Digging into the rare earth embargo

19 August 2013

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Dr Shiro Armstong is a Research Fellow and Co-Editor of East Asia Forum. Shiro’s areas of expertise include International Economics and International Finance and Government and Politics Of Asia and The Pacific. He currently teaches Masters Research Essay (IDEC8011).

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What really happened in the rare earths dispute between China and Japan, write Amy King and Shiro Armstrong.

In the aftermath of an East China Sea collision between a Chinese trawler and the Japanese coast guard in September 2010, tensions flared between Japan and China.

The Chinese trawler captain was arrested but eventually let go after what appeared like political intervention from the Japanese government. It was also widely reported that there was a stop in Chinese exports of rare earth metals to Japan. As with most issues around the Senkaku/Diaoyu islands, few looked good.

The ban of rare earths exports is now commonly cited as an example of Chinese policymakers using economic levers for geopolitical purposes. For instance, a report by the International Crisis Group stated that China ‘reportedly suspended shipments of rare earth metals’ in response to the ship captain’s arrest, and that ‘many Japanese analysts remain convinced that the Chinese government had tailored the export restriction to punish Japan’. Paul Krugman in the New York Times even described this as clear evidence that the Chinese government was ‘willing to wage economic warfare on the slightest provocation’.

But did the rare earth metals embargo actually take place? Two recent studies cast doubt on whether there was actually an embargo on exports to Japan and, if there was, whether this was linked to the Chinese trawler captain’s arrest. Analysis of Japanese port data from the Japanese Ministry of Finance shows that there was no uniform drop in Japanese imports of Chinese rare earths following the trawler collision. Similarly, a 2012 article in The Chinese Journal of International Politics cites Japanese and US news media to demonstrate that Japanese officials and businesses had been aware since mid-August 2010 of Chinese plans to reduce their worldwide rare earths exports.

The studies suggest that any decline in rare earth exports to Japan in the latter half of 2010 was more likely the result of China’s earlier decision to cut worldwide rare earths exports. Chinese industry newspapers and magazines, such as Xitu Xinxi (Rare Earth Information), suggest that in July 2010, two months before the trawler collision, the Chinese Ministry of Commerce announced its decision to reduce China’s global rare earths exports by 40 per cent in the second half of 2010. Articles in Xitu Xinxi in July and August 2010 acknowledge that this Chinese decision sent businesses and officials in Japan — China’s largest market for rare earths — into a panic, and by October 2010 the effects were taking hold. China’s total rare earths exports declined by 77 per cent in the year to September and, according to Chinese industry magazine Jiancai Fazhan Daoxiang (Building Materials Development Guide), and global prices quadrupled. The price of one major rare earth compound, cerium oxide, went from US$4.7/kg in April 2010 to US$36/kg in October.

There are two important issues raised by China’s apparent ban of rare earth exports to Japan.

First, if the Chinese government did actually intend to use the rare earths issue for geopolitical gain, why did the Chinese government never establish a link between the two issues? Although we cannot know what was said behind closed doors, there is no open-source evidence suggesting that China’s cut in rare earth exports was intended to punish Japan. In fact, Chinese sources make the opposite case. On 25 September, a spokesperson from China’s Ministry of Commerce was quoted in the China Daily as saying that ‘China has not issued any measures intended to restrict rare earth exports to Japan. There is no foundation for that’, and claimed that the cut in rare earths quotas had been issued long before the trawler collision. Further, on 7 October 2010, then Premier Wen Jiabao stated that “China does not and will not use rare earths as a bargaining tool in international trade because China strives for sustainable development throughout the entire world”. While it may be fanciful to assume that China has the world’s ‘sustainable development’ in mind when thinking about its rare earths exports, it would seem odd that if any element in the Chinese system had intended to send a message to Japan, no link was publicly made through official or unofficial outlets.

Of course it is entirely possible that the Chinese government — and particular parts such as China Customs — became more enthusiastic about implementing an earlier decision to cut rare earths exports after the Chinese trawler captain’s arrest. Doing so would be a way of signalling to China’s domestic audience that the government was being tough on Japan. New York Times reports around the time of the incident suggested that unilateral action was being taken by Chinese customs agents to halt exports to Japan. But there is little evidence of the central government drawing a link between the Senkaku/Diaoyu dispute and a ban on rare earths exports to Japan.

Second, the fluctuation in 2010 Chinese rare earths exports jeopardised China’s reputation as a secure and stable supplier of rare earth metals (and other commodities). China had a near monopoly in supplying the global rare earth industry. Rare earth metals are crucial for the production of high-tech goods and China supplies were over 90 per cent of the global total, with China holding somewhere between 30 to 55 per cent of global reserves. Japan is the largest importer of Chinese rare earths, absorbing over one-third each year, and its industries produce the high-tech parts and components that feed into Asian supply chains.

China has managed to dominate the global rare earth metal market because it can produce rare earths at low cost due to distorted factor markets that suppress prices. In the case of rare earths, cheap land, energy and labour (unregulated against workplace dangers) minimise costs, and severe environmental damage are not factored into the cost of production. Chinese policy-makers have been risking WTO action by gradually reducing the production of rare earth metals instead of addressing the underlying failures in labour and environmental standards. In August 2010, at a meeting with Japanese business leaders at a Japan-China economic forum, Chinese Minister of Commerce Chen Deming cited Chinese concerns about environmental protection and national security as the reason for this decision.

China now has to demonstrate to the WTO that the restrictions on production and exports were in fact directed at cleaning up the industry and addressing its serious environmental impact, not some misguided attempt to restrict global supply.

Amy King is a Lecturer in the Strategic Studies and Defence Centre, School of International, Political and Strategic Studies, ANU.

This story was originally published on the East Asia Forum:

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