WTO charges China for violating trade rules, but the West is not innocent
As widely expected, on March 26, the World Trade Organization (WTO) ruled in favor of the United States, Japan and the European Union in their case against China over rare earths (and tungsten and molybdenum). All these countries had filed a complaint with the WTO in March 2012, arguing that these quotas gave an unfair advantage to Chinese companies. The ‘plaintiffs’ accused China of violating the rules of world trade along the lines of a similar conviction issued in July 2011 over export taxes charged on nine other commodities. China defended its position claiming the need to protect the environment. The WTO considers that Beijing has used this trade policy for years in order to maintain control over strategic raw materials, reducing their export to key global markets such as to encourage foreign manufacturers to settle in China. The WTO found China’s environmental defense argument untenable, observing that its restrictions had clear industrial policy objectives. China has 60 days to appeal and it is sure to do so. Officially, moreover, China has formally expressed regret over the WTO’s decision, defending its chosen course and defense, which it claims follows the WTO goal of ‘sustainable development’.
The WTO stressed that China, as a member of the WTO, had no right to control the market in such a way as to protect its own companies at the expense of foreign ones. Yet the March 26 ruling seems almost prosaic now. When the complaint was first filed in 2011 when the West (including Japan)at the sight of China holding 95% of the world’s rare earths, the prices of these minerals increased by multiples of three or four and beyond in the case of specific rare metals.
Today, the prices of rare earths are recovering from a slump but they are far from the highs of 2011. The price of the much in-demand neodymium oxide dropped from USD $ 300/kg in 2011 to USD$ 72/kg last week. In many ways this is China’s fault, China has flooded the world market with cheap rare earths and is now reaping the dubious rewards. Nevertheless, even if the WTO ruling has at this point become a mere ‘insult’, declared to restore a degree of self-esteem at best to the WTO and the plaintiff nations, China is actually struggling to enforce quotas on illegal mines causing serious pollution and curbing the illegal exports that have made their own significant contribution to the mess in the rare earth markets. Moreover, China will not lose its grip on the markets in the near future. Molycorp and Lynas, the two current non- Chinese producers are far from reaching the production levels and variety of Baotou, which owns the giant rare earth deposit in Mongolia.
Certainly, there are new deposits that are ever closer to reaching production in North America, Europe and Australia, but they will, in the most optimistic of circumstances, only come online starting in 2017. No doubt, quantitatively and qualitatively, China will maintain its rare earth supremacy for a few more years, whether it is convicted by the WTO or not. The stress, however, is on the ‘few more’; China’s rare earth empire has feet of clay.
China has been able to virtually dictate the use and availability of the 17 critical metals commonly known as rare earths, using its monopoly to serve political objectives. Japan has felt this most directly in 2010 when the Port of Shanghai had suddenly and mysteriously shut off exporting shipments of rare earths. However, last September an article published by ‘China Daily’ revealed that China was ready to start buying rare earths abroad to fill its strategic stocks – about 10,000 tons. This is significant if we remember that the market is only 110,000 tons per year. This suggests that either China is not storing enough of its own production or that Beijing has become very serious about curbing excess and illegal mining. This had been publicized; the surprise is just how quickly China is planning to turn to international markets. This perspective has revived interest in several junior rare earth miners that could be among the first to come online in the next two years.
Unfortunately, while it technically should have, China’s decision had no immediate effect of pushing prices higher. Finally, it should be noted that the plaintiff countries are not entirely innocent in the China/WTO situation. The mining and processing of rare earth metals is complex, expensive and requires great care to avoid damage to the environment. More and more countries therefore withdrew from the sector, all too pleased to leave China with a virtual carte blanche to develop it and where labor is cheap and environmental requirements minimal. It has taken China’s rare earth trade restrictions to push the West to recognize the importance of reviving its own production. The growing geopolitical and economic tensions in the Pacific rim, reflected also in the series of deliberate miscommunication in the search for the missing Malaysian Airlines Boeing 777 (MH370), will only have increased the urgency for the West to start catching up in the production of critical minerals, so many of which are essential to the defense sector.