The Never-Ending Rare Earth Saga

Not again! Apparently, the Chinese are targeting the US now by withholding rare earth exports. For what? According to the NYT's Bradsher again, it's because Beijing is mighty angry at the Section 301 clean energy case that the USTR recently said it would investigate. So, Beijing is retaliating thusly:

"The embargo is expanding" beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities. They said Chinese customs officials imposed the broader shipment restrictions Monday morning, hours after a top Chinese official had summoned international news media Sunday night to denounce United States trade actions.

I was never quite convinced that China's official policy was to impose an outright ban on rare earth exports toward Japan, for some of the reasons I've mentioned in a previous post. I find it even harder to believe that China decided to retaliate against a case that the USTR hasn't even officially picked up by leveraging rare earth elements--especially since the 301 case specifically singled out China's rare earth policies as violating the WTO. So the Chinese decided that "hey, why not make it easier for the US to go after us on rare earths by blocking exports to them!" The Chinese are many things, but they are generally not so obviously callous and more strategic than that. So, such a move seems like rather uncharacteristic behavior on the part of the Chinese.

I am also struck that no US or western company has willingly come forward to validate that they are no longer receiving the minerals from China. And the NYT piece cites three anonymous industry officials, and I do wonder if the names of the sources will eventually be revealed. It would certainly lend more credibility if US companies spoke up on this issue. For now, it reads like some considerable logical leaps to weave together a narrative of China's new instrument of retaliation against perceived or real slights, particularly originating from western countries.

It would also help matters a great deal if the Chinese made clearer statements, other than the Commerce Ministry and Premier Wen Jiabao's comments that no official ban exists, that would help clarify what I sense is quite a bit of misinformation flying around. I realize that the Chinese lost the PR game on this long ago, but that's a symptom of a Chinese system that doesn't react as swiftly as it should. When no one in the bureaucracy can decide on what to do or craft a unified message, often nothing gets done. So the narrative is lost for good. However, Beijing can certainly still do something...?

For now, a silver lining (suppose that depends on who you are) is that rare earth stocks have jumped pretty substantially since Chinese moves to tighten quotas (see for example this Canadian company). And a rumor circulating today about another potential cut in export quota by 30% next year has likely prompted further improvements in stock performance. [Update: Commerce Ministry today flatly refuted the rumors circulating yesterday that China would cut export quotas by another 30% in 2011.]

I suspect this saga will continue...

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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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