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.)
if the USG refuses to open its high tech products to chinese consumers, where the heck does it get off trying to claim china’s rare earths?
the sheer hypocrisy of ppl in the USG is staggering;
by ‘high tech products’ i’m referring to satellites and space technology; but i suppose at this rate, the US advantage in bargaining for space market access is closing fast as China’s own domestic space industry takes off.
btw great point about huawei; they’ve been railroaded ever since they tried to get into the US market; perhaps it’s time for american competitors to learn the meaning of ‘what goes around comes around…’
Japanese explorers just found a large deposit of rare earth elements in ocean floor that could take out the monopoly of China in the future. I wrote the following a while ago when REE was a topic.
Indian policy watchers are watching nervously over this case, because US and EU have made similar threats of WTO suits over India’s cotton export limitations.
1 colleague made a silly distinction between US high tech products export control vs. Chinese mineral export control: That US high tech has IP behind it. “It’s NOT stuff/ commodity like mineral!” He insisted.
To which, I simply replied, “so if the Chinese mining companies hold some patents on some small mining technique improvement, or over some new improvement on refining technology, then that mineral that they produce via the new IP protected technology can be export controlled through some monopoly??!”
See, it is just more and more excuses coming out of US and EU on why they can maintain their high tech monopoly (over “national security” concerns on MULTITUDES of flimsy “dual use” technologies), but China can’t set limits on its own RARE resource exports (when it wasn’t responsible for the monopoly in the first place).
Financial times suggests that Quota on production may be legal, whereas quota on export might not be.
I think China can take a hint. But China was attempting to crack down on all illegal mining operations at the same time as setting quota on export. The quota on export merely enforced the quota on production, ie. prevent illegal mining operations from bypassing the production quotas.
But an improved policy of regulation can simply be to impose the quota on the production, AND to examine EXPORT QUOTA to match the production Quota, and impose heavy fines or halt shipments of any countries that found to be shipping illegally produced minerals.
Antigua filed its WTO suit against US in 2003, US lost, but still won’t pay up.
Even more, US furthered its “embargo” restriction against foreign online gambling websites, in contravention to WTO rules.
Antigua is considering MORE complaints in WTO.
but what’s the use? It’s just more US flouting the rules in their face.
I guess if one is a big country, one doesn’t have to pay.
Online gambling, China should get in on that, and then file WTO suits against US.
That’s the new industry China should go after. Macao has a good start on it already.
i’m sure there’s plenty of ways Beijing can compel Washington to be more…compliant in its dealings; the US isn’t the power it once was, this isn’t the 90s anymore after all.
policymakers in washinghton know they can only push beijing so far; the thing is they want to see how far they can go.
The more I get into this story, the more it demonstrated to me why the “free media” is just total poison.
I have spent more time in the last few days refuting some of the most basic lies and innuendos about the rare earth case from the Western media, simply because even my educated American friends are just going about swallowing the lies without bothering to check the facts (and then add their own misconceptions on top).
The “free media” is becoming a rumor mill, where 1 becomes 10, and 10 becomes 1000, in an expansion of exaggerations.
1 version of the media press on this story is that, China held up shipments of rare earth minerals to Japan after the fishing trawler Captain was arrested by Japanese coast guard, and China denied that there was an export quota on rare earth minerals.
That story is simply completely false.
China all along acknowledged and PUBLICLY implemented the export quota system for rare earth minerals. In deed, foreign companies PUBLICLY knew about it and PUBLICLY participated in the quota bidding process administered by the Chinese government.
China did not deny the existence of the quota system.
Holding up shipments of rare earth to Japan was a TEMPORARY, (albeit political), “administrative order”, which is completely legal under the WTO treaties, because it was (1) on a case by case basis, and (2) temporary and did not impact the overall quota of rare earth minerals received by Japan in the whole year, and (3) did NOT hold up ALL rare earth minerals to Japan, some of the rare earth alloys were still shipped.
Some may argue that such hold up of shipments were disruptive. True. So would any Coast Guard or customs impounding actions, but these are ALL case by case, and completely allowed under WTO.
Another example of “administrative order” ban on export: US government’s investigation of Huawei’s acquisition of 7 US patents, and subsequent requirement of Huawei to “reverse” the purchase.
Arguably, that administrative order by US government on Huawei was FAR MORE political, and far more dubious in nature, and more evidently protectionist. Yet, it would probably be an “administrative order”, simply because it is 1 case, 1 order, NOT (yet) evidence of all out preferential ban of trade with a country for protectionist reasons.
China eventually resumed export of rare earth to Japan, within the same quota Japan had been given.
US did not rescind its order to force Huawei to reverse the purchase of the patents.
If any one has a more legitimate complaint, China should sue US for that administrative order against Huawei, since it had a long lasting impact, instead of a mere temporary hold up.
