It's not a stretch to understand what will happen if the US defaults on it's debt to China.

Rare and Foolish

By PAUL KRUGMAN Published: October 17, 2010

Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan’s Coast Guard. Japan detained the trawler’s captain; China responded by cutting off Japan’s access to crucial raw materials

And there was nowhere else to turn: China accounts for 97 percent of the world’s supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go.

I don’t know about you, but I find this story deeply disturbing, both for what it says about China and what it says about us. On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in.

“There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry.

You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down. In at least one case, in 2003 — a time when, if you believed the Bush administration, considerations of national security governed every aspect of U.S. policy — the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China.

The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants. And even before the trawler incident, China showed itself willing to exploit that monopoly to the fullest. The United Steelworkers recently filed a complaint against Chinese trade practices, stepping in where U.S. businesses fear to tread because they fear Chinese retaliation. The union put China’s imposition of export restrictions and taxes on rare earths — restrictions that give Chinese production in a number of industries an important competitive advantage — at the top of the list.

Then came the trawler event. Chinese restrictions on rare earth exports were already in violation of agreements China made before joining the World Trade Organization. But the embargo on rare earth exports to Japan was an even more blatant violation of international trade law.

Oh, and Chinese officials have not improved matters by insulting our intelligence, claiming that there was no official embargo. All of China’s rare earth exporters, they say — some of them foreign-owned — simultaneously decided to halt shipments because of their personal feelings toward Japan. Right.

So what are the lessons of the rare earth fracas?

First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices.

Second, China’s response to the trawler incident is, I’m sorry to say, further evidence that the world’s newest economic superpower isn’t prepared to assume the responsibilities that go with that status.

Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law.

Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it.

RCP

scary

This is Paul Krugman talking?

WTF?

The US is a bad guy when we fight "wars for oil" but somehow we're now bad guys b/c we let China get a "stranglehold" on raw materials?

And I suspect this "stranglehold" is vastly overstated. It's based on low prices b/c of their use of slave labor. Other places have raw materials, but they won't or don't use slave labor to extract/produce them.

Once again, this shows the duplicity and absurdity we take in our social policies. We are proactive over questionable offenses (wasting vast amounts of money), but willingly overlook gross violations (in order to save money).

So again I pose my assertion, you can't be socially liberal and fiscally conservative.

(10-18-2010 07:55 AM)DrTorch Wrote:  This is Paul Krugman talking?

WTF?

The US is a bad guy when we fight "wars for oil" but somehow we're now bad guys b/c we let China get a "stranglehold" on raw materials?

And I suspect this "stranglehold" is vastly overstated. It's based on low prices b/c of their use of slave labor. Other places have raw materials, but they won't or don't use slave labor to extract/produce them.

Once again, this shows the duplicity and absurdity we take in our social policies. We are proactive over questionable offenses (wasting vast amounts of money), but willingly overlook gross violations (in order to save money).

So again I pose my assertion, you can't be socially liberal and fiscally conservative.

or maybe you can't be morally liberal and fiscally conservative.

The Chinese are and have been for a long time buying up the rare earth natural resources of other countries for a long time. With guess what, the money we pay them. It may not be 97% but it is practically a monopoly. Just like OPEC, DeBeers now China. So China does control the value of that commodity.

They don't have a stranglehold on anything. The stuff is still here. Oil is here too. We just need some intelligent trade policies.

YES, stranglehold....Intelligent trade policies....., my rare end.

Japan cries foul over rare earths

By FT Reporters

Published: October 24 2010 22:15 | Last updated: October 24 2010 22:15

Beijing has an export quota of 30,000 tonnes of rare earth metals and plans to raise this to 35,000 tonnes by 2015

The spat between China and Japan about supplies of so-called rare earth minerals – vital commodities used in high-tech goods from computers to electric cars – is more than just a diplomatic clash.

Driving the dispute is Beijing’s ambition to use tough export limits on these commodities as leverage to encourage foreign companies to relocate production lines to China.

Global concerns about China’s dominance of rare earth production have grown rapidly following, what Tokyo says, has been a near halt to shipments to Japan. Purchasers in Europe and the US say they are still getting shipments, albeit slowly. Each side tells a different version of the story: Beijing has officially denied the embargo to Japan and says heavy export quota cuts, imposed earlier this year, mark an effort to conserve resources.

But Chinese officials and western executives say quota cuts are part of a strategy intended to boost development of its domestic manufacturing industry by trading “resources for technology”.

The quotas create a powerful incentive to foreign companies to transfer production to China-based joint ventures because they only apply to the raw rare earths, not processed forms of the commodity, such as rare earth-made magnets.

Executives say that even more important than the quotas are a myriad Chinese tax breaks: an export duty of 25 per cent and a 17 per cent VAT rebate means that rare earth prices are much lower in China than overseas, enticing companies to relocate to China.

China’s Ministry of Industry and Information Technology has championed a policy to restructure the rare earths sector, “partly by controlling export volumes”, says Damien Ma of consultants Eurasia Group.

According to this plan, by 2015, China should maintain an annual export level of around 35,000 tonnes of rare earth metals – compared with this year’s quota of about 30,000 tonnes. It will be producing 130,000-150,000 tonnes, and have a domestic processing capacity of 120,000-150,000 tonnes.

“Instead of exporting purely unprocessed rare earths, the intention is to consolidate production and create more value-added applied materials that contain rare earths by keeping a crucial link of the supply chain in-country,” says Mr Ma.

The strategy is seen by some Japanese officials and executives as posing a serious threat to Tokyo’s technology leadership in the use of rare earths. “Clearly China wants the core technologies,” says one Japanese official. “It’s a new kind of mercantilism.”

China’s policy is causing concern at some Japanese producers.

TDK, one of the world’s largest producers of magnetic motors used in computer hard disk drives, hybrid cars and industrial robots, sees pressure to transfer production and technology. TDK’s techniques are a closely guarded secret, and advanced stages of the process are carried out only at its facilities in Japan.

Executives and analysts say Japan, which does not mine rare earths domestically, would have no other option but to accommodate some of Beijing’s demands and relocate at least some production plants to China.

But executives from some western countries are sanguine and downplay Tokyo’s concerns. Rhodia Group of France and Neo Material Technologies of Canada, both market leaders, opened factories in China in the last decade. Japanese companies such as Daido Electronics, a magnets producer, have also built plants in China.

Constantine Karayannopoulos, chief executive of Neo Material Technologies, estimates that more than half of Chinese rare earth demand is “actually consumed by Japanese, and to a lesser extent, South Korean, European and American companies, with plants inside the country”. China produces about 95 per cent of the world’s rare earth output, but it also accounts for around 65 per cent of global demand– although almost all of it is later re-exported by manufacturers. Japan consumes around 20 per cent of the world’s output, with the rest roughly split between Europe and the US.

“The picture is not as bad as it seems on the surface because materials, components and finished products containing rare earths can be exported without export quotas,” says Mr Karayannopoulos.

Rhodia says it “has not experienced any issue” with rare earth shipments.

Moreover, over the long-term, China’s strategy of using quotas to develop its domestic industry could backfire by facilitating the development of alternative mines in other countries or, more likely, industrial processes less reliant on rare earths, executives say.

Reporting by Mure Dickie, Jonathan Soble, Leslie Hook and Javier Blas

Copyright The Financial Times Limited 2010

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