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CHANGSHU, China — China has long used access to its giant customer base and cheap labor as bargaining chips to persuade foreign companies to open factories within its borders.
Now, corporate executives say, it is using its near monopoly on certain minerals — in particular, scarce metals vital to products like hybrid cars, cellphones and energy-efficient light bulbs — to make it difficult for foreign manufacturers of high-tech materials to build or expand factories anywhere except China. Companies that continue making their products outside the country must contend with tighter supplies and much higher prices for the materials because of steep taxes and other export controls imposed by China over the last two years.
Companies like Showa Denko and Santoku of Japan and Intematix of the United States are adding factory capacity in China this year instead of elsewhere because they need access to the scarce metals, known as rare earths.
“We saw the writing on the wall — we simply bought the equipment and ramped up in China to begin with,” said Mike Pugh, director of worldwide operations for Intematix, who said the company would have preferred to build its new factory near its Fremont, Calif., headquarters.
While seemingly obscure, China’s policy on rare earths appears to be directed by Prime Minister Wen Jiabao himself, according to Chinese officials and documents. Mr. Wen, a geologist who studied rare earths at graduate school in Beijing in the 1960s, has led at least two in-depth reviews of rare earths this year at the State Council, China’s cabinet. During a visit to Europe last autumn, he said that little happened on rare earth policy without him.
China’s tactics on rare earths probably violate global trade rules, according to governments and business groups around the world.
A panel of the World Trade Organization, the main arbiter of international trade disputes, found last month that China had broken the rules when it used virtually identical tactics to restrict access to other important industrial minerals. China’s commerce ministry announced on Wednesday that it would appeal the ruling.
No formal case has yet been brought concerning rare earths because officials from affected countries are waiting to see the final resolution of the other case, which has already lasted more than two years.
Karel De Gucht, the European Union’s trade commissioner, cited the industrial minerals decision in declaring last month that, “in the light of this result, China should ensure free and fair access to rare earth supplies.”
Shen Danyang, a spokesman for the commerce ministry, reiterated at a news conference on Wednesday in Beijing that China believed that its mineral export policies complied with W.T.O. rules. China’s legal position, outlined in W.T.O. filings, is that its policies qualify for an exception to international trade rules that allows countries to limit exports for environmental protection and to conserve scarce supplies.
But the W.T.O. panel has already rejected this argument for the other industrial minerals, on the grounds that China was only curbing exports and not limiting supplies available for use inside the country.
China mines 94 percent of the world’s rare earths and accounted for 60 percent of the world’s consumption by tonnage early this year. But if factories continue to move to China at their current rate, China will represent 70 percent of global consumption by early next year, said Constantine E. Karayannopoulos, the chief executive of Neo Material Technologies, a Canadian company that is one of the largest processors in China of raw rare earths.
For the last two years, China has imposed quotas to limit exports of rare earths to about 30,000 tons a year. Before that, factories outside the country consumed nearly 60,000 tons a year.
China has also raised export taxes on rare earths to as much as 25 percent, on top of value-added taxes of 17 percent.
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