Rider I says
Are you trying to say that the Communist Chinese are babies and they did not know what they are doing to centralize the world’s jobs and resources to everyone. I would have to say you are part of the Communist apologetic tribe. The ones’ that say oh poor baby. Well I am hear to say sorry, the MSS is doing this on purpose we have documents of their espionage activities:
However, Why would the WTO appeals court try and justify the worlds biggest non market economy and its centralized planning entity the SASAC as a not a non market enity. When they where the one’s who have centralized the worlds jobs and taxes along with 97% of the worlds resources to their non market activities. Specifically due to pin point placement of WTO and World Bank economic leadership of their MSS espionage agents. Which the MSS is now expanding their bases and trying to seek more espionage seats.
discounting above conspiracy blogs, I don’t belong to “tribes”.
Back to FACTS:
China began to implement its rare earth mineral export licensing/quota system back in 2004.
back appendix shows a pretty good picture of China domestic quota and foreign quota. both were reduced over time.
1 assertion of China’s rare earth “monopoly” is based upon the number that China supplies over 90% of world’s rare earth minerals TODAY, in 2011.
However, even back in 2007, China was reportedly to have only about 55% of world supply market share of rare earth minerals (specifically in magnet related rare earth).
But Western media don’t bother to mention the 2nd part.
Because if China only had 55% of the market in 2007, AND China began to set in quotas to limit their rare earth export, then China was actually trying to PREVENT itself from becoming a monopoly!
Now, China is over 90% of the market, WHILE China has been cutting quotas from 2004 to today, then China’s monopoly today is not China’s doing.
(BTW, 55% is not considered monopoly, not even by EU’s rather liberal legal interpretation of “monopoly”).
In other words, if China went from 55% of the market to 90% of the market in 4-5 years, WHILE China is cutting back its supplies, China was not actively or passively out there trying to take over the market.
(You can’t be trying to get a monopoly for yourself, when you are trying to lower your own market share).
At best, China’s current “monopoly” in 2011 in rare earth is a “monopoly” by accident.
What “accident”? Well, US Molycorp provided that answer. Molycorp recently warned that rare earth mineral market may be headed for a slump of prices, because of potential oversupply in the future. (That’s a US mining company talking oversupply, when they haven’t even started their new mines yet!)
If one look back in history, that might have been what happened. A bunch of mining companies, decided around the early 2000, to shut down their rare earth mineral mining operation, because of oversupply and cheap prices (cheap in terms of not worth the cost paid for the mining and refining).
Remember, this was when China was still around 55% of the market.
Perhaps everyone assumed that China would eventually take over the market, and just decided to cut their losses before the competition costed too much.
It’s a possibility. (And China tends to have that effect on people nowadays, intimidating merely by its reputation for ultra-competition).
But again, that’s not China’s fault. China’s actions from 2004 on, showed clearly that China was trying to prevent itself from becoming a monopoly.
Some have cited that China was trying to acquire foreign mining companies, as examples of China’s Monopolistic activities.
But (1) China never succeeded in acquiring those foreign mining companies, and
(2) so you can hardly say that China would use those foreign mining companies to extend its own market share, (since China could have also easily tried to RAMP up production of those foreign subsidiary mining operations to further prevent its own monopoly).
What we can see is FACTS against the assertion of China’s monopoly in rare Earth market, and that the quota system was a part of that monopoly.
On the contrary, the number support the conclusion that China was trying to prevent a monopoly when China began to see the danger of its accidental monopoly in that market.
This bit of analysis is quite revealing of US’s own problematic argument in the case:
US actually have import restriction quotas on 3 of the 9 minerals at issue in the WTO case!!
In other words, US is talking about both ends of itself when arguing that China shouldn’t restrict export by quota, when US is NOT going to import those SAME minerals by more than its own import quotas!!
So, China will increase its export quota, but US won’t increase its import quota?
What the heck would that do??!
*BTW, the US Trade Representative is the rumored replacement candidate for Gary Locke at Department of Commerce. I had argued the man is too hardlined and has no logic sense in trade issues. Now you can see how his own logic flaws are being spotted by Americans.
historical graphs have also indicated that world wide supply of Rare Earth minerals have exceeded world demand virtually every year, EXCEPT for 2009.
It’s hardly rational to say that China could affect prices when the supplies are more than the demands through the quota system.
Furthermore, Japan, US and EU all have import quotas set, to prevent oversupply and “dumping”, which is usually used to charge China as not playing fair, and to protect domestic producers.
It feels all too much like a scam by US mining industries to preemptively blame China for “monopoly”, and then use that as excuse to lobby for additional import quotas on minerals in US, in the name of protecting domestic supply, but really in the name of protectionism and domestic price protection.
