as it was moving to the
very center of the globalization process. And the WTO needed China as a
full and committed member to be a truly global and effective system.”139
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Ultimately, after internal bargaining at the highest Chinese levels, it was
decided that it would be best to proceed by opening a number of economic
sectors to competition and to carry out economic reform, especially in the
public and banking sectors. The time had come for China to reciprocate if
Chinese exports were to more substantially compete in the markets of
(p.157) many of its trading partners. The high-tech revolution of the 1990s
was another contributing factor to China’s decision because it could not
afford to miss participating in these technological developments. Finally,
China’s entry into the WTO would allow it to partake in the workings of the
organization and help shape its future without having to depend on
revisions for most-favored-nation status.

For all these reasons, both sides, understandably, had their own
apprehensions at the time of accession. China’s inclusion could have caused
disruption and an unprecedented trade surge. But mostly there was fear that
China would enter the WTO and then proceed to disrupt its workings by
ignoring its rules. How could the others be sure of China’s commitment? The
United States and the EU had the greatest concerns, but they took the risk
and undertook the monitoring of China’s behavior and compliance through
task forces and by using two important institutional mechanisms: the Trade
Policy Review Mechanism and the Dispute Settlement Body. They had also
requested that prior to membership, China should first accede to a protocol
under which the PRC would commit itself to wider non-WTO obligations.140
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As Mike Moore, the WTO director general, observed at the conclusion of the
meeting of the Working Party on China’s Accession, which took place in
Doha, “International economic cooperation has brought about this defining
moment in the history of the multilateral trading system . . . With China’s
membership, the WTO will take a major step towards becoming a truly world
organization. The near-universal acceptance of its rules-based system will
serve a pivotal role in underpinning global economic cooperation.”

Since China’s accession to the WTO, many have written about the subsequent
experience of those years and on China’s performance as a member. The
general consensus seems to be that China’s participation has been positive
for overall trade. During the first few years, the PRC moved conservatively
inside the WTO system, perhaps to better understand it and get its
bearings, but it gradually became more active in the workings of the
organization and of the Dispute Settlement Body system as well. The Dispute
Settlement Mechanism of the WTO is rules oriented. The (p.158) settlement
of disputes is done through a set of enforced rules previously agreed on by
both parties. Given that the disputes are brought by states against other
states, this system provides a number of benefits that induce acceptance
and a willingness to settle.141
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China’s
initial reluctance to participate in the Dispute Settlement Body mechanism
may have reflected a suspicion of normative constraints and even an
aversion to multilateral adjudication.142
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Nonetheless,
China has complied with tariff-reduction commitments in a timely fashion.143
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Since those early years, moreover, China has increasingly made use of the
mechanism for settling disputes, many of them between the PRC and the
United States. This in the minds of some indicates that these initial
disputes could be foreshadowing possible trade wars. Specifically, from
2007 and 2012, the United States brought thirteen WTO cases against China,
and China brought seven against the United States.144
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In
the end, there will always be some critics who offer a consistent critique
of China’s “maximizing its interests through minimal involvement abroad.”145
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This
critique comes mostly from those who view China as a larger threat because
of its growing economic, political, and military strength.

On March 13, 2012, the United States, the EU, and Japan chose to act in
unison by simultaneously filing complaints with the WTO demanding
consultations with China over its restrictions on the export of rare
earths, tungsten, and molybdenum.146
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The
three powers alleged that China’s actions were not in line with WTO
provisions. The actions they listed were:

The imposition of export duties; The imposition of export quotas, and other
quantitative restrictions; The imposition of other restrictions such as the
right to export based on licenses, prior export experience, minimum capital
requirement, and {other conditions that appear to treat foreign invested
entities differently from domestic entities}; The maintenance of minimum
export prices, through the examination and approval of contracts and
offered prices, and through the administration and collection of the export
duties, {in a manner that is not uniform, impartial, reasonable or
transparent}; (p.159) The imposition and administration of restrictions
through unpublished measures.147
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European Union trade commissioner Karel De Gucht said that China’s
restrictions on rare earths “hurt our producers and consumers in the EU and
across the world, including manufacturers of pioneering hi-tech and ‘green’
business applications.”148
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In
its response, China insisted that it was cutting rare-earth mining because
of environmental concerns. “Regarding rare earth management, we have a very
clear idea and direction, which is environmental protection and the
long-term sustainable use of resources.”149
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The complaint against China was subject to divergent interpretations.
Professor Yufan Hao of the University of Macau, in 2012, for example,
during an interview for the National Bureau of Asian Research said,

