CEFC Hong Kong Non-Governmental Fund Committee
Contact Us | Add favorite  
Home > Perspectives > Energy

Zhou ZiHeng:The rare earths trade war is a battle for authority

In early March this year, U.S.-based Molycorp, Inc., bought Canada’s Neo Material Technologies, Inc., a move that enabled the company to ship rare earths from California to China for processing. This trans-Pacific eco-friendly practice, however, was interpreted by American authorities as “a U.S. company paying tribute to China.” The authorities jumped to the conclusion that China was monopolizing the rare earths industry and had control over every part of the industry globally, from technology and processing to trade. Subsequently, the U.S., the European Union, and Japan proposed to the World Trade Organization that it hold a consultation on China’s rareearths export restrictions, instigating a rareearths trade war.

This trade war isnot a call for China to reduce but to expand her exports. China holds 36% of the world’s rare earths stocks and accounts for 90% of global exports. In terms of environmental control, however, China lags far behind the third largest rare earths stockholder, the U.S. Tightening environmental controls did not lowerChina’s rare earths exports, but rather caused an increase, such that rare earths prices,following their historical high last November, dropped by 75%.
By lowering Chinese rare earths imports, the United States could boost their local rare earths industry, as well as reduce their trade deficit with China. The U.S. Department of Commerce has been authorized by the Senate and House of Representatives to amend their regulations to do this. This could have led to very high taxes on imports from non-market economy states. However, why have they not applied high taxes on rare earth imports from China?
As with all their government policies, the U.S. trade policy aims to protect their own self-interest. They are vigorously setting a double standard. The U.S. version of trade war, by its nature, puts its self-interest above those of other countries. Their announced objective of a trade balance is just a slogan. The earlier U.S.-European banana trade war, the “Chicken War,” and the recent forced entry of U.S. beef into South Korea and Taiwan are clear examples of this doublestandard.
The trade war doesnot revolve around rare earths
Trade between the U.S. and China continues to grow. Though there has been a gradual decline in exports in the automobile and aviation industries, the overall volume of American exports to China has risen substantially.In the United States, reducing trade with China would not only cause consumption levels to fall, but would also dramatically hitthe manufacturing industry. Another sector that would take a blow is the American agriculture industry, because China is the biggest buyer of soybeans and other similar produce. Essentially, the United States instigated a trade war with China not because of rare earths, but because of currency.
In February, the Chinese RMB(Yuan) to USD exchange rate was at a historic high, in the range of 6.2:1. That same month, China’s trade deficit jumped to USD 31.5 billion.
If Beijing had control over the balance of trade, it would have had no reason to follow a policy of appeasement. In early March, however, Mr. Zhou Xiao Chuan, Governor of People’s Bank of China, pointed out that the Central Bank would adjust the currency according to a number of factors. The move implied that the prevailing exchange rate adjustment measures had become faulty, and the Central Government had to regain control over its own currency.
When the change in China’s situation and the huge deficit in February became public knowledge, the U.S. could no longer issue its usual statements about currency exchange. A new direction had to surface, one that would involve the Department of Commerce, in order to knock down China’s power on exports. Hence, a new round of trade containment began in order to maintain the political strength of the U.S.in the bilateral relationship. The rareearths trade war, therefore, is merely a tactic inacontinuingstrategy.
This year, China will replace the United States as the world’s largest trading country. As a result, the arrogant stance of the U.S. when trading with China will have to be toned down. Meanwhile, the importance and proportion of China’s foreign trade with the U.S. has weakened over the years,because of China’s advanced cooperation with other trading partners. The hugedeficit in February revealed that trade surplus with the U.S. alone would not balance China’s trade. It follows that China’s foreign policy cannot depend only on developments in the Sino-U.S. trade.
China is taking over the dominant position in world trade. Since it wants to remain the dominant power and to hold onto its political authority and right of way in this trade war, the U.S. has to keep its alliances with Europe and Japan.
In the post-crisis era, the strongest economies of the “Old World” (Europe, America, and Japan) experienced great downturns. The “New World” of emerging market economies flourished and reshaped globalization. The rare earths rush has been an underlying factor in global trade politics. The core of the disputes is “who is the dominant power?” On the surface, the rare earth trade disputes appear to revolve around material gains, but they are in fact battles for authority.
Global Integration
Currently, China is a major trade stakeholder, whether in resource trade or processing trade. However, she is still the price-taker, not the price-setter. It remains difficult for China to use her own currency in foreign exchanges to evaluate, settle accounts, or make payments. In addition, China has been facing extreme international pressure to appreciate its Yuan. These reflect the cold and harsh realities of the international trading system and also portend that the system is on the verge of dramatic reform.
Historically, a major setback in Sino-U.S. trade occurred during the financial crisis of 2008, resulting in a drop of 13% during the year. Although trading has greatly recovered since then, Sino-U.S. trade is no longer the world’s most important bilateral trade. Today, Sino-European trade is the most prominent, while China’s trade with emerging economies is experiencing rapid growth. To seek improvements in global trade, consensus and collaboration must be reached, but the U.S. loses rather than gains authority with the way it has been waging the rare earths trade war against China.
The president of the U.S. had to call publicly for a consultation to resolve the trade disputes, and the Chinese president agreed out of courtesy. In truth, both states are utilizing these tactics to act in their country’s best interests. This is especially apparent in the case of the U.S., with its efforts to continue to act as the dominant trade power and to showcase its ability to direct and suppress trade with China. It may be questionable how effective this strategy has been on the international stage, but at least the strategy is fulfilling the U.S. domestic needs for its election year. Meanwhile, China appears to be giving way in foreign trade, but is in fact getting stronger in its drive to regain authority and control over its own currency.
Regardless of how the rare earths trade war turns out, China will not return to the old model of producing cheap exports while sacrificing the environment. The rare earths trade war will be an additional test for the upcoming dominant trade leader, one resembling a “coming-of-age ceremony.” Since armed conflict is highly improbable, this trade war will be a conflict in dialogue, not in arms, as the major trade and industrial powers take time to adjust and refine the system shaping the new world order.

Dr. Zhou ZiHeng
Director of the Shanghai Finance and Law Institute
China Energy Fund Committee Guest Contributor
CEFC Members : CEFC China Energy Co., Ltd. China Institute Of Culture Limited CEFC Shanghai Charity Fund
© 2013 CEFC Hong Kong Non All Right Reserved Adress:Rm 3401-08, Convention Plaza Office Tower, 1 Harbour Road,
Telphone:852 - 26551666 Fax:852 - 26551616 E:info@cefc.org.hk ICP:10040147 网站建设<> 中国企业港