China’s export restrictions on rare earths

China is the world’s largest depositor, producer, consumer and exporter of rare earths, controlling 97 per cent of the global supplies.

But with China’s export restrictions, the gap between demand and supply is growing because of the dearth of any other major supplying nation.

In recent years, the Chinese government has cut down the number of export enterprises, export quotas and the annual exploitation volume of rare earth ores. Users of the minerals in industrialised countries now face tighter supplies and higher prices. China has cut its export quotas for rare earths by 35 per cent in the first round of permits for 2011, threatening to extend a global shortage of the minerals needed for smart phones, hybrid cars and guided missiles.

With the current quota system, China does not distinguish between the individual rare earth oxides but limits the total tonnage of exports across the board. This has led to Chinese companies exporting as much of the high-value heavy rare earths like dysprosium as possible, instead of low-value light ones, like cerium.

China’s imposition of export quotas on several rare earth metals, on the grounds that it needs the higher quantities for its clean energy and high-tech sectors, is squeezing an already starved market. China wants rare earth companies to increase profits by using the minerals to make more technologically-advanced products, rather than exporting the raw material. While it has cut foreign sale quotas of the raw materials, there are no restrictions on exports of finished products.

Analysts predict that by 2014 the rest of the world could face a major supply crisis because of China’s reduced or zero supply. The gap in demand and supply is expected to reach 30,000–40,000 tonnes by 2012 in the absence of any new large supplier. China’s growing economy is creating a worldwide risk to supply, as its growing consumption limits its exports of rare earths.

Recently, China announced that it would further tighten its rare earths exports even after the WTO’s ruling in July 2011 that China violated international trade rules by restricting the exportation of raw materials, refuting Beijing’s claim that these restrictions were based on environmental grounds. China rejected the WTO ruling arguing that it was unfair and subjective, exposing the insufficient representation of developing countries in the WTO and its inability to understand developing nations’ problems.

Export restrictions are designed to meet diverse policy objectives that range from environmental protection and increasing fiscal revenue to the development of processing sectors. But China believes its export restriction policy was justified under the WTO’s General Agreement on Tariffs and Trade (GATT) general exception clause Article XX, for the purpose of natural resource conservation and the protection of public health.

China’s defence hinged on two other important provisions of the GATT: one supports use of trade restrictions when exhaustible natural resources are involved, and the other allows temporary use of export prohibitions or restrictions to prevent or relieve critical shortages of products essential to the exporting countries.

China has officially cited environmental issues as one of the key factors for its recent regulation of the industry, but non-environmental motives are also driving China’s rare earth policy. According to The Economist, ‘[s]lashing their exports of rare-earth metals … is all about moving Chinese manufacturers up the supply chain, so they can sell valuable finished goods to the world rather than lowly raw materials’.

Businesses and policy makers are concerned about the increasingly restrictive and unpredictable nature of international trade in industrial raw materials. Multilateral disciplines governing the use of export restrictions are weak. This creates uncertainty for industries that depend on supply of these materials and raises the risk for investment in both mining and processing facilities worldwide.

There is no evidence China’s export restrictions had the desired effect on production. In order to fulfil the stated policy objectives of environmental stability and preservation of natural resources, the export restrictions would have needed to decrease the production of rare earth elements in China. This has not been the case, as production has risen continually over the years and so the measures that were introduced are yet to achieve their stated objectives.

October 6, 2011

Source: East Asia Forum