China, Japan and the East China Sea: déjà vu all over again?
Ever wonder what would happen if the world’s 2nd and 3rd largest economic powers went to war?
This dark hypothetical took an unfortunate step towards reality this weekend, with the announcement by Beijing that the PRC ‘s Defense Ministry has brought the Daioyu Islands under the umbrella of its air defense zone. Japan, which calls the desolate East China Sea chain the Senkakus, nationalized the islands 14 months ago. As for the world’s 1st largest economy – the U.S. – it is obligated to come to Japan’s defense under the nations’ Mutual Defense Treaty.
InvestorIntel readers will remember the tug-of-war over these islands as the trigger in September 2010 of a de facto “embargo” of China’s Rare Earths exports to Japan. China never declared it as such – to do so would have been a blatant breach of its WTO (World Trade Organization) responsibilities – but Japan and the rest of the world’s industrialized democracies made much of the episode as a “wake up call” on the dangers of China’s Rare Earths dominance.
And then the very same nations regressed to the mean, and went on to other crises.
In the 38 months since the 2010 dust-up, two “new” Rare Earths producers entered the global market – the quotation marks refer to the re-opening of the old Mountain Pass mine by Molycorp, which preceded Lynas’ entry into the space with its Mount Weld project. Neither is yet at full production, and China’s share of the global supply of Rare Earths remains above 90%. For the crucial Heavy Rare Earths, China’s share is 98% or more.
As for the next new entrant in the REE space, we will not see it in 2014. Hopes rise for 2015, and certainly 2016. The junior companies are pushing full out, but investors are still on the sidelines, and governments, at the national policy level, show little real recognition of the danger they’re in.
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As for the inevitable tsk-tsk’ing we’ll hear in the near-term about Japan and China getting caught up in bellicose chest-thumping about a few barren islands (widely described as 5 uninhabited islets and 3 barren rocks), let’s take a look at the stakes.
First, a barren island barely big enough to step foot on can confer a bonanza to the country that “controls” it. The UN Law of the Sea Treaty created a 200 nautical mile EEZ – Exclusive Economic Zone – extending ocean-ward out from a nation’s land boundaries, including the rights to the seabed and whatever resources lie beneath it. The smallest speck in the open ocean thereby confers more than 125,000 square miles of seabed rights – a territory larger than the landmass of Poland. In the East China Sea, where national boundaries are compressed, the claim confers less square-mileage – about 40,000 square miles will go to the winner of the dispute – but the principle is key. Remember that China and South Korea are engaged in a similar squabble over a submerged reef called the Socotra Rock, and China is embroiled in South China Sea claims as well. In the latter case, China’s claims are disputed by 10 other nations, while China’s claim would bring 90% of the South China Sea under its control. So the failure to defend these claims anywhere would weaken them everywhere. Don’t expect the East China Sea conflict to disappear any time soon.
Will this weekend’s step by China elicit a counter-response by Japan? Will the crowded airspace over the islands, adding to the dodge-‘em games in the sea lanes, make the prospect of accidental conflict more likely? No one knows – including even the Chinese and Japanese. And if conflict escalates, will we see a reprise of China’s Rare Earths cutoff? Big questions, and no clear answers. Such is the nature of conflict.
Meanwhile — for those of us looking on from outside, and still dependent on the flow of Chinese REEs for our technological development — we may be headed, as Yogi Berra liked to say, for “déjà vu, all over again.”
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