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Is China playing a clever capitalist or malicious miscreant?

To the victor go the spoils, they say.  But the U.S. isn't happy with China's control of over 95 percent of rare earth metal production.  It's lodged a formal complaint with the World Trade Organization, with President Barack Obama accusing the Asian economic giant of playing dirty.

I. Once the U.S. Was a Rare Earth Leader

The earliest mining of rare earth elements came from placer sands in India and Brazil.  Then in the 1950s, South Africa took the lead with its rare earth containing monazite deposits.  Between the 1960s and 1980s, Mountain Pass mine in California was a leading producer.

Then came the red giant.  China, which owns an estimated third of the world's rare earth deposits, pumped up production in Inner Mongolia in the 1990s, putting price pressure on American and other producers.  It worked.  The Mountain Pass mine was shuttered in 2002, and with it the majority of American rare earth mineral mining.

Neodymium wide
Slowly China came to dominate rare earth metal production, a realm once dominated by the U.S. (neodymium magnets pictured) [Image Source: Doug Kanter/Bloomberg]

But in their quest for ever more-efficient power electronics, electric vehicle makers, flat-panel television makers, wind turbine makers, and solar panel makers all turned to this category of scarce resources.  In short, rare earth minerals suddenly became a prized commodity, just as the U.S. exited the market and China cornered it.

China responded by imposing a 2010 cap on exports, which continued into 2011.  The artificial ceiling limited exports and sent prices soaring, adversely affecting the electronics, alternative energy, and automotive industries.

That pain finally boiled over in the form of the trade complaint filed by the EU, U.S. and Japan last week.

II. Tough Talk

"We met at least a half a dozen times with the other countries that joined us. And I'm not talking about 'howdy dowdy' kind of meetings. These were three and four day-long sessions of going through legal issues," a U.S. official is quoted by Reuters as saying.  "Literally thousands of pages of Chinese language documents needed to be found, translated and analyzed."

Rare Earth miner
Fertile sands: a laborer moves earth at a Chinese company's Inner Mongolia rare earth metal mining facility [Image Source: Stringer Shanghai/Reuters]

U.S. Trade Representative Ron Kirk views this as a case of a fresh player not wanting to play by the rules.  He states:

In fact China adds a small fraction of value to such a product - as reflected in the final price - usually at the assembly stage. China's share is well below 10 percent.  Our businesses, as a general rule, really do believe, and maybe it's that American spirit, let me go compete in the global market and I'll accept that if (my friend) has got a better idea she wins and sometimes I'll win. But you've got to promise me that the deck's not going to be stacked.

I'm not saying you can't have state-owned enterprises. But how do we determine to give my businesses and competitors the sense that they truly are operating as independent market-driven entities?

Ironically the U.S. effort received a boost from a WTO loss to the EU in a complaint about subsidies the U.S. government paid to The Boeing Comp. (BA), a Seattle, Wash. based firm and top aircraft contractor.  The U.S. has an almost identical counter-complaint about EU subsidies to Airbus, a subsidiary of the European Aeronautic Defence and Space Company N.V. (ETR:EAD).

In the WTO complaint, judges set in place new guidelines.  Under these rules, if a nation refuses to reveal information on subsidies (as the U.S. did with Boeing) it will "draw negative inferences" -- assume the worse.  This could be a fatal policy for China who reportedly hasn't published information on any of its subsidy efforts in five years.

III. Is the U.S. Being Unfair?

But some say the U.S. and Europe are being unfair to China.  While China doesn't necessarily have the best environmental track record, expanding rare earth production could damage the Mongolian wilds, as well as put miners' lives at risk.  Also, there is some irony that the U.S. and European authorities are irate at China for playing skillful entrepeneur at driving a hard bargain when it comes to rare earth resources.

Jonathan Fenby, head of China research at Trusted Sources, says that China is a convenient whipping boy for American politicians, stating, "I think that in this electoral season (in France and the United States), China-bashing is on the rise. Hence the action.  China is an obvious easy candidate and it is interesting that in the U.S. the Republicans, normally free traders, have gone for China."

But he warns that the WTO complaints and tough rhetoric may backfire, commenting, "If China hits back, how important is the Chinese market to Western firms, and what is the impact on foreign companies that rely on China for assembly such as Apple?"

iPhone 4S
Pushing China too hard could backfire, particularly for U.S. companies like Apple who rely on the nation to produce their products. [Image Source: PocketLint] 

China isn't above such petty retaliation.  It recently sunk a $12B USD Airbus deal after the EU moved to enforce carbon taxes on it.  With the manufacturing futures of virtually every American devicemaker -- including Apple, Inc. (AAPL) -- on the line, Mr. Fenby argues that America may have more to lose than the Chinese.

