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China Raises Threat Level Over Rare Earths – Analysis

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By Michael Lelyveld

China’s state media outlets have hailed the surprising rise of the country’s exports last year, with one notable exception — a double-digit drop in supplies of minerals known as rare earths.

On Jan. 14, the Communist Party tabloid Global Times noted a 23.5-percent reduction in exports of rare earth elements (REEs), a class of 17 strategic materials used in products ranging from sophisticated magnets and cell phones to wind turbines and missile systems.

China is the dominant source of REEs, accounting for 62.8 percent of world production in 2019, according to U.S. Geological Survey data, although past published estimates have run as high as 99 percent.

The Global Times quoted a Beijing-based energy analyst as saying that the slump in shipments of REE ore to the lowest level since 2015 was partly due to a government policy of promoting higher-value exports.

“Rare earth ore exports are limited in value, and the global demand for raw materials is relatively low,” said Liu Enqiao of Anbound Consulting.

But Liu added that the decline “might be partly due to China’s tightening of regulations on strategic resources” under the country’s new export control law, which took effect on Dec. 1.

The law restricts sales of items related to China’s national security. The Ministry of Industry and Information Technology (MIIT) has also issued proposed regulations on quota management, production and other controls, the Asia Times reported.

The government has yet to publish its list of controlled items under the new law, but it is expected to include categories covered by the U.S. Commerce Department’s Control List and the U.S. Munitions List, an online posting by the White & Case law firm said.

The export control law may give China a new opening to restrict rare earth exports under a national security exception to World Trade Organization rules against restraints on free trade.

Trade friction

The national security curbs come nearly seven years after the WTO confirmed a ruling against China’s previous attempts to impose export restrictions on environmental and domestic demand grounds in a case brought by the United States, the European Union and Japan.

But whatever the reason given for the controls, China has made no mystery of its motives for restricting REE exports.

On its web page, the Global Times cited earlier reports describing the new law as a “deterrent,” a “bargaining chip” and a “tool of reprisal” against the United States.

The export controls on REEs are seen as retaliation for the U.S. exclusion of telecom giant Huawei Technologies Co. from development of 5G networks, sanctions on Chinese firms for suspected military ties and penalties for repression in Xinjiang.

“It makes no sense for the U.S. to use Chinese rare earths to make things like chips and then block their sales to Huawei,” said Zhou Shijian, former vice president of the China Chamber of Commerce of Metals, Minerals & Chemicals Importers, in a Global Times report on Nov. 30.

In another report on Oct. 23, the Global Times suggested that the law would allow China to cut off exports of seven other nonferrous metals including tungsten, tin, antimony, molybdenum, niobium, titanium and cobalt, deemed vital to the U.S. defense industry.

China’s maneuvers related to REEs and nonferrous metals have been the subject of WTO complaints dating back to 2012.

The threat of retaliation against the United States mirrors China’s ban of REE exports to Japan in 2010 following the detention of a Chinese fishing boat captain who rammed Japanese patrol boats in contested waters of the East China Sea.

The incident touched off a long series of tensions regarding access to rare earths and technologies.

In an analysis for the Foreign Policy Research Institute last October, June Teufel Dreyer, political science professor at the University of Miami, charted China’s efforts to preserve its near-monopoly over REE mining and processing, giving it a high card to play in strategic conflicts.

Dreyer noted that President Xi Jinping visited a rare earths mine in southeast China’s Jiangxi province in May 2019 during a period of rising trade frictions with Washington. The move was seen as a signal of muscle-flexing.

“Lest the implication be missed, Renmin Ribao, the official newspaper of the Chinese Communist Party’s Central Committee, wrote, ‘We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests,'” Dreyer quoted the paper as saying.

“Don’t say we didn’t warn you,” Renmin Ribao said.

In November, more than a year later, then-President Donald Trump issued an executive order declaring “a national emergency in the mining industry” to spur production and reduce reliance on China for REEs.

Beijing may have more than one motive for cutting its export of rare earths, which could be critical to its goals of developing domestic semiconductors and technologies under its “Made in China 2025” plan.

“I suspect it’s either to send a signal to the U.S. or to ensure an adequate domestic supply, or both,” said William Reinsch, a former Commerce Department official and now an international trade expert at the Center for Strategic and International Studies in Washington.

Retaliation

Either way, China can send a retaliatory message by restricting exports, knowing that another complaint to the WTO would take a long time to resolve.

“If the objective is to tweak the U.S., they can make their point easily, because there wouldn’t be a WTO panel outcome for a year after a case was initiated,” Reinsch said.

The Global Times reports suggest that the primary reason for the cuts is leverage.

“I see the drop as 90 percent retaliation and reprisal against the U.S.,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

Hufbauer said the new administration of President Joseph R. Biden Jr. is likely to respond by reducing U.S. reliance on China for strategic minerals.

“My expectation is that the Biden administration will guarantee a large share of the U.S. rare earths market to suppliers other than China, like the United States, Canada and Morocco,” Hufbauer said.

On Jan. 20, the U.S. Department of Energy’s Office of Fossil Energy announced U.S. $28.35 million (183.1 million yuan) in federal funding for cost-shared research and development projects on critical minerals and rare earths.

The United States is “completely dependent on imports” for 14 out of 35 critical minerals, the agency said in a press release.

“The U.S. currently imports 80 percent of its REEs directly from China, with remaining portions indirectly sourced from China through other countries,” it said.

The agency said the current U.S. $5-billion (32.2-billion yuan) global market for REEs is expected to grow by 40 percent in the next five years.

The threat of rare earths retaliation seems to fit an emerging pattern in Chinese policy of targeting trade to exert pressure on foreign countries and further political goals.

Most recently in December, China’s top planning agency formalized a ban on coal imports from Australia after delaying deliveries since November 2018. China cited a list of grievances against Canberra, including investment restrictions against Huawei and “siding with” the United States.

The coal ban on Australia coincided with a wave of energy shortages in China as the government authorized power companies to “import coal without clearance restrictions” from all other suppliers.

China has persisted in punishing Australia, which previously accounted for some 40 percent of its coal imports, despite the effect on price increases.

The ban may be seen as a measure of the relative importance of the government’s foreign policy priorities regardless of the economic costs.

Last year, China’s coal imports of nearly 304 million metric tons rose 1.5 percent, rising for the fifth consecutive year, the official Xinhua news agency reported.

Domestic coal production rose 0.9 percent to 3.84 billion tons last year, the NBS said.

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