Haider  Syed    
January  5th  2011  

China’s rarer-earth

The   term   “rare   earths”   refers   to   a   group   of   seventeen   chemical   elements,   namely  
scandium,   yttrium   and   fifteen   lanthanides.   They   are   used   to   in   the   production   of   a   wide  
variety  of  high-­‐technology  products  such  as  flat  screen  televisions,  cellular  telephones  and  
are   present   in   specialized   industrials   products   such   as   hybrid   vehicles   and   military  
equipment.   Up   until   recently,   most   of   these   metals   were   sourced   from   deposits   in   India,  
Brazil,  South  Africa  and  the  Mountain  Pass  rare  earth  mine  in  California.  Today,  the  Indian  
and  South  African  deposits  still  produce  some  rare   earth   concentrates,   but   their   supply  are  
no  match  to  the  Chinese  production.  Annual  world  demand  for  rare  earths  is  currently  at  
about  120,000  metric  tons,  with  China  accounting  for  over  97%  of  the  world's  rare  earth  
supply1,  even  though  possesses  has  only  37%  of  proven  reserves.2  

In   a   controversial   move,   China   has   gradually   reduced   its   annual   tonnage   of   export  
quotas  from  2006  to  2009,  and  reduced  the  tonnage  of  allowed  exports  by  more  than  half  
in  the  second  half  of  2010.  As  a  result  prices  for  the  rare  earth  surged  seven  fold  in  some  
cases  (cerium  oxide)3  amidst  discussion  of  Chinese  export  quotes  on  the  precious  elements.  
Beijing’s   move   led   to   increasing   frustration   among   international   buyers   and   officials   in  
Japan  and  Germany,  who  accused  China  of  exploitation  and  argued  that  they  were  victims  
of   undue   advantage   that   left   major   technology   companies   little   choice   but   to   relocate   to  
China   to   mitigate   higher   costs.   Regardless   of   the   international   outcry,   China   reduced   its  
second-­‐half  export  quota  for  minerals  by  72%  with  further  plans  of  reduction  for  2011  by  
another  35%.  According  to  the  Ministry  of  Finance,  China  also  decided  to  start  levying  an  
export   tariff   of   25%   in   2011   on   alloys   that   contain   more   than   10%   rare-­‐earth   content.    
Previously,  China  issued  a  single  quota  for  all  17  elements  that  were  categorized  as  either  
heavy   rare   earths   or   light   rare   earths.   The   simpler   system   provided   exporters   more  
incentive   to   ship   the   more   lucrative   and   precious   heavy   rare   earths   overseas   for   higher  
returns.   The   new   tariffs   involving   alloys   and   separate   quotas   for   heavy   and   light   rare  
earths,   means   even   closer   monitoring   by   Beijing   on   the   resources   as   it   seals   potential  
loopholes  for  exporters  to  sidestep  regulations.  
                                                                                                               
1  1  http://www.wikinvest.com/wiki/China%27s_Rare_Earth_Dominance  
2  2  http://www.nytimes.com/2010/10/30/business/global/30rare.html?_r=1  
3  3  http://www.bloomberg.com/news/2010-­‐10-­‐20/china-­‐pledges-­‐to-­‐maintain-­‐rare-­‐earth-­‐sales-­‐official-­‐says-­‐
exports-­‐may-­‐rise.html?cmpid=yhoo  

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From   China’s   perspective,   policy   makers   felt   entitled   to   take   such   an   unwelcomed  
stance   because   of   a   brutally   simple  environmental   reckoning.   China   not   only   controls   the  
majority  of  the  world’s  rare  earth  supply  because  of  geologic  good  fortune  but  also  because  
it   has   been   wiling   to   endure   the   toxic,   environmentally   unfriendly   and   often   radioactive  
byproducts   that   the   rest   of   the   world   has   long   shunned4.   Understandably,   China   believes  
the   quota   reduction   is   necessary   in   order   to   limit   domestic   environmental   damage   and  
encourage   local   and   international   mining   companies   to   become   increasingly   efficient   and  
limit   pollution.   The   Ministry   of   Environmental   Protection   has   already   approved   the  
regulations,   which   will   slash   the   amount   of   pollutants   that   miners   of   the   minerals   are  
allowed   to   produce.   The   regulations   plan   to   allow   up   to   2-­‐3   years   for   each   rare   earth  
company  to  upgrade  their  machinery  and  extraction  techniques.  After  the  period,  they  run  
the  risk  of  being  banned  from  mining.  Evidently,  the  restrictions  will  likely  result  in  overall  
higher  production  costs  and  export  prices  but  diminish  the  environmental  cost.    

