... or else we'll do something really bad to you (except that we can't)

When it comes to rare earth metals -- a vital part of modern electronics -- depending on whom you ask, China is either brilliant or abusive.
I. All Your Rare Earth Metals are Belong to Us
Rare earth metals are difficult to mine.  It can take up to a decade -- and billions of dollars -- to get a mine running at peak capacity.  And it isn't cheap. In the 1970s and 1980s, the U.S., Australia, and most other regions decided to stop mining the scarce resource.  At the time the decision seemed to make sense.  Rare earths were primarily used for specialty commercial purposes and scientific research.
China, however, bucked the exodus and decided to keep its rare earth metal mines under its control (both in China and in other parts of Asia), active and producing.  At the time the Chinese looked like fools.  Now that "foolish" stubbornness has handed them a gold mine.
Fast-forward to the present and rare earths are vital to numerous businesses.  They're found in solar panels, wind turbines, car windshields, computer displays, sensors, and many other devices.  And with China controlling 90 percent of the world's production, buyers have nowhere else to turn.
Rare Earth Ore
[Image Source: Shutterstock]

China in a stroke of brilliance -- or diabolical evil, if you're an American tech firm -- realized a few years back that it could simply cut exports.  Given its virtual monopoly, buyers were largely helpless to prevent prices from rising as their were few desirable alternatives from a materials engineers perspective.  China, could sit back and sell less of this precious resource, while pulling in basically the same amount of profit.

One obvious solution is to make the expensive investments to restart rare earth production of their own.  But, as mentioned, that will take some time to achieve.
In the meantime the U.S. has led an international coalition in filing a complaint at the World Trade Organization, an international arbitrator, accusing China of abuse.
Today the WTO finally issued a ruling, concluding that China was acting in an abusive way for its own benefit.  Comments the WTO:

The overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers.  Under the circumstances, the Panel concluded that the "even-handedness" required by the Appellate Body under Article XX(g) had not been met, and hence the quotas could not be justified under that provision.

China imposes certain restrictions on the right of enterprises to export rare earths and molybdenum. Although China has committed to eliminating trading restrictions in its Accession Protocol, it argued that the restrictions in question are justified pursuant to Article XX(g), since they too relate to the conservation of exhaustible natural resources. Although the Panel found that China could rely on the Article XX exceptions to justify the restrictions in question, it found that China had not satisfactorily explained why its trading rights restrictions were justified under this provision. Accordingly, the Panel concluded that China's trading rights restrictions breach its WTO obligations.

In other words, China is restricting a valuable resource and keeping the remainder for itself.
II. Domestic Production in U.S., Japan Expected to Rise Substantially by 2020
A long-term solution is in the works.  In the U.S., Molycorp, Inc. (MCP) completed a successful stock offering and in Aug. 2012 announced that it had reopened a rare earth metals mine in Mountain Pass, Calif.  Once the world's largest supplier of rare earth metals, the mine must now trudge along over the next half decade or so, trying to ramp up production.

Mountain Pass mine
Molycorp's Mountain Pass mine is now back in action, but will take a while to ramp up production.
[Image Source: Molycorp]

The U.S. also committed $120M USD to a "rare earth resource center" to investigate alternative strategies, such as rare earth metal recycling and economic strategies to put pressure on China.
There are two legislative efforts in the works in the U.S., but both appear pretty much dead.
The latest effort by the U.S. comes courtesy of U.S. Senator Roy Dean Blunt (R, Miss.) and U.S. Senator Joseph "Joe" Manchin III (D, W. Virg.).  Dubbed the "National Rare Earth Cooperative Act of 2014", the bill would direct federal funding to support public-private partnerships to accelerating exploration and potential extraction of one of the nation's promising potential deposits of ore rich in rare earth metals -- the Pea Ridge iron-ore mine in Washington County, MO.  That bill would order the U.S. Geological Survey (USGS) to coordinate the effort.  But according to GovTrack, the bill only has a 2 percent chance of being enacted.
A second bill, the Critical Minerals Policy Act of 2013 (S.1600), is even more nebulous in its objectives. It looks to establish a "critical mineral list" that promotes certain resources (e.g. rare earth metals) as "critical to national security objectives", perhaps promoting federal spending on them or other new legislation.  That bill -- sponsored by Senate Energy and Natural Resources Committee Chairman U.S. Senator Ronald Lee "Ron" Wyden (D, Oreg.), Sen. Blunt (R, Miss.), and U.S. Senator Lisa Ann Murkowski (R-Alaska) -- has only a 3 percent estimate chance of passing.
Japan -- perhaps even harder hit than the U.S. by the export ban -- also announced some good news last year, with the discovery of rare earth metals in the rocky sea off the coast of its island Minami-Torishima.  Japan has exclusive economic rights to using the seas surrounding the island, which is located in the Pacific Ocean, southeast of Tokyo.  Ocean mining is a complex and at times treacherous occupation, but given the value of the resource it's too important to pass up.

Japan rare earths
[Image Source: PhotoLibrary (left); University of Tokyo (right)]

Japan uses an estimated half of the world's rare earth metals.  Tokyo University Professor Yasuhiro Kato states:

We have found deposits that are just two to four metres from the seabed surface at higher concentrations than anybody ever thought existed, and it won't cost much at all to extract.

Japanese officials have stated that it should take two years (through 2015) to explore the deposits and then will look to rapidly scale up extraction over the next half decade.  Despite the undersea location, the unusually high concentrations of the scarce compounds may allow Japan to extract rare earth metals more cheaply that Chinese controlled mines and the Mountain Pass mine.
Between the two efforts, the situation seems bound to improve, but in the short term more immediate remedies were needed.  To that Japan, South Korea, the EU, Australia, and the U.S. were pleased with the WTO's decision.
II. Can the U.S. Really Sanction China Without Shooting Itself in the Process?
U.S. Trade Representative Mike Froman crowed triumphantly at the news:

We will continue to defend American manufacturers and workers, especially when it comes to leveling the playing field and ensuring that American manufacturers can get the materials they need at a fair market price.

China’s decision to promote its own industry and discriminate against US companies has caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths.  WTO rules prohibit this kind of discriminatory export restraint and this win today, along with our win two years ago in an earlier case, demonstrates that clearly.

China's trading rights restrictions breach its WTO obligations.

China's Ministry of Commerce fired back, stating:

China believes that these regulatory measures are perfectly consistent with the objective of sustainable development promoted by the WTO.

Humorously, China has turned a common Western argument back against its economic foes, arguing that if it did not ban exports, rare earth mining would cause undue environmental damage to China.  China has up to 60 days to appeal the decision, which it will likely do.

World Trade Organization
The World Trade Organization [Image Source: AFP]

If it opts not to appeal or if it loses its appeal, it could face sanctions from the EU, Japan, South Korea, Australia, and the U.S.  
The question is how precisely these regions could punish China without hurting themselves, given that China assembles most of the world's electronics and is increasingly become an important source of revenue for many international businesses.

China rare earth
Chinese workers mine metal ore. [Image Source: Telegraph]

Most likely they -- like the EU, U.S., and their Asian allies will say a lot and do nothing -- precisely what disgruntled customers with no leverage will always do.  After all, talk is cheap, but rare earth metals are not.

Sources: World Trade Organization, The New York Times

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