USA, EU, Japan v China: REE Round 1

A trade war is about to breakout between the G-7 and China, over the issue of rare earth elements and their products. Nothing good will be the outcome of this. The Chinese Communist Party is in the run up to a generational handover of power in October and November. The existing office holders are unlikely to just rollover before handing over power to their juniors. The new filing comes on the heels of last year’s successful complaint against China on a different set of raw material restrictions. My guess is that China will retaliate.

Of course China’s previous policy of driving out of business nearly all non-Chinese supply of REEs has come back to haunt it. Effectively China now needs all its heavy REE supply for its own needs and the needs of the coming decades. In fact, China will need soon to import some HREE supply from the rest of the world according to the industry experts.  The problem is that non-Chinese HREE supply doesn’t exist at present. With Lynas suffering delays in Malaysia, and Molycorp deficient in heavy rare earths, plus any World Trade Organisation complaint taking up to two years to reach a resolution, it’s hard to see quite what is gained by pressing ahead with the filing. The cynic in me suggests it is timed to the upcoming US November election.

March 13, 2012, 2:37 a.m. ET
U.S. and Europe Move on China Minerals

The Obama administration Tuesday intends to escalate its trade offensive against China, a move heavy with political overtones, by pressing the World Trade Organization to force the export giant to ease its stranglehold on rare-earth minerals critical to high-tech manufacturing.

—-The U.S., joined by the European Union and Japan, plans to ask the WTO, the international arbiter of trade practices, to open talks with China over its restrictions on exporting the rare-earth minerals, administration officials said.

China dominates both the mining of rare-earth materials and the ability to process mined oxides into the metals that serve as key components of everything from smartphones to hybrid vehicles to military equipment.

—- The latest U.S. effort was widely anticipated by people in the industry following years of unsuccessful efforts to press China directly on the issue. The U.S. will ask the WTO to push China to stop its controls on the production of rare-earth minerals. Barring a surprise breakthrough in negotiations, the issue is likely to become a full-fledged case at the WTO against China.

The fact is that the G-7 has followed a dangerously complacent lack of policy on rare earth elements for at least a decade.  The US and Europe happily all too willing to rely on cheap Japanese, South Korean, and Chinese REE products. Now the Chinese economy has reached the point of remediating its environmental abuse, restricting illegal REE smuggling, and needing all its REE supply for its own future, the rest of the world finds itself caught between two stools. It neither has the ability to really force China to supply REEs at the levels and prices of the mid 2000s, nor has it yet the ability to supply non-Chinese REEs especially heavy REEs.

Rather than filing WTO complaints, or bailing out Club Med to prop up the failing Euro project, it might be wiser for America and Europe and Japan to come up with some acceptable way of crash funding some viable North American based, EU based, and non-Chinese Asian based heavy REE supply and REE refineries. It might not be pure capitalism in the strict sense, but in our new age of too big to fail bank bailouts, we haven’t been on pure capitalism for a couple of decades.

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