Across   China,   rare   earth   mines   have   damaged   countless   valleys   by   removing   vital  
topsoil   and   dumping   acid   into   streambeds.   The   environmental   costs   are   substantial   in   a  
city   like   Baotou,   a   smoggy   mining   and   steel   city   in   China’s   Inner   Mongolia,   where   the   air  
carries  metallic  taste.  Nearly  50%  of  the  global  supply  of  rare  earths  come  from  a  solitary  
mine   in   hills   located   north   Baotou.     After   mining   the   iron   ore   is   processed   at   low-­‐tech  
refineries   in   western   Baotou   and   rare   earth   minerals   are   extracted.     The   waste   from   the  
refineries   is   gathered   into   an   artificial   lake   and   presents   itself   as   a   dark   gray,   slightly  
radioactive   sludge   laced   with   toxic   chemicals.   Despite   being   confined   by   a   large   earthen  
embankment,  the  four  square  mile  noxious  swimming  pool  is  not  far  from  the  Yellow  River  
watershed   that   supplies   drinking   water   for   most   of   northern   China.   In   line   with   growing  
government   concern,   Baotou   authorities   have   begun   a   program   to   reinforce   the   levee  
alongside  the  embankments.  The  mines  of  southern  China  are  essentially  free  of  thorium,  
which   is   not   a   rare   earth   but   is   the   radioactive   component   of   the   ore.   Rare   earths   in  
Southern   China   are   easily   separated   from   the   clay   by   dumping   the   ore   in   acid.   But   this  
relatively  easy  process,  and  soaring  prices  on  the  world  market,  has  led  to  the  development  
of   many   illegal   mines,   which   sell   to   organized   crime   syndicates   that   pay   for   rare   earth  
concentrate   with   sacks   of   cash.   The   government   has   implemented   a   widespread   crack  
down  on  illegal  mines  smuggling  and  hopes  the  new  measures  further  aid  in  regulating  the  
export   of   rare   earths.   Moving   forward,   however,   China   still   hopes   to   continue   supplying  

                                                                                                               
4  4  http://www.nytimes.com/2010/10/30/business/global/30rare.html  

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substantial   rare   earth   to   the   world   markets   while   maintaining   restrictions   to   protect  
exhaustible  resources  and  ensure  sustainable  development.5  

At   the   same   time,   many   have   perceived   China’s   move   as   means   to   supply   ample  
amounts   of   rare   earth   to   the   domestic   fast-­‐growing   manufacturing   industry.   Moreover,   the  
export   quotas   seem   to   have   designed   with   intentions   to   foster   the   development   of   value-­‐
added   industries   within   China   as   more   technology   powerhouses   consider   relocation.  
Beijing  has  done  little  to  curb  domestic  demand  of  buyers  who  enjoy  rock  bottom  prices.  As  
it  stands,  annual  world  consumption  outside  China  totals  about  55,000  tons  of  rare  earth  
minerals,   rising   about   7%   every   twelve   months,   with   an   expected   200%   increase   for   the  
particularly   high-­‐price   minerals   necessary   in   green   projects.   Annual   production   outside  
China   is   around   7,000   tons   but   poised   to   rise   to   at   least   50,000   tons   a   year   within   three  
years,  as  international  buyers  scramble  to  fight  China’s  monopoly.  Interestingly,  a  quirk  in  
how  China  calculates  quotas  dictates,  that  1-­‐ton  of  rare  earth  for  some  alloys  is  allowed  to  
be   exported   after   2   tons   of   quota   is   used   domestically.   That   apparent   double   standard  
could   prove   important   to   the   case   that   the   United   States,   Europe,   Mexico   and   have   brought  
forward   to   the   World   Trade   Organization   accusing   China   of   unfairly   restricting   exports  
through  of  quotas  and  duties.      

