Optics and symbolism

On May 28, the South China Morning Post reported that upon visiting one of China’s major rare earth mining and processing operations in Jiangxi Province, President Xi Jingping commented he would give priority to domestic demand over exports. Beside him was his lead negotiator in trade talks with the United States. At the same time, his top economic planning agency leaked it would not rule out using rare earths as a bargaining chip in the trade war.

The visit and Xi’s signal came just days after the Trump administration ratcheted up US tariffs on US$200 billion worth of Chinese goods followed by China’s response that it would increase in tariffs on US$60 billion worth of US goods.

When it comes to trade in rare earths, we’ve been here before. It’s a story worth unpacking as yet another cautionary tale about the perils of China’s meteoric rise to dominance in supplying the world with critical inputs, in this case the metals that lie behind today’s — and tomorrow’s — modern electronics, high-tech and advanced military applications.

Magic pixie dust in the Earth’s crust

There’s a group of 17 chemical elements on the periodic table that are classified as rare earth elements or rare earths. They can discharge and accept electrons and mix well with other elements to convey magnetism, luminescence, added strength and other key properties.

For example, neodymium helps power the magnets in hard drives and hybrid cars; praseodymium is deployed to create strong metals for aircraft engines; gadolinium is used in MRI scanning equipment; yttrium, terbium and europium are used to produce our computer, TV and device screens. As our consumer tech and industrial products become more sophisticated and new uses are discovered, demand for rare earths will only grow. Rare earths also play a key role in some of our military’s most advanced defense tools from stealth technologies to guidance systems and armored vehicles.

REE table

Not rare, but hard to harvest

The issue is not that rare earth deposits are scarce, but that they are challenging and costly to mine. Rare earths tend to be scattered rather than clustered, and bond easily with other minerals, so the elements must be separated in painstaking and costly processes that produce toxic and hazardous waste. Significant investments over years are required to get a mine and processing facility up and running and to control for environmental risks.

China’s rise to top producer, user and exporter

Although China began mining rare earths in the 1950s, the Chinese government put the capacity to mine and produce rare earths on its critical path toward economic modernization in the 1980s. Rare earths are now part of China’s Made in China 2025 plan to achieve global advantage in advanced manufacturing, high tech and green technologies.

As was the case in other industries such as steel, glass, paper and auto parts, the Chinese government deepened its intervention in the rare earths sector in 1990s to ensure access to low-cost supplies for domestic producers. Government support enabled Chinese companies to ramp up mining and processing of rare earths even while operating at a loss.

As production grew, exports were encouraged through export rebates, attracting more Chinese entrants to the industry. Excess production flooded global markets, setting in motion a downward spiral in prices and profitability for producers in other countries. Between 2002 and 2005, rare earth prices dropped to historic lows, forcing most of the world’s mines outside China to close.

An overplayed hand?

Having achieved global dominance, producing over 90 percent of the world’s rare earths, China created a two-tier pricing system through a variety of export controls. According to data from the U.S. International Trade Commission, by the beginning of 2010, US importers were paying an average US$5,589 per metric ton for rare earths from China.

When China announced in July 2010 it would restrict exports of rare earths by 70 percent and impose minimum export price levels, rare earth prices surged by the fall of 2011 to US$158,389 per metric ton. By applying export duties, quotas and price floors to exports, China created a two-price system, keeping low-priced supplies for itself. US manufacturers had no alternative but to curb spending on Chinese rare earths, causing a drop in US imports.

In March 2012, the United States, European Union and Japan initiated a dispute settlement case in the WTO against China’s rare earth restrictions. Two years later, a WTO dispute panel agreed that China had violated commitments it made when it joined the WTO to eliminate dual pricing practices, certain export duties, and price controls. The panel also found China violated other aspects of other WTO agreements such as those governing the administration of export quotas. After losing its appeal, China agreed to remove quotas by December of 2014 and abandon its export tariffs by May 2015.

Damage done

Life goes on in the global economy and for industry players over the two years that WTO cases are being decided. In a 2017 National Review article, Mike Fredenburg explains what happened to the US company Molycorp that owned the Mountain Pass mine in California, which at one time was the largest producer in the world.