Chapter 10. China Ends Rare-Earth Minerals Export Quotas

10.1 section

Chapter 10 HEADLINE: China Ends Rare-Earth Minerals Export Quotas

China has dropped decade-old quotas limiting exports of strategically important minerals that sparked a global trade dispute and led some countries to reduce their reliance on Chinese supplies. The shift comes after Beijing lost a dispute at the World Trade Organization in 2013. But the policy also proved to be of little value for Beijing as many countries found other sources for the materials known as rare earths, which are widely used in high-technology industries such as smartphones and missile systems. “The change is likely because of the pressure from the WTO decision,” said Frank Tang, an analyst at investment bank North Square Blue Oak. “China is saying that as a WTO member, it’ll have to abide by WTO rules.”

The quota system was once a major global trade issue. In 2010, China pushed global rare-earth prices sharply higher—in some cases tenfold—when it slashed its export quota on the 17 elements by 40% from the preceding year. China has said it was an effort to clean up a highly polluting domestic rare-earth mining industry. The Obama administration described the move as a “wake-up call.” Trade complaints followed, adding rare earths to a raft of items—including car parts and solar panels—that have been the subject of friction between China and its trading partners in recent years. The U.S., European Union and Japan in 2012 complained that China was using the quota to push up global rare-earth prices in violation of WTO rules.

But since then the world has reduced its reliance on the minerals from China, which until recent years produced about 93% of the world’s rare earths. China’s share of global rare-earth output has fallen to around 86% as other producers amped up supply. China’s exports now frequently fall short of maximum levels under the quota system. In 2012, it eased quota restrictions. But after it lost the WTO case, government officials said the quota’s days were numbered.

Source: Excerpted from Chuin-Wei Yap “China Ends Rare-Earth Minerals Export Quotas,” The Wall Street Journal, January 5, 2015, online edition.

Question 1

Question

What does China’s argument that rare-earth minerals represent a strategic commodity that should be exempt from export quota restrictions under Article XX suggest about trade in goods derived from those minerals?

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If the minerals are critical to the domestic production of a good by China to the exclusion of producers in other nations, then China would not be inclined to export those goods to other nations, reserving consumption for its own domestic market. That China exports goods that use rare-earth minerals suggests that China is hoarding rare-earth minerals to protect its own domestic industry, and drive up the cost of foreign producers using those resources.

Question 2

Question

What do China’s actions and the rest of the world’s response suggest about the relative scarcity of mineral resources?

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Mineral resources are inexhaustible economically. Even non-renewable resources often have substitutes, or high cost sources, that can become economically viable. That both the U.S. and Australia were willing to reopen production suggests that the environmental costs can be overcome if the demand exists for those resources.

Question 3

Question

Does China’s argument that it restricted exports to allow for environmental cleanup hold water? Is it believable?

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Nominally, yes, if you believe that China wanted to reduce the scope of the industry to reduce the environmental damage. But China could have required firms mining the minerals to clean up their mess, forcing firms to internalize the costs they impose on Chinese society through pollution. This is both a more direct and efficient means of dealing with the environmental costs. The fact that they chose the indirect route, imposing an export quota, suggests they were in fact attempting to give an advantage to Chinese producers over their foreign competitors.