Rare Earth WTO Dispute Heightens China-US Divide

By Shihoko Goto — Exclusive to Resource Investing News

China’s domination of the rare earth market has united the United States, Japan, and the European Union in what may turn into a drawn-out legal dispute. Last week, President Barack Obama announced that the powers were joining forces before the World Trade Organization for the first time in order to challenge Beijing’s policy on the restriction of rare earth exports.

“American manufacturers need to have access to rare earth materials – which China supplies,” Obama said in the White House Rose Garden.

With China controlling well over 90 percent of the 17 elements that are critical in industry, especially for defense purposes, the consultations with China requested by the US, European Union, and Japan under the auspices of the Geneva-based organization will be closely watched not just by commodities investors, but also by policymakers and defense analysts alike.

China’s policies to limit exports of rare earth “hurt…manufacturers of pioneering high-tech and ‘green’ business applications,” said European Union Trade Commissioner Karel De Gucht.

Indeed, Obama’s very public announcement of the decision highlights the importance the administration places on the current situation in the rare earth market, said Yaron Vorona, Executive Director of the Institute for the Analysis of Global Security’s Technology & Rare Earth Metals Center, which held a two-day conference on the industry last week in Washington, DC.

Obama is “on track…with a narrow focus” in regards to resolving the imbalance in the global rare earth market, said Jonathan Ossoff, Senior Legislative Assistant for Hank Johnson, a Democratic member of the House who represents the state of Georgia. Johnson is a co-chair of the House Rare Earth Caucus, and introduced the Resource Assessment of Rare Earths Act of 2011, which directed the US Geological Survey to conduct a comprehensive three-year global mineral assessment of rare earth elements in an effort to jump-start the industry within US borders.

The problem is that in recent years, the US has grown increasingly dependent on China for rare earth, and private US, European, and Japanese companies have steadily retreated from the market as public opposition to potentially environmentally hazardous rare earth mining has intensified. These circumstances have allowed Chinese companies to undercut their US, Japanese, and European counterparts pricewise in the international market. As such, even if China is forced to increase exports amid increasing pressure from the WTO, non-Chinese manufacturers would likely remain heavily dependent on Beijing for critical materials.

Another issue is whether or not there actually is a case to make against China in the WTO. Speaking at the Technology & Rare Earth Metals Center’s annual conference, the Second Secretary of the Economic Affairs Office of the Chinese Embassy in Washington, Dr. Si Jinsong, said that China’s export policy does not violate any international regulations. He specifically cited the WTO’s Article XX, which exempts the imposition of quotas if they are related “to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.”

The Chinese media has been blunter in defending the government’s export restrictions.

“China has time and again emphasized that the export restrictions are necessary in order to conserve its exhaustible natural resources and to protect people’s health and are thus permitted by the General Exceptions clause in the WTO rules,” wrote Xu Li, director of the policy review division of Beijing WTO Affairs at China Daily.

Xinhua News Agency stated that “[i]t is strange that the Western world has never launched ‘anti-dumping’ measures against China’s rare earth products as they have, more often than not, done to other China-made products such as shoes, shirts and tires,” adding that “the irrational exploitation of rare earth in China [has] led to underestimation of the values of rare earth.”

The 60-day process for the two sides to reach an agreement is now underway. Failing resolution, the WTO will be establishing a panel to reach a decision, which may take as long as two years. Following Obama’s announcement, share prices of Chinese rare earth companies are on the rise  in hopes that exports will increase; however, it may be some time before those expectations are met.  Moreover, the WTO dispute will not have any immediate impact on the rare earth mining industry outside of China or for junior miners.

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.