Rare Earth Curb Backfires

By halting exports to Japan of the high-tech materials, China may have shot itself in the foot.

Fact file on rare earth minerals

China may have done more damage to itself than to other countries by halting vital rare earth mineral exports to Japan, experts say.

Other nations are now rushing to fill the gap in world supplies, thanks to China's reduced quotas and export curbs on minerals that are essential to so many high-tech products.

The effect on the rare earth mineral trade has been one of many ripples from a Sept. 7 fishing incident near the unsettled border between the two countries.

China's tough trade and diplomatic moves against Tokyo have prompted Asian neighbors to take precautions, said Adam Segal, senior fellow at the Council on Foreign Relations in New York.

"We already see on the political front that everyone is moving to tighten relations with the United States," said Segal. "On the economic front with rare earths, it's going to force others to seek new suppliers and open new sources of supply."

The collision of a Chinese trawler with Japanese patrol boats near disputed islands in the East China Sea set off reactions that have raised concern for world production of goods ranging from wind turbines to hybrid cars.

The controversy emerged two weeks after the confrontation near the Diaoyu Islands, known as Senkaku in Japan, when China stopped exports of the exotic minerals to the Japanese market, as first reported by The New York Times.

The development shed a sudden spotlight on rare earths, a class of 17 elements used in computers, electronics and missile systems. Due to declines in mining elsewhere, China has become the source for over 90 percent of world supplies.

Conflicting statements

That may soon change as the result of the abrupt cutoff and conflicting Chinese statements about export restrictions.

China's Ministry of Commerce at first denied any export ban on Sept. 23, but traders told western news agencies that Chinese customs had stopped the shipments because annual quotas were used up.

On Oct. 7, Premier Wen Jiabao declared that "China is not using rare earth as a bargaining chip," but supplies to Japan remained blocked.

Twelve days later, a Ministry of Commerce source told the official English-language China Daily that it would cut quotas by 30 percent next year, but the ministry denied the report as "groundless" the next day.

Then, eight days later, China resumed shipments to Japan despite the earlier explanations about quotas, the Times reported.

"In a way, they backhandedly conceded that they had stopped it," said Lowell Dittmer, a political science professor at the Berkeley campus of the University of California.

The result of the conflict and confusion is that importing countries are turning elsewhere for the vital resources.

On Oct. 3, Japan's daily Asahi Shimbun said the country would increase rare earth imports from Mongolia. About three weeks later, Indian Prime Minister Manmohan Singh also pledged supplies from his country during a visit to Japan, AFP News reported.

Days later, Japanese Prime Minister Naoto Kan announced another agreement for sourcing from Vietnam, according to the Associated Press.

"Drastic measures"

Dittmer said China may have damaged its own interests and image as a reliable supplier, and that its anger at Japan's arrest of the fishing boat captain may have spun out of control.

"They were just so frustrated and enraged that they undertook rather drastic measures to show that they could really get at the Japanese," said Dittmer. "For their long-term interests, I don't think that it was very wise, perhaps, for the Chinese to do this."

Despite the release of the captain six weeks ago, frictions with Japan and concern over rare earths have continued, in part because of mixed signals from China about quotas.

The episode will put business interests on watch because it may be the first time that China has used trade for political purposes, with the exception of past restrictions on dealing with Taiwan.

"I can't think of another case in another diplomatic instance where the Chinese used economic ties as a weapon," Segal said.

China's new use of the trade tool may be seen as a reflection of its growing influence and economic power. But Segal doubts that it will try to punish other countries with similar measures.

"The blowback has been so extreme," said Segal.

"I would be surprised if they tried again. I think the lesson from this is going to be pretty sharp for Chinese leaders that this is not a particularly effective use," he said.