September 4, 2011 (Source: Forbes Magazine) — Yesterday, the Pittsburgh Tribune-Review reported that Hitachi Metals denied it was shifting a fifth of its production of high-power magnets to China in 2013. The move, first reported by the Nikkei news service, was said to have been prompted by the need to assure the supply of rare earth minerals. “Nothing has been decided on this matter,” the company stated.
The Nikkei report, however, seems only to have been premature as Hitachi Metals, which accounts for 45% of the global market for such magnets, appears determined to move production out of Japan. Hitachi, if it goes ahead, will be following Showa Denko, which announced in June that it would increase by 50% its output in China of alloys used in magnets for hybrids. “Japanese production is moving to China faster than I’ve ever seen in the past,” said Constantine Karayannopoulos, the chief executive of a company in the industry. “We may be witnessing a fundamental restructuring of the global rare earth supply chain.”
American and Canadian businesses that rely on these important minerals have also moved operations to China. Take General Electric, which now makes most of its lighting products there. The multinational depends on that country’s rare earth phosphors for its fluorescent lamps.
Why the rush to move factories to China? Chinese mines lowered prices on rare earths in the 1990s and essentially drove out all competition. Now, Beijing controls about 98% of global production of this group of 17 elements. Not all 17 are particularly rare, but dysprosium, critical for magnets, is. Prices for Chinese dysprosium have more than tripled since May.
It’s not hard to see why. Beijing slashed export quotas on rare earths by 72% for the second half of this year after cutting them for the first half as well. It also raised the resource tax on these elements by as much as 150 times. Moreover, Chinese officials in July increased the scope of export quotas to include other rare earth minerals, and there are rumors that they will expand these restrictions yet again to cover certain processed alloys. If you want to manufacture products with rare earths, you will almost have to move to China.
That’s Beijing’s master plan. “If we can get Japan’s advanced manufacturing technology of magnetic materials in return, China welcomes Japanese companies shifting their downstream manufacturing of application products,” said Wang Guozhen, quoted on an official Chinese government website in a report on the important Showa Denko deal. The former vice chairman of the China Nonferrous Metals Engineering and Design Institute has clearly suggested that Beijing is using its control over rare earths to force companies to move their manufacturing to China.
Such gouging is a clear violation of China’s commitments as a member of the World Trade Organization. Beijing issues statement after statement claiming that the rare-earth export restrictions have been put in place for environmental reasons, but Wang’s clear words indicate that the country’s intent is malign.
China gave up export restrictions when it joined the WTO, but it has gone back to imposing them in the last few years. The rest of the world has complained. In July, the global trade body, acting on complaints filed in 2009, ruled that China’s duties and quotas on the export of raw minerals, such as zinc, violated its rules.
Beijing is trying to delay the proceedings by appealing the ruling, which will undoubtedly be upheld because the Chinese measures are patently non-compliant. China just wants to keep them in place to force more manufacturing to relocate. Despite its initial loss on its export restrictions, Beijing maintains that its rare-earth rules, similar to those just struck down, comply with its WTO obligations. That’s obviously not the case.
The Heritage Foundation’s Derek Scissors, however, believes we don’t have to do anything about China’s rare-earth restrictions, arguing that they’re self-defeating. But unfortunately they are not. True, Beijing, by forcing up prices, is encouraging producers around the world to open new mines, thereby undercutting its monopoly on rare earths. Yet before producers can take advantage of them, most manufacturers will have moved to China. Miners, in short, cannot react fast enough. Beijing is showing other governments that extortionate behavior in fact works.
This is a pattern we have seen before, in industry after industry. As analyst John Tkacik notes, China’s predatory policies follow a predictable pattern: Beijing demands that foreigners bring technology to China and then the Chinese steal the technology, undercut foreign competition on global markets with subsidies, and finally drive foreign competitors into bankruptcy.
The world’s free-trade architecture is not working as it should. China’s rapacious rare-earth tactics demonstrate that governments need to intervene, perhaps with measures as rough as Beijing’s.
