This week, a trade war that was supposed to tear the world of high-tech manufacturing apart ended peacefully, quietly and with few casualties.
China announced plans that would comply with a WTO decision from last year by removing export quotas and other restrictions on rare earth elements (REEs), the minerals used widely in the manufacture of electronics, computers and cars. It was another success for the US, which has not only chalked up a series of impressive wins against China in the WTO’s dispute settlement process but also (by no means a given) often succeeded in getting Beijing to implement the decisions.
So, a big victory for global governance? Huzzah for the international rule of law, and a celebratory round of Dan Drezners? Sort of. In reality, it was the free market as much as trade rules that did for China’s attempt to corner global commerce in rare earths. Moreover, in a rather choice irony, Chinese companies employed the very tricks that they use to sidestep trade restrictions by other governments to sabotage the export quotas set by their own.
By 2010, China produced 97 per cent of the world’s basic rare earth oxide production and much of the processing business. In its submission to the WTO, Beijing laughably argued that a complex system of export restrictions it had placed on its REE companies since the mid-2000s was aimed at protecting the environment by controlling mining. In reality, as the WTO dispute panel swiftly twigged, it was an attempt to give its domestic electronics and other manufacturing industries a competitive advantage by ensuring a cheap captive supply of raw materials.
This is a familiar pattern among commodity-producing emerging markets trying to develop their own manufacturing industry. When first Ukraine and then Russia joined the WTO in 2008 and 2012 respectively, for example, the EU insisted they make binding pledges not to restrict raw material exports, particularly metals.
China’s policy seemed to have some success. The rocketing price of the minerals in the late 2000s disadvantaged end users across the world. As Eugene Gholz at the University of Texas says in this excellent report, some Japanese manufacturers that use rare earths as an input did relocate to China to take advantage of cheap and reliable supply. And just to provide the non-specialist media with a nice story, in 2010 China reportedly used the threat of more export restrictions to force Japan into returning a Chinese fishing-boat captain it had arrested sailing worryingly close to disputed islands in the South China Sea.
For the rest of this article, click here: http://blogs.ft.com/beyond-brics/2015/01/08/rare-earths-and-chinas-self-correcting-folly/?