President Obama has been talking tough about what he sees as unfair Chinese trade policy since at least this year’s State of the Union speech, when the President boasted that his Administration had brought up trade cases against China at nearly twice the rate of his predecessor. (In former President George W. Bush’s defense, there was a good three-to-four-year stretch there when he seemed to simply forget that China existed.) When Chinese Vice President and likely future leader Xi Jinping visited the U.S. a month ago, there was some hope that the two major trade partners would be able to work out their differences — those differences being that the U.S. thinks China is giving unfair support to its exporters, and China think it’s, well, not doing that. Trade between China and the U.S. was worth nearly $400 billion in 2009, making it in the interests of both countries to work something out.
Or not. This morning Obama announced that the U.S. — along with the European Union and Japan — had filed a case with the World Trade Organization requesting talks with China over its export controls of the rare-earth minerals used in the high-tech and clean-tech manufacturing industries. The request for consultations is the first step in a process that will lead to a full legal case within two months, unless China agrees to the demands to ease its tightening export quotas on rare-earth minerals. That isn’t likely — and the fact that Obama chose to make his case publicly, from the White House Rose Garden, indicates that both sides could be gearing up for a trade war in a presidential-election year. “Being able to manufacture advanced batteries and cars is too important to sit back and do nothing,” Obama said. “We can’t let the new energy industry take root in other countries because they are allowed to break the rules.”
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What are rare earths, and why is the President so concerned about them? A 2011 TIME piece I wrote explains some of the basics:
Today China produces 97% of the world’s rare earths. The vulnerability of the rest of the planet to Chinese dealers became apparent last year, when Beijing — allegedly out of concern for the environmental cost of mining — suddenly restricted rare-earth exports, sending prices soaring. Chinese leaders now say they’ll cut the export quota for rare earths 35% over the first six months of 2011, threatening a shortage that could put the brakes on the U.S.’s green growth. “The problems are real and serious,” says Robert Jaffe, a physicist at the Massachusetts Institute of Technology. “If appropriate steps are not taken, we face possible short-term constraints of supply to what could otherwise be game-changing energy technologies.”
Rare earths are rare in the sense that they are not often found in concentrations that are economically worth mining, though China, the U.S. and Australia all have major reserves. Despite their scarcity, rare earths have become a vital part of the global economy, and the gray and silvery metals are only going to become more valuable. For instance, iPods contain small quantities of the rare earths dysprosium, neodymium, praseodymium, samarium and terbium. Fiber-optic cables need erbium, europium, terbium and yttrium. Rare earths serve a number of purposes. Praseodymium is used as a pigment, while neodymium is a critical component of strong magnets. (See photos of old bombs turned into scrap metal.)
Rare earths are especially essential to clean-tech products, including solar panels, wind turbines and batteries. Each Chevrolet Volt — GM’s new extended-range electric vehicle — uses 7 lb. (3.2 kg) of rare-earth magnets, while each utility-scale wind turbine uses 661 lb. (300 kg) of neodymium. As the clean-tech industry has grown and as China has curtailed exports, the price of rare earths has skyrocketed. Dysprosium — one of the most critical rare-earth elements, with a name that means “hard to get” in Latin — has gone from $6.50 per lb. ($14.33 per kg) in 2003 to over $130 per lb. ($287 per kg). “Almost any clean-tech product or any electronic gadget needs these elements in one way or another,” says Craig Cogut, founder of Pegasus Capital Advisors, a private-equity firm that has invested in rare earths. “They are absolutely critical to the growth of green tech and IT.”
China has restricted exports of the minerals recently, claiming that it was doing so because mining for rare earths can be environmentally destructive. That’s true — and one reason why rare-earth mines in the U.S. closed down years ago — though China seems to have little desire to reign in the many other environmentally destructive parts of its economy. But the restrictions effectively make rare earths outside China several times more expensive than they are inside the country. And since rare earths are essential to the clean-tech industry, that price differential gives foreign companies an incentive to move their manufacturing to China — which is exactly what Obama is complaining about.
Of course, bashing China is always popular in an election year, although, as Edward Luce wrote for the Financial Times yesterday, it may be particularly rough this time around:
Finally, this time the politics feel different. Usually the Democrat bashes China on trade while the Republican holds back. But in 2012 it is the Republican who has taken the lead. Mr. Obama will have to parry as the election gets under way. Mr. Romney has promised to brand China a currency manipulator “on my first day in office”. He would not easily be able to wriggle out of this. Mr. Obama will do well to avoid matching it.
Still, the fact that both the E.U. and Japan — which is generally reluctant to act against China for fear of fanning anti-Japanese sentiment — have joined the U.S. over the rare-earths issue indicates that this case may be about more than presidential politics. And it’s not just rare earths — there are more battles ahead over solar panels, cars and auto parts. When it comes to China and the U.S. on trade, things will almost certainly get worse before they get better.