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Monday, July 6, 2020

China's worrying rare earth monopoly

by Linda S. Heard

The Chinese President, Hu Jintao greets the US President Barack Obama

China has begun to limit its exports of rare earth deposits, with worrying consequences for the world. Linda S. Heard asks why

Have you ever heard of Scandium, Yttrium or Promethium? What about Samarium, Thulium or Lutetium? The answer is probably no, but don’t worry, not many people have. These are examples of 17 strategic rare earth metals or chemical elements, all of which come from China. In fact, 97 per cent of the world’s supply of rare earth metals and chemicals originate in China, and this, according to some reports, is causing serious problems for the rest of the world.

The issue lies in the fact that it has limited its rare earth exports and completely cut-off supply to Japan, as part of what some would call global power play.

All of these resources are of the utmost importance in the manufacture of a number of essential things - night-vision glasses, nuclear missile launchers, solar devices, aerospace components, hybrid vehicles, magnets, lasers, flat-screen televisions, wind turbines and pharmaceuticals. They are also crucial to the production of petroleum products and technology used for green initiatives. 

The Chinese began limiting their export of such materials, most of which come from Mongolia, several years ago. Then, at the end of last year, the government announced a further decrease of 35 per cent in exports. Moreover, recently there have been a number of inexplicable delays of shipments to Western countries, caused by customs officials suspected of having been ordered to make life difficult for foreign importers.

Countering criticism of its stranglehold on rare earth elements, China insists that it is not contravening the World Trade Organisation (WTO) rules or purposefully holding its trade competitors to ransom. It says its first priority is its own industries. Other reasons put forward include the country’s need to conserve precious natural resources and ensure environmental integrity.

However, the US and other developed nations suspect there’s something more sinister behind their partial embargo and especially in light of the trade war between China, America and the EU, as well as the ongoing dispute over China’s refusal to revalue the Yuan to reflect its actual value. Washington has accused the Chinese government of manipulating the yuan to give Chinese exporters an unfair competitive edge.

In January, three Democratic senators planned to introduce a bill to penalise ‘currency manipulators’, with Beijing in mind. Simultaneously, US trade officials accused China of possible infringements of WTO rules by attempting to coerce multi-national companies into manufacturing goods that require rare earth elements, within China itself.
Prior to President Hu Jintao’s recent visit to the White House to meet with President Barack Obama, the Chinese leader told journalists that the global hegemony of the US dollar is a “product of the past” and complained about a decision made by the US Federal Reserve to boost America’s economy with an injection of US$600 billion (Dhs2, 200 billion); a move that some experts believe will weaken the greenback, making US exports more attractively priced.

“The monetary policy of the United States has a major impact on global liquidity and capital flows and, therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,” said the Chinese President, Hu Jintao.

In recent years, the Chinese government has been taking small steps towards making the yuan an international trading currency, which may occur before the end of next year. If this should happen, experts predict it’s likely that many Asian and South-East Asian countries will switch their reserves from the dollar to the yuan, or even decide to opt for a yuan currency peg.

Although deficiencies in the supply of rare earth metals have yet to cause an emergency situation, global demand is predicted to soon increase by 40,000 tonnes annually. New deposits must be found elsewhere or China has to be persuaded to loosen its grip on them. In the meantime, the scarcity of these indispensable materials has led to burgeoning prices.

If this trend continues, China could eventually price itself out of the market as buyers are already seeking alternative sources – in particular, Australia, the United States, Canada, South Africa and Vietnam.

Rare earth elements do exist in these countries but, until recently, little serious excavation of them has taken place outside China, mainly because it was offering highly competitive prices. However, alert to the danger of China’s ability to pull the plug as a bargaining chip or in retaliation against US currency or trade policies, the US Congress is now looking at the feasibility of rare earth mining in the US, which if implemented would take three to five years to yield tangible results.

Superficially, relations between China and the US appear to be friendly. However, beneath the surface, lie a number of issues over which the two countries disagree. China’s limitation of rare earth exports is just one.

Washington regularly criticises China for its human rights record and its censorship of the internet, as well as its refusal to agree to tougher UN Security Council sanctions on Iran, its increase in its enriched uranium supply and its unwillingness to sign-up to international climate change agreements.

For its part, Beijing is disgruntled over planned sales of US weapons to Taiwan, including attack helicopters and minesweepers. The Chinese are also disturbed by America’s admitted fears concerning Beijing’s booming economy, its increased international influence and, especially, China’s development of sophisticated weapons and ever-increasing nuclear arsenal. The Pentagon has also complained about China’s military capabilities in space, which means the country can now destroy US satellites or jam their communications should they wish. 

The US has also made known its fear that China is gearing up to overtake it economically and militarily, and as a result, has been accused by the Chinese of scaremongering. A recent editorial, published in China’s Global Times, which is owned by the ruling Communist Party, accuses the powers that be in Washington of pursuing “a strategy that intensifies and exploits public fear of the unknown”, adding that, “demonisation [of China] is running full scale”. It also condemns the American media for being “devoted” to disseminating China-phobic fears.

The bottom line is that Washington is feeling more and more vulnerable in the face of the international mammoth that China is threatening to become within only a very short time. Even if Beijing slams the door on rare earth exports entirely, there is little the US can do to hit back, given that Uncle Sam owes China a mind-blowing US$12.4 trillion (Dhs45.54 trillion).

It’s no wonder that President Obama had the White House silverware polished for a lavish state dinner in President Hu’s honour. It was attended by former presidents Jimmy Carter and Bill Clinton, along with Hollywood glitterati, a number of high profile businessmen and, of course, prominent Chinese Americans.

For now, the leaders of America and China remain on cordial terms but, behind the handshakes and the smiles, is a very different story. The shortage of rare earth elements is understandably disturbing for weapons and hi-tech manufacturers in the West, but, ultimately, given that the Chinese Tiger is poised and ready to bare its teeth, Washington may soon have a lot more to worry about.

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