Source: Reuters

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By 440sixpack on 3/19/2012 4:17:47 PM , Rating: 5
Between the 1960s and 1980s, Mountain Pass mine in California was a leading producer.

Then came the red giant.... The Mountain Pass mine was shuttered in 2002, and with it the majority of American rare earth mineral mining.

Sooooo....... reopen it?

RE: Solution?
By pensive on 3/19/2012 4:42:55 PM , Rating: 2
no problem with that....
reopen it.
aha! Obama and the CA regulators don't
really WANT mining here.
aside from costs, that's why this mine
is still not in current production.
there are other deposits of RE's in
the USA...

RE: Solution?
By sigmatau on 3/19/2012 10:16:28 PM , Rating: 2
Your little link didn't say anything about Obama wanting to prevent mining. Lie much?

The mine will reopen soon by the way. But monkeys that hold their hands to their ears, eyes and nose should really be holding their hands to their mouths.

RE: Solution?
By Reclaimer77 on 3/19/12, Rating: -1
RE: Solution?
By Integral9 on 3/20/2012 8:56:50 AM , Rating: 3
From March 5, 2012

President Obama, while in New Hampshire last Thursday, countered Republican charges that he was to blame for the rising pain at the pump. “We’ve opened millions of new acres for oil and gas exploration, and approved more than 400 drilling permits since we put in place new safety standards in the wake of the gulf oil spill,” Mr. Obama said.

Presidential abuse? Vietnam was a colassal abuse of presidential power. Stopping the oil drilling to adjust the safety measures and review the equipment is not abuse, more like prudent.

RE: Solution?
By Reclaimer77 on 3/20/12, Rating: 0
RE: Solution?
By Reclaimer77 on 3/20/12, Rating: -1
RE: Solution?
By Integral9 on 3/20/2012 1:56:27 PM , Rating: 4
What war would that be? Libya? The Libyans started that themselves. Sending planes over to bomb aid rebels against a regime we've had an "antagonist" approach towards since the 1970s is hardly starting a war. We were just leveling the playing field.

Don't fool yourself, the impeachment hearing began because the republicans are in congress. It's just another "feather" in their caps and headlines for reelection purposes. Nothing will come of it. Clinton was impeached for adultery. Still served 2 terms.

btw. Was there an impeachment of Bush when he started the Iraqi war? against all international support and with falsified evidence and the illegal torture of militants and the illegal termination of government employees. I don't believe so.

Speaking of "Czar's" how many "Czar's" did Bush create and appoint? And back room dealings, the Republicans are the largest offenders. Why do you think they all vote together? Then there's Chaneys abuse of power by voting in Congress when his vote is only needed for a tie breakers. Did I mention that he also orchestrated the "de-fanging" of the EPA? Allowing oil companies to destroy the ground water while fraking w/ little more than a letter of disappointment?

RE: Solution?
By Reclaimer77 on 3/20/12, Rating: -1
RE: Solution?
By Integral9 on 3/20/2012 4:46:17 PM , Rating: 4
If you had read he constitution, you would know that the War Powers Act allows the president is commit a certain amount of troops w/out congressional approval for up to 60 days. And every President has done it since I can remember.

Iraq was a war Bush started with falsified evidence. How is that not a high crime? Torturing people not a high crime?

It's a fools errand to assume anything in politics isn't partisan gamesmanship. Almost everything in politics is partisan gamesmanship. Politicians are professional liars and spin doctors and get where they go mostly through back room dealings and lying. So all this dribble about ending back room dealings, et al is just political dogmatic dribble. Remember the ear-marks crap from a year or so ago? What happened? Nada. Everybody just put their ear-marks back in their bills and life went on.

Impeached for lying under oath about adultery. So sorry.

RE: Solution?
By sigmatau on 3/20/2012 6:41:52 PM , Rating: 4
Aw the monkeys came out to play today. You guys can't stand being called liars? Obama is not blocking it. This mine has already been approved and they are trying to accelerate the proccess to open it.

But hey, monkeys going to throw feces anyways.

RE: Solution?
By JasonMick on 3/19/2012 4:44:29 PM , Rating: 5
Sooooo....... reopen it?
MolyCorp is in the process of doing that. It bought the mine and is investing $500M USD to reopen/restart it. It's actually cleared all the environmentalist red-tape more or less.

However, restarting production and reaching full capacity will likely take 4-8 years.

In the meantime, expect plenty of tension between the U.S. and China.

