An Economic Assessment of China’s Rare Earth Policy

Publication: China Brief Volume: 10 Issue: 22 November 8, 2010 03:38 PM Age: 4 daysCategory: China Brief, Foreign Policy, Military/Security, Energy, China and the Asia-Pacific, Featured, Home Page By: Jianjun Tu

The term rare earths (RE) apply to a group of 17 chemically similar metal elements that include scandium, yttrium and the fifteen lanthanides. RE elements are considered strategically important commodities that are used to manufacture defense and commercial high value-added applications, especially green technology. Rare earths were traded freely and at a discounted price on the global market before the mid-2000s. Since 2005, however, China—the world’s leading RE producer—gradually tightened export restrictions on rare earth oxide (REO). In late September, Chinese exports of REs to Japan were reportedly halted due to a dispute over maritime boundaries in the East China Sea, which underscored an unprecedented risk in the global RE supply chain. Most consuming countries were caught unprepared by this RE supply crisis. Indeed, China’s annual REO output at 129,405 tons in 2009 represents 97 percent of world total, and the technological complexity, resource availability and capital intensity of RE separation and processing make the diversification of supply away from China implausible in the near term.

The ascendance of the Chinese RE supply chain is the outgrowth of Beijing’s long-term planning, the invisible hand of the free market and, as this paper has shown, strategic miscalculation made by the U.S. government. Though sizable RE production capacity may be developed outside China, Beijing is expected to remain the leading producer with the formidable power to squeeze out any new competitor, thus China is able to continuously reserve the right to use REs as a political bargaining chip in the years to come—in spite of what its leaders claim (Xinhua News Agency, October 28). Nevertheless, Beijing’s current RE policy will not only face challenges from the international community, but it will also need to overcome the autonomous and often chaotic nature of the Chinese economy and the conflict of interests between the central and local governments. Even so, given the strategic importance of RE resources, new overseas entrants may soon follow suit with behavior similar to China’s. As a result, the era of cheap Chinese rare earths may be forever gone.

SEE ALSO: Colo. company breaking into rare metals mining
Published: Saturday, Nov. 13, 2010 1:06 a.m. MST

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