By Yogesh Joshi
The recent spat between Japan and China over the ownership of a group of islands also highlighted the world’s dependence on China for rare earth metals. China is said to have stopped the supply of these strategically important metals by observing an informal embargo on exports to Japan and later to the United States and European countries as well. The use of economic assets and especially natural resources as a means of aggressive diplomacy came as a shock to these economies. The incident has raised fundamental questions about rising Chinese influence in the global milieu and its disregard for the rules of engagement in an interdependent world.
A group of 17 elements which occupy the 6th and 7th period and belong to the 3rd group of the periodic table, rare earths are critical for many high-technology products. Lanthanum, Neodymium, Cerium and Dysprosium are some of the key elements. Used in green technologies such as hybrid cars, modern wind turbines and solar cells, and in military applications such as precision guided bombs and missiles, the rare earths are the backbone of the increasing technological sophistication which the world has witnessed recently.
The total reserves of rare earth in the world are estimated to be around 99 million tonnes. China and the United States control most of these reserves with individual endowments of 36 million tonnes (30 per cent of world’s total) and 13 million tonnes (13 percent of world’s total), respectively. Other countries which hold substantial reserves are Australia, India, the Commonwealth of Independent States, and Brazil. Over the years the supply patterns of rare earths have undergone fundamental changes. According to the US Geological Survey’s Mineral Commodities Summary, whereas till 1995 USA and China produced equal quantities of rare earths, today China produces approximately 97 per cent of the world’s rare earth. Of the 124,000 tonnes of ore mined in the year 2009, China produced 120,000 tonnes. So what led to this awkward shift in production capacities?
First, China adopted aggressive market strategies. Deng Xiaoping’s southern tour in the mid-1990’s focussed on developing China’s rare earth production capacity. Cheap labour allowed a steady decrease in the cost of mining rare earth, which is a costly, tedious and hazardous exercise. Infusion of cheap labour and government resources and capital in the rare earth industry led to many foreign firms being out-competed. However, this was only possible because free trade by this time was accepted as a worldwide norm. Even if China increased the production of cheap rare earths, it appeared to be compatible with the laissez-faire principles of world trade. China’s transition to an open economy and accession to WTO further emboldened the perception that free trade is firmly entrenched in the Chinese mindset.
Moreover, when big firms were enjoying the availability of cheap rare earth, no one decried the loss of jobs in the mining business in the West. Mining of rare earth is environmentally an extremely hazardous enterprise and the growing environmental awareness in the West also fed into the decision of surrendering the production of rare earths to Chinese control. All these factors led to the closure of the Mountain Pass mine in California, the biggest producer of rare earth in the world, in the year 2002. Two Chinese firms – Baotou Steel High Technology Company and Jianxi Copper, now virtually control the rare earth market.
Thus the present Chinese monopoly on rare earth is not only a result of a conscious strategy on the part of China, but the consumers of rare earth were equally comfortable with this kind of an arrangement where China was performing the dirty work of mining the rare earth and advanced economies were busy making high-tech products. In other words, China was gifted a monopoly, it did not create one.
The extent of the Chinese monopoly can be observed from many distinct sources. First, even when the demand for rare earth has decreased considerably after the global financial crisis, the prices of these metals have risen. According to an estimate by Proactive Investors, a risk assessment firm, “Rare earth prices are soaring, up on average by 300 per cent between January and August 2010, with the rise for each individual metal ranging from 22 per cent to as much as 720 per cent.”1 For instance, Samarium, a rare earth used in the navigation system of M1A2 Abrams tanks has jumped from $ 4.5 a kg to $ 34. Artificial intervention by Chinese authorities is the main reason. China has decreased the export quotas by more than 72 per cent and recently announced another 30 per cent reduction for next year.
Second, one can relate the monopoly powers of China with the flight of manufacturing units of firms involved in rare earth business from home countries to China. General Electric (USA), Rhodia Group (France), New Materials technology (Canada), Diaodo Electronics (Japan), are among many who have relocated to China. Beijing has cajoled these firms through the instruments of Quotas and Tax Breaks.2 Since Quotas only apply to raw material and not semi-finished or finished rare earth products, foreign companies have created joint ventures with local Chinese enterprises. Tax Breaks are another indication. China levies a duty of 25 per cent on export of rare earth whereas it gives a rebate of 17 per cent on value added tax for firms based in China. This relocation has allowed an increase in high-class manufacturing jobs in China. This has also led to very high consumption of rare earths within China.