China should not sit back, but rather file counter suits on US, Japan, and EU’s import quotas systems, and use their own arguments against them.
While China certainly can informally use its influence to force US, Japan, and EU to be compliant, that would miss the point of WTO membership.
China joined the WTO to have the reputation of “free trade”, it cannot now simply sit back and let insults of “China cheating” fly by. Otherwise, there is very little point in being in WTO and being constantly called a cheater by those who do the same things in WTO. China must fight for its reputation aggressively in WTO, not merely through favorable settlement, but by exposing the trade hypocrisies of US, EU, and Japan.
The problem with our world institutions right now is they are really without teeth against the big powers. They are effective in keeping the weaker in check. That’s been the way at the U.N. and we see that at the WTO.
But I think if the U.S. abuse WTO rules too much, there will be a risk of completely undermining the organization and polarization will happen. My fear is that in the U.S., the American views toward the world is so skewed politically by their media. When society falls apart in the U.S., there won’t be common sense for the public to keep the government rational vis a vis the rest of the world in places like WTO, U.N., etc..
China can simply rebrand those rare minerals into strategic goods and effectively taken it out of the market. Thats exactly what US is doing.
In rush to break China’s “monopoly” on rare Earth, investors cash in on a new bubble, suckers beware.
The WTO is a court with rules only to be manipulated by the powers that be, and China should learn to excel at gaming the system. This free trade is a load of feel-good nonsense anyway, no one with their interests at heart would advocate complete free trade unless they were already the largest player.
A map showing deposit of rare earth:
What the maps do not show is the demand from individual countries.
China is currently producing about 90-97% of world’s rare earth, depending on the specific element.
However, China’s domestic DEMAND for rare earth will exceed its supply within the next few years.
China is already world’s largest producer of wind and solar power equipment.
Japan, produces most of the world’s rare earth magnetic and other high tech equipment using rare earth.
However, Japan is moving many of such manufacturing to China. (some of this is due to the rare earth supply shortage. Japanese companies hoped to use local Chinese subsidiaries to take advantage of local and possibly illegal supplies, WITHOUT the hassle of export processes and without the scrutiny of government monitor. However, the advantage of localizing the supply-producer chain is limited, as even Chinese companies are subject to supply quotas of rare earth).
In the next few years, even the Chinese domestic supply market will be very constrained, causing the rare earth values to increase.
The real motive for many of the “new developing” mines in US, is to potentially break into the Chinese market, as China increasingly becomes a net-consumer of rare-earth, rather than a net-producer.
However, the rare earth WTO suit will likely put a damper on that, as China will likely retaliate by imposing its own “import quota” on rare-earth, just as US currently does.
In relation to the recent Solyndra bankruptcy fiasco, Molycorp USA is ducking under the potential political firestorm over Federal Government’s “stimulus” in Greentech.
Media has not made much connections between Green Stimulus to Molycorp, but let’s take a look any ways.
(1) I have said Molycorp is building up to a Bubble in rare Earth supply, and I was right. According Molycorp’s financial statement, http://www.businesswire.com/news/home/20110309006788/en/Molycorp-Reports-4Q-2010-Results-Project-Phoenix, its revenues in 2010 was up from 2009, but it still operates at a net loss. Its “inventory” is UP substantially, almost 2X of what it was in 2009. Sales are not up much, Revenue increased largely due to general increase in Rare-Earth pricing (partly due to hoarding/stockpiling by various countries), but that’s already declining in 2011.
(2) Molycorp’s Japanese partners, Hitachi and Sumitomo, have balked on JV initially proposed. And Molycorp, after initially raising 350 Million dollars in IPO, (plus some $180 Million loan from Sumitomo), now is pursuing lobbying of US DOE guarantee loan of $280 Million (sounds familiar to Solyndra affair).
(3) Molycorp is spending its money to trying to stimulate Rare-Earth demand, by investing in US Wind-Farm technology companies. http://www.denverpost.com/business/ci_18888636. (Molycorp bought some undisclosed $MILLIONS in a wind-farm tech company’s stock).
Meaning? Molycorp knows that it can’t sell its inventory of Rare-Earth fast enough. So, it’s trying to “stimulus” the Greentech itself to create some customers in US. But wind-farm tech companies in US also face stiff competitions in pricing from Europe and China, and their viability is also questionable. (4 of the top 10 wind turbine manufacturers in the world are Chinese companies, only 1 of the top 10 is a US company, GE, which manufactures all over the world). Molycorp is rolling a dice with this investment, a many sided dice.
*My prediction again, is that Molycorp is building up to be a bubble, like Solyndra was.
Another straw on the Molycorp Camel:
Toyota, GM and GE to “design around” Rare-Earth Mineral, using Induction motors.
Black Pheonix says
Molycorp sued for false financial disclosure information