Also keep in mind that the U.S.'s demand for rare earth metals has risen -- so even if the Mountain Pass mine is reopened, it is unclear whether the U.S. will be capable of self-sufficiency. It's very likely that reliance on Chinese imports will be reduced, not eliminated.

RE: Solution?
By havoti97 on 3/19/2012 5:25:43 PM , Rating: 5
After MolyCorp or any US compnay has heavily invested in the mines, China will again flood the market with cheap rare earth metals, crippling their start up rivals. With no cash flow, they will quickly file for bankruptcy and China will rinse and repeat.

RE: Solution?
By Zhuubaajie on 3/19/2012 6:01:20 PM , Rating: 2
Note that it is now the joint forces of U.S.A., EU and Japan that are forcing Beijing to lower prices (and thus kill the new mining efforts), seeking to ensure that rare earths are only available from China.

It is Alice in Wonderland.

RE: Solution?
By Solandri on 3/19/2012 6:42:59 PM , Rating: 2
From a national standpoint, it makes sense to use up China's rare earths before harvesting your own supplies.

But I think you're mischaracterizing it as The US, EU, and Japan wanting to force Beijing to lower its prices. They just want consistency - the same price for domestic and international buyers, and a stable (market-driven) price over time. If China deems to set that price lower than those of US, EU, and Japanese producers, then so be it. If China sets it higher, that's no big deal too. It doesn't matter one way or the other, as long as China is consistent about it.

RE: Solution?
By FishTankX on 3/19/2012 11:36:33 PM , Rating: 3
The obvious solution to this is, as soon as China floods the market with cheap rare earths, slap on an indefinite subsidy on the american production of rare earths. Assault largely abated. I doubt it'd take more than ~$5b a year to make all of this mess go away.

RE: Solution?
By Samus on 3/20/2012 1:32:06 PM , Rating: 2
with all the worlds super-economies on board, if it is suspected China will rinse and repeat, I think the pact will simply purchase from the mountain-pass (or other friendly facilities) even if the prices are higher.

China is playing with the big dogs, and like Iran, shouldn't be taken seriously.

RE: Solution?
By The0ne on 3/19/2012 6:55:07 PM , Rating: 2
Both of your points are the main ones and ones that I believe most members don't understand. Cost and time to reopen a mine. Having said that however I'll again state that China has the smarts to capitalize on this for decades now. Having this get started up seems fruitless. China was just smarter to get ahead that's all and there's no point in complaining. They invested millions upon millions in various countries/nations to gain this advantage.

And lastly I agree, US will never be self-sufficient on REM. China is too dominant now as every nation knows. US and Japan can do absolutely nothing except for the extremely drastic measures. We've seen throughout China's industrial progress how they've manipulated REM from the process. They can do the same again, over and over.

RE: Solution?
By Jaybus on 3/20/2012 4:19:00 PM , Rating: 2
Don't forget that the name for these elements is very misleading. The rare earth elements are the 15 lanthanide series (elements 57-71) plus yttrium. Of these, the only one that is really rare is promethium, which wouldn't be a first choice anyway, as it is radioactive.

With cheaper labor and far more lax mining regulations China simply undercut the competition and made the European, US, and Japanese mines unprofitable. It had nothing to do with the elements being very scarce.

With increased demand and China forcing up the price, mines elsewhere in the world will once again be profitable. In the end, more competition should force supply/demand equilibrium. Unless, of course, China persists with state subsidies in the form of tariff rebates, which indeed IS government interference with free trade.

RE: Solution?
By jimbojimbo on 3/19/2012 7:35:26 PM , Rating: 4
The only winner in any attempt to reopen the mines are lawyers. Smart people and all the environmental hypocrite hippies who are pushing for electric cars will both hire lawyers like crazy to fight it out.

So environmentalists, you want everyone to drive electric cars how about doing something that'll let the US help achieve that??

RE: Solution?
By Shig on 3/19/2012 8:02:13 PM , Rating: 3
Fair point. I consider myself middle-left, but a lot of these environmental people are like the Tea Party except the polar opposite.

Just once I'd like to see Congress compromise on something without the republicans wanting NO regulations and the liberals wanting insane over-regulation. This all or nothing BS has got to go.

Lithium mining is also going to be a major issue soon. The major Lithium countries are Argentina, Chile, Bolivia, US, China. China is already trying to buy them up, but it's looking like the governments who have the lithium deposits are as bad as OPEC in the middle east.

"Google fired a shot heard 'round the world, and now a second American company has answered the call to defend the rights of the Chinese people." -- Rep. Christopher H. Smith (R-N.J.)

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