Third, and the most glaring example of this monopoly, was the Chinese decision to impose an informal embargo on rare earth exports to Japan days after the Japanese authorities arrested the captain of the Chinese trawler near Senkaku (Diouyu) Islands. Not providing customs clearances was the most favoured instrument for such an embargo. The Japanese reliance on exports of high-tech products, many of which need rare earth in a significant quantity, as the mainstay of its economy and the absence of any indigenous or alternative sources of rare earth combined to constitute a rare vulnerability for the Japanese economy. In fact, Japan considered the blockade as a direct threat to its economy with Fiscal Policy Minister Banri Kanieda saying “the de facto ban on rare earth exports that China has imposed could have a very big impact on Japan’s economy.”3
However, in the short run, there is no escaping the Chinese monopoly. In the World Trade Organisation, China can easily defend its policies. Any administrative embargo is hard to be established. Decrease in Export Quotas can be reasoned on environmental costs as well as an increase in domestic consumption of these metals. Arguments referring to national sovereignty over natural resources as well as sustainable development will also be valid. Thus, the WTO has very little mandate. Clarifying the WTO’s role in the whole matter, Pascal Lamy, the General Secretary of WTO, said in a conference organised by the Federation of German Industries on the issue that the “WTO has no responsibility in dealing with raw materials (rare earths) as such.”4 There is no way existing rules on world trade can be of any help. This thought was shared by Frank Haffmeister, the Deputy Chief of Cabinet of the EU, when he said “the fact is that existing rules do not appear to be commensurate to the problems we face.”5
Though alternative technologies which bypass the need for rare earths have been seriously worked upon, the gestation period for these technologies to mature and to penetrate the market will be long. The development of alternative sites of rare earth is a viable option. Japan has concluded a comprehensive plan called “Strategy for Enhancing Stable Supplies of Rare Earth” allocating more than 100 billion yen for improving rare earth supplies.6 It has signed treaties with Mongolia, Vietnam and India to develop rare earth resources. Recently, the House Committee on Science and Technology of the US Senate has proposed a bill called Rare Earth and Critical Materials Revitalization Act, which seeks to revive the US rare earth mining industry through subsidies. The House of Representatives passed the bill with a margin of 324 to 98. Molycrop Mineral, a Colorado based mining firm, is now all set to reopen the Mountain Pass Mine. The European Union is devising new strategies to meet its requirements of rare earth minerals.7 It is planning to invest more than 17 million Euros on research and development of new technologies to replace rare earth and exploration of new sites of rare earth especially in Africa.
The news for dependent actors is not very good. The Government Accountability Office of the USA claims that it will take more than 15 years for the supply chain to be established again.8 Moreover, the most important factor in the development of alternative sources is the current Chinese monopoly. If China smells a rat, it can always ease out production and flood the market, thereby making huge investments by other countries unviable in the short run. The bane of globalization is that translational actors are driven by the logic of the market rather than nationalistic concerns.
As Waltz has argued in the Myth of Interdependence and to which Keohane and Nye consented in the first chapter of Power and Interdependence, Vulnerability interdependence is a great power resource. Even in an interdependent relationship, distributional aspects of mutual cooperation still linger. A vulnerable state in an interdependent relationship is prone to manipulation from a less dependent state. The Chinese monopoly on rare earths has indeed created vulnerability for other states.
However, the conflict over rare earths is not only a consequence of the monopoly amassed by China on rare earth production and distribution. It also suggests that the current flux in global power hierarchies provides incentives for states not to follow the rules of the liberal order. The United States, as Michael Mandelbaum has argued in The Frugal Superpower, under the impact of the economic crisis, is unable to perform its role as a guarantor of the global economic order. The decline of the hegemon may also be a factor in growing Chinese assertiveness when it comes to rare earths.
1. Janie Ashcroft, “China’s Precious Metals- Rare Earth Boom Outpasses Gold and Oil rallies,” Proactive Investors, 4 October 2010,
2. “Japan Cries foul on Rare Earth Exports,” The Financial Times, 24 October 2010,
3. Hiroko Tabuchi, “Block on Minerals called a Threat to Japanese Economy,” The New York Times, 28 September 2010.
4. Jude Dempsey, “West Should Diversify its Sources of Rare Earth, Officials Say,” Bataviase.co.id http://bataviase.co.id/node/437670
6. Japan Ministry for Economy, Trade and Industry,
7. Jude Dempsey, “EU Seeking new strategy to reduce reliance on China for Rare Earth,” International Herald Tribune, 25 November 2010,
8. Rare Earth Minerals in Defence Supply Chain, United States Government Accountability Office, 14 April 2010,
Originally published by Institute for Defence Studies and Analyses (www.idsa.in) at http://www.idsa.in/idsacomments/PowerInterdependenceandChinasRareEarthMoment_yjoshi_281210
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