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March 14, 2012

The Rare Earths Distraction

By

The U.S., EU and Japan are suing China in the World Trade Organisation (WTO), calling Chinese export quotas on rare earth elements an illegal trade practice.

The U.S. will most likely win. But the suit is peripheral to real issues and was brought because the U.S. is unable or unwilling to address the true problems in Sino-American economic relations.

Of the many questionable practices in Chinese trade policy, the rare earths quota is a strange one to pick on. Last year, the quota was barely half-filled; higher prices and expanding supply elsewhere caused demand for Chinese rare earths to plummet.

Last week, the largest American rare earths company, Molycorp, swung a deal that will lead to Molycorp exporting to China. The fear that China would deny rare earths to the world never made much sense and makes even less now.

Still, there is in fact something to see here, folks. What the U.S. really wants to complain about is anti-competitive Chinese behaviour in rare earths both in the global market and in China itself. Globally, China became the dominant producer by driving everyone out of business with low prices.

After doing so, Beijing decided that competition was “disorderly” and suddenly discovered environmental harm in rare earth mining. It is now attempting to force consolidation of its rare earth industry. The export quota is a minor symptom of a major illness — China likes rare earth competition only for other countries’ firms.

This may sound familiar. America complaints about the value of China’s currency, the RMB, have led to a 25 percent appreciation. But almost none of the problems in economic relations have been solved. That’s because the danger isn’t an exchange rate peg or a quota; those are just (minor) tools.

The heart of the matter is that China subsidises its firms so they can outcompete everyone else’s internationally but uses regulations to prohibit competition at home. It’s a win-win: China wins at home and China wins overseas.

The U.S. government has struggled with this for years, for good reasons. The WTO treats subsidies inadequately, and American competition regulations stumble over state-owned companies. But those are the real issues to tackle, not a quota that may not even get filled.

Derek Scissors is a senior fellow at The Heritage Foundation.

First appeared in Reuters

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