Rare error

Deng Xiaoping famously, though perhaps apocryphally, announced on his Southern Tour in 1992 that "the Middle East has oil [but] China has rare earths." It is not the catchiest of catch-phrases in either English or Chinese, but it has been widely quoted in recent months as rare earth metals – elements like neodymium,  gadolinium and lanthanum used in lasers, computer memories, batteries and electric motors – have seized the news cycle.

It is, of course, misleading. While China commands 95% of the world’s production of rare earths, it is home to just 37% of global reserves. In comparison, the Middle East contains about 80% of easily exploitable global crude oil reserves.

China’s dominance in rare earths is not a stroke of geological fate, and neither is it an accident of history. Recognizing the importance of the rare earth industry early on, Beijing aggressively developed it, undercutting prices of foreign producers and ultimately pushing most countries to suspend production.

Most estimates now suggest that even if the US and Australia were to restart rare earth production, it would not be feasible on a commercial level for five to 10 years.

However, judging from recent comments from senior Chinese officials, the country’s rare earth monopoly is a terrible burden. It has cut the rare earth export quota by 39% this year, and there were suggestions throughout the autumn of further reductions in 2011.

Officials have frequently justified export quota cuts with environmental concerns, noting that rare earth production is a highly polluting process. Similar worries are behind Beijing’s plans to consolidate domestic rare earth production in the hands of a few giants like Inner Mongolia Baotou Steel Rare Earth (600111.SH).

The environmental concerns are real, and much is to be gained from shutting down smaller, less easily regulated producers. However, these concerns are frequently being used not as a legitimate excuse, but as a convenient cover for a disingenuous position. China’s actions have too often been driven by petty domestic political interests. This is unfortunate, and it is a recipe for needless international tension.

Beijing’s tussle with Japan over the collision of Japanese and Chinese vessels near the disputed Diaoyu/Senkaku islands is a case in point. In the days after the collision, China unofficially suspended rare earth shipments to Japan, its largest export market for the materials, where they are used in high-tech manufacturing.

Beijing denied any embargo, but Japanese government and industry officials said shipments halted in late September. This was apparently the first instance of China using commercial sanctions over disputes in the East China Sea.

Shipments to the US and Europe were also reportedly stopped in September and October after Washington quietly indicated support of Japanese sovereignty over the islands.

These steps prompted 37 US, EU, Japanese, Korean, Indian and Brazilian business organizations and companies to write an open letter to leaders at November’s G20 summit in Seoul, condemning government "interference with commercial sale of rare earth elements, domestically or internationally, to advance industrial policy or political objectives." China was not named, but the letter’s target was clear.

Beijing’s position on rare earths has created a crisis of goodwill. In the face of overwhelming evidence that it is in fact using its monopoly in the materials for political means, claims to the contrary do nothing but reinforce preexisting suspicions of Chinese industrial policy.

Ultimately, this will be damaging not just to China’s credibility, but its long-term potential for innovation and cross-border cooperation. The firms it is alienating – global leaders in electric vehicles, high-tech hardware and wind power turbines – are the very ones it should be courting to share their innovations.

Pursuing questionable political ends may cause the desired discomfort for trade foes in the short term, but further ahead it is China that will bear the cost of these policies most keenly. For a country famed for the long-term reach of its planning, this is an atypical and unfortunate miscalculation.