Chapter 10 HEADLINES: China Signals Support for Rare Earths

China has changed its rare earths policy amid fears that its hard line on producers threatens its dominance of the global market for 17 key substances found in items from smartphones to missiles. In a move that Beijing describes as “promoting orderly development”, China will provide direct subsidies to revive struggling producers—a tacit acknowledgment of the strategic importance of the industry. The subsidies represent a significant shift in China’s policy of the past two years, which focused on restricting production of rare earths, closing down illegal mines, and tightening control of exports. These moves led to price fluctuations and slowing global demand.

Chen Zhanheng, of the China Rare Earths Industry Association, said the move would help the large, state controlled rare earths companies the government is trying to promote. “In the long run, the policy can promote resource protection and effective utilisation of rare earths,” said Mr. Chen. “[The subsidy] is aimed at supporting technological upgrades, energy conservation and environmental protection.”

…Beijing’s near monopoly in the strategic sector has raised concerns in Washington and Tokyo, particularly when China suspended rare earths shipments to Japan during a diplomatic dispute in 2010. That incident, combined with broader concerns about the reliability of Chinese supply, triggered a surge of investment in mines outside China, several of which are set to start producing next year. Lynas Corporation, an Australia-based miner, announced yesterday that its first shipment of rare earths ore had arrived in Malaysia, where it has a processing facility expected to start producing the substances in the first half of 2013.

Source: Excerpted from ”China signals support for rare earths,” Financial Times, Nov. 23, 2012, p. 14. From the Financial Times © The Financial Times Limited [2012]. All Rights Reserved.

Questions to Consider

After reading China Signals Support for Rare Earths, consider the question(s) below. Then “submit” your response.

Question

1. China initially held export quotas for its rare earth minerals. These quotas, however, didn’t have the desired result of impacting the world price, thus China opted to replace them with direct subsidies. Discuss why a subsidy would be preferable to an export quota from the view of the WTO.
While a subsidy is costlier to the government, it is more difficult for the WTO to control direct subsidies. Also, producers would have no incentive to reduce their supplies to domestic consumers. Their domestic and foreign price would be the same.

Question

2. Washington and Tokyo appear concerned by China’s use of rare earth minerals as a political tool. If these concerns continue to rise, what might you expect of the U.S. and Japan with respect to their trade behavior with China?
In 2012, the U.S., Japan and the E.U. filed an official request for dispute settlement with the World Trade Organization (WTO) with respect to China’s unfair export restrictions. Ultimately the WTO found China in violation of international trade law with these practices.