Common Sense and Rare Earth

By Jacob Tremblay, Center for Strategic Research

Yellow Lanterns Hanging at Temple with Chinese CharactersAlthough the diplomatic spat between Japan and China over the detention of a Chinese fishing boat captain near the disputed Senkaku/Diaoyutai Islands has simmered down, Japanese companies are still feeling the effects of an unofficial ban on rare-earth minerals.  Since September 22, Chinese customs agents have prevented shipments of materials vital to high tech gadgets in what is widely viewed as a means of protesting the detention begun when the captain allegedly rammed 2 Japanese Coast Guard vessels near the islands.  In utilizing customs agents, as opposed to announcing an export ban, China has skirted WTO rules designed to prevent such punitive anti-trade measures and avoid suit in a dispute resolutions court.  In doing so, China uses a crude club to browbeat Japan into accepting Chinese demands and make Japanese politicians in the future wary of confronting Chinese officials.

China currently supplies around 97% of the world’s rare-earth minerals which, despite their name, are actually quite common but expensive to mine and refine.  Japanese companies, including Sony and Toyota, rightfully fear that a prolonged de-facto export ban will make production extremely expensive if not impossible for several high tech goods. However, Japan has continued to aggressively pursue alternative sources of supply in a fashion that will thwart Beijing’s exertions aimed at limiting Tokyo’s maneuverability.  The Japanese controlled Sojitz trading company was already engaged in talks with Vietnam and Sumitomo was negotiating with Kazakhstan to begin rare-earth mining operations.  China’s ban will only increase the imperative for Japanese companies to diversify suppliers.

A large question of why China would institute a ban, when, in the short term, it appears that prices for rare-earth minerals will rise and reserves will run low, and Chinese suppliers are likely to be frozen out of the Japanese market as alternative sources come online.  Experience in other sectors shows that supply chain disruptions lead companies to consolidate their operations or search for more reliable suppliers; Boeing did precisely that in the instance of the Dreamliner, and, Gazprom has proposed building an alternative gas pipeline to supply Europe bypassing the oft-troublesome Ukraine.  Is Beijing’s course of action in the context of its dust up with Japan simply an instance of China flexing its muscles in unfamiliar realm, or is it a poor miscalculation that this move would advance Chinese interests?

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Filed under National Security Reform, Regional Studies, Strategic Studies

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