China  argues  that  its  export  controls  are  in  line  with  World  Trade  Organization  rules  
as  the  measures  are  necessary  to  protect  China's  environment  and  supply  of  resources.  The  
WTO's   grandfathered   treaty,   the   General   Agreement   on   Tariffs   and   Trade   (GATT),   bans  
prohibitions  and  restrictions  such  as  quotas  on  both  imports  and  exports.  But  among  the  
exceptions,   specifically   Article   XX6,   it   allows   are   measures   to   protect   health   and   those  
"relating   to   the   conservation   of   exhaustible   natural   resources   (Article   XX(g))   if   such  
measures   are   made   effective   in   conjunction   with   restrictions   on   domestic   production   or  
consumption."   It   also   allows   restrictions   on   exports   of   domestic   materials   to   ensure  
supplies  to  domestic  industry  if  the  domestic  price  is  held  below  the  world  price  under  a  
government   stabilization   plan,   provided   those   restrictions   do   not   help   domestic   industry  
increase  its  exports  or  enjoy  protection,  or  generally  undermine  the  WTO's  basic  principle  
of  non-­‐discrimination.  Despite  the  provision,  the  United  States,  European  Union  and  Mexico  
launched   a   dispute   at   the   WTO   in   2009   over   their   complaint   that   Chinese   export  
restrictions  on  the  rare  minerals  discriminated  against  foreign  manufacturers  that  use  the  
inputs  and  gave  an  unfair  advantage  to  domestic  producers  by  distorting  competition  and  

                                                                                                               
5  http://online.wsj.com/article/SB10001424052970203525404576049431885987972.html  
6  http://www.wto.org/english/tratop_e/envir_e/envt_rules_exceptions_e.htm  

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increasing  global  prices7.  Under  WTO  rules,  a  panel  should  normally  publish  a  ruling  on  a  
dispute   within   six   months   of   being   formed.   The   WTO   agreed   to   set   up   the   panel   in  
December  2009,  and  its  membership  was  agreed  at  the  end  of  March  2010.  However,  for  
undisclosed  reasons,  the  W.T.O  has  deferred  the  case  to  April  2011.    

While   the   decision   continues   to   raise   concerns   from   governments,   mining  

companies  outside  of  China  are  working  hard  to  restart  projects  in  other  parts  of  the  world.  
Australia’s   Lynas   Corp.   and   U.S.   based   Molycorop,   for   example,   have   enjoyed   growing  
attention   and   rising   stock   prices8  since   official   word   from   China.   The   rare   earth   mine   in  
Mountain   Pass,   California   plans   to   reopen   soon   and   aims   regain   its   coveted   status   in   the  
rare  earth  market.  Environmental  concerns  forced  Molycorp  to  shut  down  Mountain  Pass  
in   the   late   90s   due   to   a   leak   of   radioactive   fluid   into   the   nearby   desert.   Not   only   did   the  
event   lead   to   a   costly   cleanup   but   also   spurred   unpopularity   of   rare   earth   mining   in   the  
United   States.   As   with   many   other   industries,   by   the   early   2000s,   low   cost   Chinese  
alternatives  made  the  mine  less  economically  viable.  9  

Similar   searches   for   alternative   sources   in   Australia,   Brazil,   Canada,   South   Africa,  
Greenland,   and   the   United   States   are   ongoing.   A   November   2010   U.S.   Geological   Survey  
found  that  deposits  that  total  about  13  million  metric  tons  had  been  found  in  14  U.S.  states.  
Other   significant   sites   under   development   outside   of   China   include   the   Nolans   Project   in  
Central  Australia,  the  remote  Hoidas  Lake  project  in  northern  Canada,  and  the   Mount  Weld  
project  in  Australia.  The  Hoidas  Lake  project  has  the  potential  to  supply  about  10%  of  the  
$1   billion   of   rare   earth   consumption   that   occurs   in   North   America   every   year.   Additionally,  
Vietnam   signed   an   agreement   in   October   2010   to   supply   Japan   with   rare   earths   from   its  
northwestern  Lai  Châu  Province.  In  the  short  term,  however,  many  will  still  look  towards  
Chinese  suppliers  due  to  the  many  barriers  of  entry  in  the  new  markets,  many  of  who  are  
not  poised  to  become  important  players  for  the  next  5-­‐10  years.  

