Rare Earth Dispute

A Chinese Perspective

Will it work for China?

China are set to ban the export of raw materials from 2015

The measure has come as China attempt to tighten up regulations on the mining and distribution of rare earth metals. Rare earths are resources, necessary in the production of many high value goods including loud speakers, hybrid batteries, hard drives and wind turbines. The proposed restrictions were immediately met by a complaint filed by the US, EU and Japanese last March. They argue a case that the restrictions violate the World Trade Organisation (WTO) trading system, and are an act of unfair trade practise.

China currently accounts for over 90% of the worlds rare earth production. However, it only constitutes to a third of the worlds total rare earth resources. Thus, China believe they are being exploited for their natural resources and are taking action to prevent this.

What effect will it have on China?

As far as benefits and consequences are concerned, there are valid points for either side of the argument. If we begin with the benefits to the Chinese economy, the greatest gainers are China's domestic firms. By banning the exports of rare earths, China will decrease the supply in the global economy. Through the laws of supply and demand, the unit costs of rare earths will increase as supply decreases. This gives China's domestic firms a competitive advantage in the international market as the additional unit costs will cause international firms to produce higher priced goods.

China argues that a further reason for tightening regulations, is to increase the sustainability of their economy. Rare earths are non-renewable resources, therefore China can not continue to mine at such a rapid rate. The cut in supply will increase the longevity of the resources. This will be significantly beneficial for future generations, as they will still have resources available to use in production. Also, better working conditions for Chinese miners will result in a healthier labour force and less strain on the health service. A social benefit that will aid the efficiency of the Chinese health care. 

A way in which international companies may attempt to overcome the shortage in supply, is by relocating to China. This way firms can access rare earths at the same price as China's domestic firms, making them equally as competitive. China's advantage from this comes in the form of Foreign Direct Investment (FDI). Added investment from international firms will boost Chinas aggregate demand, and the increased output should raise China's already growing GDP.

All of this however, is not to say it's all good news for China. We must bare in mind that the ban on rare earth exports, will not be emplaced until 2015. China's economic position could alter until then. Already though, the restrictions have provoked a dispute between a few very powerful economies. If the measure does go through, China must be conscious of the negative effect it will have on their international relations, and the retaliation they may possibly face from trading countries.
Furthermore, it is be argued that a shortage in supply can bring the benefits of innovation. Entrepreneurial spirit and invention may increase as foreign countries seek possible alternative goods or resources, in order to replace those of rare earths. China must be aware of this situation, as the ban may, metaphorically speaking, section them off from the rest of the world. Setting them behind the rest of the world in terms of innovation.

Will it work?

Whether you agree or disagree, there is no shying away from the fact that a complete ban on exporting rare earths is an extremely drastic measure. I believe alternative regulations should be considered by China, regulations that have less of an effect on foreign relations for future generations. For example a tax on domestic mines. 

Equally, China can not continue to produce over 90% of the worlds rare earths. It is not sustainable for their economy, particularly considering that it only constitutes for a third of the worlds total supply. Foreign countries should look for other supply sources around the world as a short run solution. I believe the ultimate solution, is the idea of innovation. It is much more long term, and a complete movement away from non-renewable resources is definitely the future.