The basis for the three complainants’ case is the WTO’s support for free
trade, and that the three parties think that China’s export restrictions on
rare earths are against WTO rules. However, many people in China feel that
this case is quite ironic. These countries never complained to the WTO
about China previously dumping underpriced rare earth product, as they did
with China’s export of low-priced steel and textiles. They urged China to
sell them rare earths at a very low price, and denounced rare earth export
restrictions from a liberal economic viewpoint. And at the same time, these
three groups are also very reluctant to sell China high-tech products, not
to mention arms, which are produced using rare earths.150
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Others raised questions about China’s defense strategy. Jane Nakano, a
fellow in the Energy and National Security Program at the Center for
Strategic and International Studies, had the following concerns:

China’s dominance of the global rare earth supply has come at a great cost,
with serious environmental issues. But many consumer countries feel that
China will have to provide a much more satisfactory (p.160) answer as to
why the export quota has been declining while the production quota has been
increasing. Also, it’s one thing to have the overall level of export quotas
unchanged, but it would be quite another to allow exports—in a sufficient
amount—of the types of rare earth materials that consumers want.151
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The EU, the United States, and Japan took their complaint to the WTO in
accordance with their wider policies of seeking to find solutions with
China through an institutionalized, cooperative, rules-based framework to
which all parties have subscribed. It was also their way of not merely
settling a trade dispute but also using a tool of economic statecraft to
challenge the Chinese position.

This became particularly clear when President Obama himself stepped into
the Rose Garden to announce to the world that the three allies had taken
action. Obama, with much fanfare, was responding to China, not just to a
material shortage of rare earths. His announcement was tailored to both an
international and a domestic audience. As the US president faced criticism
on an economy still in recession, Obama’s words were greeted partially as a
predictable political maneuver to emphasize the government’s concern with
job creation in the United States. In the Rose Garden and under the guise
of the rare earths dispute, the president could defend American interests,
promote renewables as a response to climate change, and put China on
notice, all in one fell swoop. On an international level, he indicated that
the United States would continue to defend fair-trade practices, protect
its dominant position both in the high-tech and in the green-tech
industries, and champion a system of international rules and norms.
Accordingly, President Obama underlined that American manufacturers needed
unobstructed access to rare earths in order to produce high-tech products
such as advanced batteries and that by curtailing exports, China was not
allowing them to do so. This, he stated, went against WTO regulations.
“Being able to manufacture advanced batteries and hybrid cars in America is
too important for us to stand by and do nothing. We’ve got to take control
of our energy future, and we can’t let that energy industry take root in
some other country because they were (p.161) allowed to break the rules . .
. We are going to make sure that this isn’t a country that’s just known for
what we consume.”152
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The president, the most vocal of all three actors in the dispute, strove to
ensure that the clean-energy agenda that his administration had been
pushing would have the materials necessary for production. Reliable and
affordable access to rare earths was essential to achieving this aim. The
steep rise in prices following the 2010 crisis and the fear that exports
could be further restricted in the future raised concerns in
green-technology companies in the United States because rare earths were
essential elements in their industry.

It had not been the first time China had interfered with the supply of
critical materials. On the contrary, it had restricted raw-material exports
before. In 2009 the United States, the EU, and Mexico launched a WTO case
challenging China’s right to restrict bauxite, coke, magnesium, manganese,
and zinc exports, again forcing prices to rise.153
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On
January 30, 2012, a WTO panel ruled that China was in fact in violation of
WTO regulations.154
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The
panel asserted that the restrictions led to price inflation outside China
and gave domestic Chinese firms unfair advantage. The ruling encouraged the
United States, Japan, and the EU to submit a similar case about rare earths
on March 13, 2012.

Immediately following the ruling on bauxite, coke, magnesium, manganese,
and zinc, Vivian Pang, an analyst with the Asian Metal consultancy in
Beijing, said, “It is still too early to say what the impact will be [on
rare earths], but I can’t see it having a big impact on prices—the main
issue will still be supply and demand.”155
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According
to industry analysts at the time, the widely held belief was that China
would most likely not increase its production capacity because its priority
was to control the environmental repercussions due to lax oversight in
mining and separation and in order to maintain high prices of their
strategic elements. The use of the environmental defense at the WTO was, in
fact, grounds for limiting exports, so China needed to demonstrate the
health and environmental implications of REE mining, and to show how the
reduction of production had in fact helped to cut pollution and improve
public health. China had also to convince the WTO that it applies its
policies equally to foreign and domestic companies.

