Even as the United States, European Union and Japan were jointly filing a trade case recently against China over its export restrictions on strategic rare earth metals, many specialists could not help wondering: Is it too little and too late to do much good for Western and Japanese manufacturers?

President Barack Obama heralded the case as a landmark when he announced it at the White House recently, signaling that the United States and its allies would require China to play by international trade rules.

“Our competitors should be on notice: You will not get away with skirting the rules,” he said.

But international trade officials, industry leaders and specialists in China and the West noted that Beijing would have a strong hand of cards as it seeks to defend its export policies on rare earths.

The metals are needed for making an array of sophisticated products, from smartphones to smart bombs, as well as wind turbines and other green technologies. China is the source of more than 90 per cent of the world’s processed rare earth metals.

Even if the West and Japan overcome the stiff challenges of winning their case at the World Trade Organisation, it could still take several years before Beijing changes its policies, by which time, companies in the West and Japan could have moved even more of their factories that use rare earth metals to China.

“The filing was too late,” said Karl A Gschneidner Jr, a longtime rare earths specialist at Iowa State University. China was “cutting off supplies and controlling things in the past couple years,” he said.

He noted that this year, the reopening of a long-idle US mine at Mountain Pass, California, and the opening of another mine in Australia will start putting more rare earths into the global supply chain, potentially enough to meet more than half of the demand outside of China. But many rare earth metal users, including computer hardware manufacturers and producers of energy-efficient lighting, have already shifted operations to China and are unlikely to move soon.

But some specialists say that the West has benefited indirectly from China’s quotas, because they drove rare earth prices up by as much as 30 times. That caused a boom in mining investment that is now opening alternatives to China.

“I don’t think it’s too little, too late,” said Yaron Vorona, the executive director of the Technology and Rare Earth Metals Center at the Institute for the Analysis of Global Security, a nonprofit organization in suburban Washington that focuses on energy security.

Whatever the eventual implications for world supplies of rare earths, in some ways, a recent Western victory on a somewhat related trade case may have strengthened China’s hand.

The World Trade Organisation ordered China last July to dismantle export duties and quotas on nine other industrial raw materials, including bauxite, and an appeals tribunal upheld the ruling and added details in late January.

China has been able to study those orders as it has redesigned its export restrictions on rare earths. The new quotas are as stringent as the old ones, making it harder for Western manufacturers to obtain rare earths in the quantities and with the timeliness their factories require. But the revamped quota rules could be easier for China to defend in front of a WTO tribunal, than its earlier policies would have been.

China, for example, has begun requiring its rare earth exporters to obtain a certificate of environmental compliance before they are allowed to make any overseas shipments. That could strengthen China’s claim that export quotas on rare earths are environmentally necessary. Without dispute, the mining and processing of rare earths have many toxic and even radioactive byproducts – which is one reason the West and Japan for decades were reluctant to produce them.

China denies claims by Western trade officials that Beijing has waved the environmental flag to disguise its true motive: to force Western and Japanese factories to move to China to gain access to an uninterrupted supply of low-cost rare earths.

The Chinese government has also lent large sums to four state-owned mining companies that are buying many of their smaller, private domestic rivals in rare earths. That raises the prospect that China could assemble a state-owned rare earth oligopoly – one that could effectively limit exports without government policies that mandate the restrictions.

WTO rules mostly cover government regulations, not the behavior of oligopolies.
“It will be much more difficult for us to win the rare earth case than it was for us to win the previous case,” said a Western trade official, referring to the WTO rulings on industrial raw materials.

The official, who insisted on anonymity because the case was diplomatically and legally delicate, added that the rare earth case could still be won because of voluminous files that point to abusive Chinese trade practices.

A diplomatic confrontation between China and Japan over disputed islands in September 2010, for example, turned into a Chinese show of force on rare earths. Chinese regulators abruptly summoned the presidents of China’s rare earth mining companies to a secret meeting in Beijing, said a person with a detailed knowledge of the meeting, who insisted on anonymity to avoid angering Chinese officials.

The mining executives were told that the Chinese government was about to halt all shipments of rare earths to Japan, where the electronics industry, camera industry and others depended very heavily on the materials. The executives were told that if any of their companies stepped up shipments to another country instead, allowing reshipment of rare earths from that country to Japan, then the company would lose its export license, which could mean financial ruin. The assembled executives were also warned against speaking to the news media about the coming embargo, this person said. Chinese government trade statistics later showed that exports of rare earths to Japan dropped to almost zero during the embargo, which continued for two months. Legal shipments to other markets increased little in that period, although smuggling to Vietnam and then on to Japan did increase.

Besides trying to free the global flow of rare earth metals, the United States and its allies also demanded that China dismantle export restrictions on two other strategic minerals that are also mined mainly in China: tungsten and molybdenum, which are used to strengthen steel.

Obama also signed a law intended to make it easier for companies and unions to file anti-subsidy cases against imports from China and other countries designated by the United States as having nonmarket economies.

The New York Times