Another   source   of   rare   earths   is   electronic   waste   and   other   wastes   that   have  
significant   rare   earth   components.   New   advances   in   recycling   technology   have   made  
extraction   of   rare   earths   from   these   materials   more   feasible,   and   recycling   plants   are  
currently   operating   in   Japan,   where   there   is   an   estimated   300,000   tons   of   rare   earths  

                                                                                                               
7  http://www.chinaeconomicreview.com/partnercontent/info/US_Slams_China_on_Exports.html  
8  http://www.economist.com/node/16944034  
9  http://www.economist.com/blogs/babbage/2010/09/rare-­‐earth_metals  

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stored  in  unused  electronics.  10The  scarcity  of  rare  earths  has  also  encouraged  innovation  
and  lead  to  cloning  of  rare  earths  in  Japan.    

In  conclusion,  I  believe  China’s  decision  to  introduce  export  tariff  on  rare  earths  is  
completely   justifiable.   However,   to   point   out   China’s   environmental   and   supply   concerns   is  
not   to   overlook   the   economic   benefits   the   nation   accrues   by   restricting   exports.   The   global  
shortage  will  give  rise  to  foreign  investment  in  underdeveloped  parts  of  the  country  as  well  
as   increasing   profitability   of   local   producers.     Accusations   by   the   United   States   and   the  
European  Union  are  warranted  and  claim  that  the  Chinese  policy  has  distorted  competition  
by   providing   domestic   production   a   competitive   advantage.   The   new-­‐look   protectionist  
plan  aims  to  supply  value-­‐addition  services  within  China  will  marginally  low  cost  materials  
while  raising  costs  for  those  beyond  its  borders.  I  believe  it  is  important  to  point  out  that  
the   parties   who   have   filed   the   dispute   with   the   W.T.O   are   mostly   developed   countries  
(United  States  and  E.U.)  who  are  threatened  by  China’s  growing  stature  in  the  international  
stage.   Perhaps,   that   is   the   reason   why   the   issue   has   been   delayed   at   the   W.T.O   as   is  
transcends   the   boundaries   of   trade   and   becomes   more   of   a   political   tug   of   war   between  
China  and  the  West.    

Secondly,   China   has   continued   to   encourage   other   nations   to   share   the   burden   of  
rare  earth  supply.  Meeting  world  demand  with  only  37%  of  proven  reserves  while  coping  
with  the  toxic  waste  is  a  price  that  the  Chinese  have  realized  it  too  high.  Through  the  new  
measure,  miners  will  have  to  explore  elsewhere  and  as  mentioned  before  many  locations  
have  already  expressed  interest  in  rare  earth  exploration.  The  United  States,  for  example,  
should  look  within  its  territories  to  satisfy  domestic  demand.      

Moreover,   I   am   of   the   opinion   that   every   country   has   the   sovereign   right   to  
determine   how   to   deal   with   its   own   natural   resources.   Membership   of   the   World   Trade  
Organization  does  not  require  a  country  to  export  any  of  its  natural  resources.  Rather,  the  
membership   mandates   that   all   purchasers   who   belong   to   the   W.T.O   be   treated   equally.   If  
the   Chinese   decide   to   treat   all   international   buyers   the   same   by   imposing   a   uniform   export  
tariff  it  maintains  the  most  favored  nation  status  towards  all  members  of  the  W.T.O.  In  the  
same  way,  the  U.S.  can  decide  that  its  own  coal  and  oil  and  natural  gas  are  too  important  for  
American   industries   and   people   and   therefore   cannot   be   exported.   I   believe   the   case  
presented  at  the  W.T.O  will  be  in  favor  of  China  as  previous  cases  like  the  US-­‐Gasoline  of  
199511  (the   U.S.   imposed   an   import   restriction   on   gasoline   from   certain   countries   which  
                                                                                                               
10  http://en.wikipedia.org/wiki/Rare_earth_element  
11  http://www.wto.org/english/tratop_e/envir_e/edis07_e.htm  

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did   not   meet   EPA   requirements)   was   also   decided   with   particular   concern   for   the  
environment.    

Trade  Tensions  between  China  and  West  trade  remain  at  an  all  time  high  with  focus  
on   currency   and   global   trade   imbalances   which   threaten   to   derail   the   world   economic  
recovery,  however  faint  it  maybe.  Rare  Earth  Minerals  are  proving  to  be  another  big  thorn  
in  trade  relations  between  China  and  the  West.  

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