EDITOR: | November 24th, 2013 | 4 Comments

China, Japan and the East China Sea: déjà vu all over again?

| November 24, 2013 | 4 Comments

Ever wonder what would happen if the world’s 2nd and 3rd largest economic powers went to war?

Japan-v-China-Gets-Worse-by-The-Day-300x187This 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.

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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  • Rare Earth sector hits 52-week low and investors pencil in Graphite winners | InvestorIntel

    […] up +17.78% and U.S. Rare Earths Inc.’s OTCQB: UREE up +10.20%. Combine in rising tensions between China, Japan and the East China Sea and as Dan McGroarty writes this weekend – rare earth rising price déjà vu all over […]

    November 25, 2013 - 7:22 AM

  • Dave G.

    Really good article Dan. In North America we forget about the long standing conflict between these countries and how seriously they could affect our lives….. watching and waiting, thanks for this article.

    November 25, 2013 - 9:36 AM

  • Daniel McGroarty

    Thanks, Dave. Having ramped up, it will be hard for China to back down. You’ll note that since I wrote my piece, the U.S. Air Force did a B-52 flyover of the airspace China claims as under its control. This is one to watch.

    November 27, 2013 - 12:51 PM

  • Jack Wu

    Shooting war.

    Always good to test the USA-Japan Defence Treaties even when Carrie Kennedy is USA Ambassador to Japan, and weakling Obama still smoozing in the White House.

    Why not test the Strategic Alliance at its weakest?

    All good news for vital military rare earth based weapons?

    Why would China ever give Chinese Dysprosium to anyone? In peace time? Or at times of potential war?

    Is the new Chinese leadership filled with idiots? Do the Chinese #9 leaders obey the laws of self preservation, or bow to Western “old world powers” (WTO)?

    My $$$ is on conflict erupting into a shooting war!

    Why should China and Japan ever be friends, after the last 100 year old history? “Cum by ja”

    Oh by the way, how much dysprosium “went up in smoke” to enter outer space on its way to China establishing a permanent “play station” on the moon?


    December 2, 2013 - 3:00 AM

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