Clarifying the Rare Earths Hubbub

The conversation surrounding what seems to be a slowdown in China’s rare earth sector has been verging towards the bizarre recently, with news sources arguing that an embargo of exports of the minerals to Japan is obvious, unconfirmed, non-existant, over,continuing, and expanding to the West.

The really odd thing about this story is that this seems to be one of those rare cases where the Chinese government is being completely upfront with an unpopular decision–which is enough to raise anyone’s suspicions.

The Chinese government announced earlier this year that it would cut exports of rare earths by an incredibly high 72% in the second half of the year. According to Wang Baodong, a spokesman for the Chinese Embassy in Washington, the Chinese government was putting the restrictions on the mining, processing and export of rare earths to protect the environment (NYT). This doesn’t seem too unlikely, because, as the Western press is all too keen to point out, the Chinese rare earths sector has only become so dominant due to lax environmental standards (NYT)(Krugman). As many companies are still reporting that they are getting their rare earths, this seems like a much stronger explanation for the news than a politically motivated embargo.

Could they have other motives, like “to force multinational companies to produce more of their high-technology goods in China” (NYT)? It seems very unlikely. As many people have pointed out, rare earths aren’t actually all that rare, and China mostly has a monopoly on them because they manage to meet global demand at low costs (remember mining in China is one of the most deadly professions in the world). A reduction will only increase mining elsewhere (which has already happened to a degree) and damage the market for Chinese produced minerals. Essentially there is no long-term benefit to China except for environmental protection.

An argument could still be made that the decision to use an export ban, instead of a straight production ban or stricter rules on environmental protection, constitutes a breach of free trade agreements and unfairly benefits companies manufacturing within China. I expect China’s motives are somewhat less sinister – the port in Dalian is easier to control than hundreds of mines in the rural northeast – but this would provide more rational grounds for a legal challenge that would ease pressures on technology firms outside China while production of rare earths is levered up elsewhere.