China can be smarter on reserving more resources

October 7, 2009

China might have good environmental reasons to restrict the production of rare earth metals, but export quotas and duties are not the way to do it.

Instead, it should raise environmental standards which will force consolidation in the production of these metals, which are key to green technologies. That will improve China’s environment, give it greater control over output, but reduce the risk of a trade battle.

China dominates the global production of rare earth metals — a collection of 17 chemical elements in the periodic table that are key materials for making hybrid cars, wind turbines and smart phones. This is unusual, as China depends on imports from abroad for most of its raw materials. However, the country’s control of supply has not helped it control prices.

Although demand has been rising more than 10 percent each year, prices were a third lower in 2005 than in 1990, mainly because of a surge of exports. Meanwhile, China’s reserves are being used up rapidly. They now account for only half of the world’s total, down from almost 90 percent in 1990.

In response, China has started to impose quotas and duties on rare earth exports in the hope that less supply might help improve prices. This has had some success: since 2004, exports from China have shrunk by about 10 percent each year. But it has angered China’s trading partners. Concerned that China wants to use its resources mainly for its domestic consumption, the U.S. and EU both filed complaints with the World Trade Organization earlier this year.

China’s move to restrict exports looks poorly coordinated with its recent resources acquisition frenzy. If this is how it behaves when it is the dominant supplier of a valuable resource, how can it complain that the rest of the world does not want to sell it more?

A better solution would be for China to raise environmental standards in rare earth production. This would squeeze out smaller producers and give China greater control over exports.

Production in China has soared mainly because swarms of small, unregulated Chinese miners have ignored the environmental harm of rare earth extraction. To get these elements, miners pump potent acid into holes in the ground, where it dissolves the minerals and ends up in artificial ponds which can be leaky. It is a bitter irony that the very elements needed to produce green technologies exact such a large environmental toll.

This disdain for the environmental costs of rare earth production gives China an advantage over its trading rivals. Explorers in Canada, Brazil, Australia and South Africa are not producing much at current price levels, mainly because they have to bear much higher environmental and labour costs, and cannot compete with China on price.

China does charge resource taxes for mining, but the tax is lower than in other countries and covers fewer resources. Unlike most other countries, it does not tax the use of land, forests, water and the ocean. The duties for using mining areas is only 6 percent of the value of the output, much lower than 20 percent in European countries and 12.5 percent in America.

In addition, Beijing subsidizes electricity to a level that is cheaper than in other developing countries such as Mexico and Brazil. That’s why industries like steel and non-ferrous metals that use a lot of energy thrive in China.

China’s central authority has been trying to consolidate the rare earth industry since the 1990s, but has made little progress because low exploration costs has drawn in more firms. The fragmented sector also undercuts Beijing’s efforts to negotiate better prices in the global commodities market.

This is the reverse of China’s situation in iron ore, where it is the largest importer but has little bargaining power over the biggest mining firms. But the outcome for the nation is similar.

It is time China realised it is better to price in the real costs of the environment, energy and health to force industry consolidation. As China gets richer, it can afford to sacrifice a little growth for the sake of the environment and to get the bargaining power it craves.

Other countries may still complain about China’s attempts to control the price of rare earth. But their protests will be harder to justify. After all, haven’t Western countries been arguing for years that China’s low environmental standards give it an unfair advantage? The WTO has also increasingly sided with countries that present a strong environmental argument.

If China now uses higher environmental standards to give it greater clout in rare earth exports, it will be hard for the West and the WTO to object.


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