WTO ruled China’s regulations of rare earth mineral quotas as illegal, China promises to comply, but it really doesn’t matter, because China is not responsible for China’s monopoly on rare earth mineral, and there is little anyone can do to, and really, WTO is toothless.
A few weeks ago, my young American newly minted lawyer friend breathlessly argued with me that China is responsible for China’s monopoly on rare earth mineral (and disclaiming with that Western nations shared some blame for not maintaining their own strategic sources).
Yesterday, unconsciously, he came up with his own counterexample analogy against his own arguments.
He IM’ed me asking me for my knowledge of Virginia State Law on landlord/tenant contracts. He explained that his friend is having problems with a tenant. The tenant moved into a basement, after signing a standard rental contract, but then began to complain and make demands about every little thing.
The tenant complained that there were no spaces in the shared refrigerator in the house, thus he couldn’t cook for himself in the house, but ONLY after he taken himself out for restaurant food, and then decided to discount his own meals from the rent payment. (Thus paying only partial rent for the month).
Furthermore, the tenant then decided that he wanted his own refrigerator, and decided to buy himself a brand new refrigerator, and discount the cost from the rent payment.
*I did not openly make the analogy clear, but here is it.
Like the tenant above, Western nations (and Japan) decided to rely upon China’s rare earth mineral by their own choice. And China, like the landlord, when entering into the rare earth mineral market, did not make any promises to provide the mineral to every satisfaction of the tenant.
It is a RARE earth mineral market, by nature, RARE and subject to limitations and regulations for a variety of reasons, Just as a landlord didn’t sign up to modify his house to the whim of every tenant.
In the WTO suit, US and Mexico (and others) complained that China’s regulations “disrupted” industries. (Much like the Tenant above complained that the lack of space in the fridge caused him to unable to cook for himself.) But that’s what happens when you rely unreasonable on someone else’s sources, and when you rent someone else’s house.
The WTO suit also alleges that China’s quota system unfairly favor domestic consumers. This point is arguable, because the allegation is that China is “giving” more rare earth mineral to domestic consumers to stimulate high tech industries, to effectively extend monopoly into another market. However, preferentialness is not shown in the “quota” system. Chinese domestic consumers are subject to the same quota system as foreign companies, and somewhat proportional to actual demands.
World demand is approximately 110,000 tons per year, with China accounting for 75% of the demand, and the rest split mostly among US, EU, and Japan. Last year, about 20 Chinese companies obtained quotas, and some 10 foreign companies obtained quotas from the Chinese government for rare earth mineral. (The quota system does not clearly shown some evident preferential treatment of Chinese companies, considering the high demand from China).
(Again, the Tenant apparently doesn’t like the lack of space in the fridge!)
*But all this doesn’t matter much, as the WTO ruling itself is muddy at best. While symbolically giving US, EU, and Mexico a “victory”, (like other cases before), WTO vaguely does not say what would be the proper regulation for China.
China will appeal the ruling in any case, but China will likely also come up with a different quota system (renamed of course), just enough to get around WTO’s ruling.
Worst case scenario, China can get around the anti-monopoly ruling by vertical integration, ie. shut down all rare earth mines and let the domestic consumer companies in China have exclusive licenses to mine rare earth minerals as needed, under some Patented processes for specific minerals, which will cut out all foreign companies completely. (The same process is used by large US agricultural producers that own patents on genetically modified food stocks designed ONLY for production of refined food ingredients such as corn syrup).
*Naturally, Western nations will both retaliate by tariffs and also try to find alternative sources. Japan has already claimed to have found a mega source of rare earth minerals on the sea floor of the Pacific Ocean, in between Hawaii and Japan (which may set off a sea dispute between US and Japan).
But again, it doesn’t really matter. Tariffs won’t make China increase its production of rare earth. It will only disrupt it further. If China wanted to preferentially stimulate its domestic high tech companies, tariffs on China’s other industries (such as textile), will only cause China to increase preferential treatment of its domestic high tech companies. In other words, what’s the point of tariffing Chinese industries that China intended to all along shift AWAY from? If tariffs are imposed on Chinese high tech companies, it would only hurt Western high tech industries in turn.
But rare earth was only 2nd case that proves the ineffectiveness of WTO regime to promote “free trade”, (actually, probably 3rd, 4th, or 5th case), because at the end of the day, it’s about who has what others want, and who has the economic leverage, in trade, there is no equal bargaining positions.
(For example, the landlord always has the advantage over his tenants, because he owns the house, he has what others want).
As well known, WTO ruled against US many times, especially on the case of Online gambling, US continued to flout against that ruling after so many years, still refusing to pay damages to the winning party, because the winning party was Antigua, a small nobody of an economic player in the world.
Antigua has nothing US wants, it has no bargaining power. (Now, if Antigua has rare earth mineral, it would be a different story. Or if Antigua sits only 90 miles off the coast of China.)
*Now, clearly, China does want US’s trade relationship, but China does also want to promote its own domestic high tech. So, it is not to China’s interest to press too hard on its rare earth advantages. But nor is it to China’s interests to continue to rely upon US’s high tech dominance.
There is an argument that if US can argue that its high tech export restrictions are based upon national security concerns, then China’s rare earth policies are also based upon the SAME national security concerns, because China’s rare earth minerals are fueling the same high tech monopolies imposed by US and EU in the world.
Why should China export rare earth to US and EU, only to have the high tech companies in US and EU refuse to export valuable high tech derived from those minerals?! (And at the same time, when US and EU refuse to allow Chinese high tech companies, such as Huawei, to enter into their domestic market?!)
A new proposed China rare earth mineral policy could be based upon a scheme of reciprocity of derivative products/markets. In other words, China can impose an automatic larger quota for foreign companies that produce ONLY products that are exportable back to China, and not to companies that manufactures export control products (such as military equipment), OR ONLY to foreign markets that allows Chinese high tech company participation/entries.
The justification would be that China does not want its rare Earth exports to promote other nations’ monopolistic practices in high tech industries, NOR favoring any other individual nations’ high tech companies.
(Logically, why should China’s rare earth minerals further US’s military high tech dominances in the world? Afterall, that is a disruption in Chinese high tech market, ie. the export control/etc.)