Donald Trump wanted to clobber China with egregiously high tariffs. Too many people, including yours truly, warned him the whiplash could hurt America but make China stronger. That’s what happened. Now Trump is dancing with joy that China is resuming buying millions of tons of soyabeans from beleaguered American farmers. Uncle Sam is ecstatic that China has released the chokehold on exports of rare earth metals, allowing America’s electronics and high-tech industries to breathe for one more year. There’s a palpable re-emergence of complacency.
That’s mighty dangerous! I know that Trump is disdainful of history, but somebody should tell him what China once did—and will do again, even more coercively—if the world were to fool itself into relaxing.
In the heyday of American power, from the mid-1960s through the 1980s, the US dominated the production of rare earth metals. Mines in 14 states—including California, Alaska, and Wyoming—harvested tons of the precious substances for use in rapidly innovating industries like technology, health care, and defence. The biggest site was a mine in Mountain Pass, California, on the edge of the Mojave Desert, whose rare earth deposits were discovered in 1949.
The pit expanded in the 1960s with the advent of colour TV, which relied on its stores of europium to create the red hues. By the late 1980s, Mountain Pass produced the bulk of the world’s rare earth metals, digging up as much as 20,000 tons of ore a day.
Deng Xiaoping Discovers China’s ‘New Oil‘
But then China jumped into the game. In 1986, at the urging of four scientists, Deng Xiaoping established a new government program to nurture innovation and “achieve ‘leapfrog’ development in key high-tech fields in which China enjoys relative advantages“.
Beijing began cultivating its prodigious deposits of rare earth metals, first discovered in 1927 in Bayan Obo, a massive mine on the plains of Inner Mongolia that workers today refer to as ‘Treasure Mountain’.
In 1992, Deng spurred efforts to capitalise on the coveted natural resource, proclaiming, “There is oil in the Middle East; there is rare earth in China.“ Between 1990 and 2000, Chinese production of rare earth metals soared from 16,000 tons to 73,000 tons per year. Thanks to lower labour costs and fewer government restrictions, Chinese mines could extract the metals much more cheaply than their American counterparts, driving down market prices; ore fell from $11,700 a ton in 1992 to $7,430 a ton (in constant dollars) by 1996.
American mines couldn’t compete. China cracked the market just as Washington began tightening environmental and safety regulations around open-pit mining. A series of leaks at Mountain Pass dumped thousands of gallons of radioactive wastewater into a nearby lakebed, putting an end to chemical processing at the site in 1998.
By 1999, the US was importing 90 per cent of its rare-earth metals. One by one, its rare earth operations shut down. The last one standing, Mountain Pass, closed in 2002.
Overnight, it seemed, China had cornered the market, supplying more than 90 percent of the world’s rare earths—even though it sat on just over a third of the global reserves. Beijing wanted to control the global flow of rare earths—and all the products that relied on them. So, it levied heavy export taxes on the metals, and in 2006 began limiting exports of rare earths altogether, citing mounting environmental concerns and the growing needs of its own manufacturers. It was a clear sign of Beijing’s increasing assertiveness as a major economic power, and of America’s weakened position.
Dysprosium, for instance, a rare earth metal used in lasers—which, fittingly, means ‘hard to get’ in Latin—shot from $15 per kilo in 2003 to $150 in 2009. That year China accounted for 97 percent of the rare earths produced worldwide—129,000 of 132,000 tons—but exported less than 50 percent of its output.
China Weaponises Its Rare Earths Monopoly
The true extent of China’s stranglehold on rare earths became alarmingly clear after a showdown with Japan in the disputed waters of the East China Sea. On 7 September 2010, a Chinese fishing boat smashed into two Japanese Coast Guard patrols that had tried to intercept it near a chain of rocky islands claimed by both countries. Japanese guards chased down the trawler and arrested the Chinese captain. Beijing suspended high-level diplomatic contacts with Tokyo, demanding the captain’s release. Then the flow of rare earth metals from China to Japan—more than 19,000 tons, comprising about 90 percent of Japan’s rare earth imports—mysteriously ceased.
On 18 October, the embargo inexplicably spread to rare earths shipments headed for the US and Europe. The move came a few days after Washington announced plans to look into whether China’s trade policies on clean energy—subsidising exports and imposing quotas on imports—violated the World Trade Organisation (WTO) regulations.
The embargo ended 10 days later, as abruptly as it had begun. US Secretary of State Hilary Clinton called the stoppage a ‘wake-up call’, and indeed, America and the other major powers suddenly seemed jolted out of passivity.
World Responds, First With Vigour, Then With Fizzle
Molycorp, the American company that had run Mountain Pass before it suspended mining operations in 2002, was resurrected by a group of private-equity investors, who purchased the mine in 2008. Likewise, the Sydney-based company Lynas pushed ahead with plans to develop a new mine on Mount Weld in Western Australia, long known to harbour one of the world’s richest deposits of rare earths.
India, the distant-second largest producer of rare earth metals, seized the opportunity to challenge China’s grip on the market. It revived the state-owned India Rare Earths Ltd, shuttered since 2004, with the development of a new processing plant in the eastern state of Odisha. Delhi also announced plans to mine the depths of the Indian Ocean in collaboration with Japan.
China’s victims seemed fired up, vowing to end the Dragon’s coercive monopoly on rare earths. But then the wily state became docile, especially after getting a rap on the knuckles. In August 2014, the WTO handed down its final ruling, ordering China to remove all barriers to unfettered trade in rare earths or face punitive consequences. US trade representative Michael Froman called it “the end of the line“ for the rare-earths conflict, and indeed, Beijing moved quickly to comply.
Once again, the world had lapsed into complacence, allowing China to regain its unconscionable dominance.
Until Trump and other world leaders were rudely jabbed by China’s retaliatory export bans this year—more aggressive, coercive, and dangerous than ever before. The clueless cohort realised this is not the moment to be happy or relieved. It’s a moment to be paranoid, to use every means—including big explicit subsidies—to rebuild production capacities of rare earth metals outside China.
Postscript: Global leaders must never forget the definition of insanity, ie doing the same thing over and over again expecting different results!