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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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RE: cheaper to buy full assembly
By TSS on 3/20/2012 2:07:19 AM , Rating: 3
So china is always looking for the best deal for themselves. That's no different then the US or the EU.

I'd argue the fool here would be the person who would rely on somebody else to not do so.

The fool, in this case, is clearly the US for not keeping the mines operational at a low volume, with the option of scaling it to full production within a short timeframe. Instead i'm sure US presidents loved the possibility of shutting down the mines and getting some good graces from the enviromental movements.

China's still in the wrong though. Nothing good has ever come from a trade war. They are a new player in the global markets, the last time this happened (the 20's and 30's) they really weren't a significant power.

And we all know how that trade war ended.


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