China may stub its toe on rare earths quotas

January 3, 2011

HONG KONG (Reuters) — China may stub its toe on its rare earths quotas. By restricting exports of the metallic elements, it is hoping to give domestic industries a boost. But Chinese companies will lose if the move leads to trade restrictions or boycotts of overseas acquisitions. If Beijing is serious about addressing environmental concerns, it should cut rare earths production, not exports.

Rare earths, a group of 17 related elements, are used in electronic devices and clean energy technology. Though China controls just 36 percent of the world’s rare earths reserves, it supplies 97 percent of global demand, according to the U.S. Geological Survey. Cutting export quotas will make sure that, in the short term, more production using rare earths will stay in China. Reopening mines takes time, and there is limited operational expertise outside China.
Though the move raises trade concerns, the World Trade Organization can’t twist China’s arm. WTO Director-General Pascal Lamy has said that export restrictions on resources are very difficult to address under existing provisions. Securing access to resources wasn’t a political priority when trade rules were set up 60 years ago.
Nevertheless, countries worried about losing access to strategic raw materials may take the law into their own hands. The U.S. Trade Representative’s office says it is “very concerned” about China’s quota cut. Washington is already in dispute with Beijing over tyres and solar subsidies. It could impose more tariffs on Chinese imports, or restrict high-tech exports to China. Japan’s Sony Corp. has threatened to source fewer products from China.
Besides, China is heavily dependent on imports of other raw materials. It is the world’s largest buyer of iron ore, and is scouring the globe to secure access to strategic resources. Export quotas send a bad signal.
Beijing says its goal is to reduce the environmental damage caused by extracting rare earths. If so, it should limit supply, not exports. China has been reducing rare earths export quotas since 2006. Yet, according to the OECD, production has risen 8 percent to 11 percent a year in the past decade — in line with global demand. Supply limits would not aid domestic industry. But they would help silence China’s foreign critics