PRC: Rare Earth Metals Gone in 15-20 Years

I would just like to pointing you to an announcement by the PRC's Ministry of Commerce (MOFCOM) hitting back at countries criticizing it for restricting the export of rare earth metals crucial to the manufacture of key electronic componentry. There are, of course, rumblings about China restricting these exports as a strategic tactic. A few weeks back, China supposedly planned to limit their export to Japan over the Senkaku islands fishing boat incident. In response, Japan has announced intentions to build electric motors that didn't need rare earth metals from China. And so on and so forth.

Don't forget there are also rumblings from developed countries like Japan and the US taking the matter to the World Trade Organization. So, in response, China is now citing (surprise!) environmental protection as a basis for limiting the export of these metals. Rock on!? Mining is not exactly a clean industry, so there are indeed grounds for citing the environment. The depletion bit I'm not so sure of...

China’s medium and heavy rare earths reserves may last 15 years to 20 years at the current rate of production, possibly requiring imports, the Ministry of Commerce said today. Domestic rare earths deposits dropped to 27 million metric tons by the end of 2009, or just 30 percent of the world’s total known reserves, from 43 million tons, or 43 percent of the world total, in 1996, Chao Ning, section chief of foreign trade at the ministry said at a Beijing conference.

China, controller of more than 90 percent of production of the materials used in cell phones and radar, cut its export quotas by 72 percent for the second half and reduced output, spurring a trade dispute with the U.S. The country may not be able to meet growing global demand as the government continues to curb output, Lynas Corp. said in March. “We cannot rule out the possibility that China may need to rely on imports sometime in the future for these minerals, instead of supplying the world,” Chao said.

Japan, the world’s biggest importer of rare earths, will urge China to boost shipments of the minerals after a government survey showed that 31 Japanese buyers reported problems with exports, Trade Minister Akihiro Ohata said in Tokyo Oct. 5.

The U.S. has asked business groups and labor unions to provide evidence that China is hoarding these elements for a case that might be filed at the World Trade Organization. Production and export quota cuts are to protect the environment and in line with WTO rules, Yao Jian, spokesman for China’s Ministry of Commerce, said yesterday. China reduced its quota for rare-earth exports to 7,976 tons for the half, compared with 22,283 tons for the first half and 28,417 tons for second half of last year, according to data from the ministry.

“China cannot afford to continue to carry the burden of supplying the world, from a strategic, environment and economic point of view,” Chao said. Rare earths are a group of 17 chemically similar metallic elements, including lanthanum, cerium, neodymium and europium. The U.S. was self-sufficient in the materials until the mid- 1980s, when lower labor and regulatory costs helped China’s climb to dominance, the U.S. Geological Survey said in a report.

“China is not the only country that has these deposits, but it has been carrying the lion’s share of the supply in more than a decade, at the cost of quickly depleting its own resources and hurting its environment,” Chao said. A rare-earth mine in the U.S., in Mountain Pass, California, shut down most operations in 2002. Molycorp Inc., which owns the mine, plans to reopen it this year, the company said in a June prospectus.

Which is an entirely good point: if the US stopped mining these rare earth metals in recent years over economic criteria, reduced Chinese exports of the same should see their prices rise and make it economic once again to mine in the US and elsewhere. It certainly is a disputable point if others choosing not to mine what's in the ground is legitimate grounds for a WTO case. In fact, the WTO has some material on this pending dispute. the gist of the argument is similar--export restrictions are not really well-covered in the WTO rulebook as it were:

The review of the previous GATT/WTO cases on export restrictions illustrates that the vast majority of the disputes involved alleged “unfair” advantages that the measures created for the downstream producers and processors of the country instituting them, at the expense of the downstream sectors in complainant countries. For the defendants, economic and political objectives seem to have been the primary motivation. For the complainants the primary incentive was the objective of obtaining greater access to raw materials (e.g. minerals, fisheries, and leather etc.) and other intermediary goods (e.g. semi-conductors). As such, the latest dispute between China and the US, EU and Mexico could be seen as another example of competition over resources. As the world economy recovers from the current slowdown and when the international competition over raw materials picks up again, it is highly likely that there will be more disputes over export restrictions coming before the DSB...

Looking beyond the pure economics of the matter, however, export restrictions are highly relevant in the context of environmental protection. By placing restrictions on exports, countries may want to prevent or slow down the depletion of their natural resources — including minerals, fisheries, forestry and fresh water — or may simply choose to keep them for the benefit of future generations. These measures could also be effective in containing the environmental side effects of certain export-oriented production activities. Mining is a case in point — as by-products of extracts, and various inputs used in mining operations could be highly contaminating. For instance, some mining sites in China, India, Peru, Russia and Zambia have been identified as the world’s most environmentally polluted areas — as contamination of the air, water and soil caused by discharged material from mines substantially exceeded the safety limits. There are also other environmental concerns arising from the high energy intensity of the production and processing of some minerals. Placing restrictions on exports of minerals produced through environmentally damaging operations, or through high levels of energy consumption and carbon emissions may help alleviate some of the adverse impacts on the environment.

To what extent such policy interventions justify the welfare losses occurring as a result of the consequent market distortion is a question of the social value of the environmental goods (or marginal social cost of depletion/pollution) as well as the effectiveness of the intervention in question. There could be significant discrepancies between the objectives that are intended to be achieved through export restrictions and the actual impact on the ground. Depending on the objective and the nature of the environmental externality that is to be addressed, various policy tools could be employed and be equally as effective or more so than export restrictions (and potentially less costly in terms of welfare losses). Hence the effectiveness and the potential social benefits of export restrictions should be carefully weighed against the welfare losses they cause and the alternative tools at the disposal of policy makers.

The WTO regulation dealing with export restrictions is relatively limited, offering ample “policy space” for domestic policy considerations [my emphasis].