(p.162) According to Dr. Si Jinsong,156
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at
the time the second secretary of the Economics Affairs Office at the
Embassy of China in Washington DC, who spoke at the TREM 12 Conference on
March 14, 2012, China would continue to supply the global market with rare
earths. It would also develop its policies and effectively manage its
resources in line with WTO regulations. The PRC, according to Dr. Jinsong,
would strengthen its international cooperation with the United States, in
particular, especially in areas of substitution and the improved
utilization of these resources. He insisted that China had been urging
other countries to develop their own rare-earth resources—since they do
exist elsewhere—instead of only turning to China for supplies.

Dr. Jinsong spoke at length about the need to consolidate the industry
within China, which once had 1,000 REE mining, smelting, and separating
enterprises, but at the time had only 120. He attributed this reduction to
the need to monitor the environmental toll of extraction and processing in
many parts of the country, as well as the Chinese decision to crack down on
the illegal mining and smuggling157
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of
rare earths.

Dr. Jinsong produced extensive data highlighting that thirty-four countries
had discovered rare earths, adding that China’s rare earths accounted for
36.4 percent of the global total. He stressed that China’s per capita
reserve of rare earths was lower than the reserves of other countries,
emphasizing that mining had led to China’s reserves quickly dwindling,
falling by 40 percent in the past fifty years. China, he continued, had
been exporting beyond its reserve share, and it now had to be careful
because if the reserve was exhausted, it would be damaging not only to
China but also to the world economy. In short, China’s position was that
the world had received ample warning that it needed to look elsewhere for
rare earths, because if China remained the only reliable supplier, then it
would be safe to surmise that such a trajectory would lead to conditions of
scarcity because of limited market availability.

To underscore these concerns, the Chinese Information Office of the State
Council released a white paper on rare earths in 2012. It was drafted to
“provide the international community a better understanding of this issue.”
158
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According
to its findings, excessive mining taking place over the (p.163) past fifty
years had led to such rates of decline that in rich rare-earth areas like
Baotou,

only one-third of the original volume of rare earth resources is available
in the main mining areas, and the reserve-extraction ratio of
ion-absorption rare earth mines in China’s southern provinces has declined
from 50 two decades ago to the present 15. Most of the southern
ion-absorption rare earth deposits are located in remote mountainous areas.
There are so many mines scattering over a large area that it is difficult
and costly to monitor their operation. As a result, illegal mining has
severely depleted local resources, and mines rich in reserves and easy to
exploit are favored over the others, resulting in a low recovery rate of
the rare earth resources. Less that 50 percent of such resources are
recovered in ion-absorption rare earth mines in southern China, and only
ten percent of the Baotou reserves are dressed and utilized.159
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Nevertheless, the Chinese arguments did not suffice, and the PRC did not
win the case at the WTO. The ruling came out against China on March 26,
2014. China, moreover, lost its appeal, on August 7, 2014, and subsequently
announced its compliance, which took place in May 2015. While the dispute
lasted, there had been much speculation about what China would be willing
to do vis-à-vis rare earths. Would it abide by its WTO obligations or not?
The outcome of the dispute and China’s compliance indicates that the
PRC—just like other members—had gained the expertise on how to adhere to
the rules and regulations of the organization while simultaneously using
the rules to promote and secure its own interests.

A recent study published in *Resources Policy*,160
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in
2015, examining whether or not China’s rare earths export policies had
worked over the period in question showed that, in fact, “the market power
and price sensitivity of China’s rare-earth products increased
dramatically, indicating that China’s export policies have exerted
significant effects. The quantitative estimate of the market power of
China’s rare-earth products on the US and Japanese markets shows that it
has risen significantly.” However, (p.164) the authors also suggest that in
the future, and in terms of sustainable improvement in pricing power,
China’s focus could shift from “controlling exports to controlling
production.”161
<https://oxford.universitypressscholarship.com/view/10.1093/oso/9780190670931.001.0001/oso-9780190670931-chapter-5#oso-9780190670931-miscMatter-8-note-573>

Furthermore, by the time China was required to comply with the WTO ruling,
it had nothing to lose. Prices had dropped, and there was an oversupply in
the market because of ongoing smuggling and the stockpiling at the height
of the crisis. While the case was being discussed, China had taken
advantage of the critical years it needed to consolidate the industry
domestically in order to reposition itself for the future. As the famous
Chinese strategist Sun Tzu said, “Ultimate excellence lies in not winning
every battle but in defeating the enemy without ever fighting.”162
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2010 are as follows:

Steps in the Mining Process


   -

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   separating the rare earth ore into individual rare earth oxides;
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   refining the rare earth oxides into metals with different purity levels;
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   forming the metals into rare earth alloys; and
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