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    Greater China
     Oct 29, 2010

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Japan spins anti-China merry-go-round
By Peter Lee

The current irritant in Sino-Japanese relations is Beijing's alleged embargo on exports of rare earth oxides.

However, Japan's accusation appears to be little more than a cynical repackaging for political gain of its unsuccessful year-long campaign to persuade China to loosen its publicly announced quotas on rare earth exports.

This incident represents another effort by Seiji Maehara, Japan's neo-conservative foreign minister, to reposition China as freedom's existential antagonist in Asia - and Japan as America's indispensable ally.

Maehara's attempts to drag Washington into the disputes on


Japan's side may not be especially appreciated by the Barack Obama administration, which now sees itself returning to Asia on the coattails of Japanese adventurism.

A distinctly under-reported or misreported aspect of the dispute over the Diaoyutai/Senkaku islands on East China Sea between China and Japan in September was the fact that the Obama administration had passed a message to the Japanese government immediately prior to the conflict that it was not interested in openly backing Japan in disputes over the islands.

As Japan Times reported in August:
The Obama administration has decided not to state explicitly that the Senkaku Islands, which are under Japan's control but claimed by China, are subject to the Japan-US security treaty, in a shift from the position of George W Bush, sources said Monday.

The administration of Barack Obama has already notified Japan of the change in policy, but Tokyo may have to take counter-measures in light of China's increasing activities in the East China Sea, according to the sources. [1]
These ''counter-measures'' apparently included Maehara's deliberate decision to escalate the matter of the collision between the Chinese fishing boat and two Japanese coast guard vessels on September 7.

Even before Maehara became foreign minister, he employed his position as minister of land, infrastructure, transport and tourism - which has jurisdiction over the Coast Guard - to insist, over the hesitation of the cabinet, that the Chinese captain be arrested and tried in a Japanese court.

When Maehara visited the United States in October as foreign minister to rally support for his confrontational stance, the Obama administration pointedly declined to issue an unambiguous statement backing Japan over the Diaoyutai/Senkaku islands issue.

Fortunately for Maehara, US unwillingness to publicly rebuff its ally was spun into claims by the Japanese and US media that America had affirmed that the Senkakus were covered by the US-Japan Security Treaty. [2]

Maehara's run of good luck, at least in certain quadrants of the world media, has continued with sloppy and sensational international reporting of the Japanese government's most recent allegation: that China is embargoing rare earth exports to Japan.

Here's how the issue shook out in the Japanese media in late September:
Economy, Trade and Industry Minister Akihiro Ohata said Friday he has heard from some trading firms that Chinese exports of rare earths to Japan, or related procedures, have been halted, and that the ministry is confirming the situation.

While noting that the Chinese Commerce Ministry has denied setting such an embargo, Ohata speculated that the possible export problem may be linked to a widening row with China stemming from a ship collision incident in the disputed East China Sea.

In a hearing by the trade ministry a day earlier, one trade company said its Chinese partner told the company that ''its (rare earths) exports were halted.'' Another trade firm said it heard from a Chinese exporter that ''new applications are not allowed,'' according to Ohata. [3]
It was a case of anecdotal evidence countered by an explicit Chinese denial that only acquired sufficient legs through the speculation of a Japanese government official.

The story of Chinese economic perfidy was, however, too good to pass up. An article by Keith Bradsher in the New York Times on September 22 took the story global:
Industry officials said that mainland China's customs agency had notified companies that they were not allowed to ship to Japan any rare earth oxides, rare earth salts or pure rare earth metals, although these shipments are still allowed to go to Hong Kong, Singapore and other destinations. But no ban has been imposed on the export to Japan of semi-processed alloys that combine rare earths with other materials, the officials said. China has been trying to expand its alloy industry so as to create higher-paying jobs in mining areas, instead of exporting raw materials for initial processing. [4]
It should be noted in passing that the reported ban was on rare earth oxides, not semi-processed rare earth materials, an indication that selective industrial policy, not diplomatic consideration, was probably at work.

Bradsher doubled down with an October 19 article asserting that China had extended an unofficial embargo on rare earth exports to the EU and the United States. The sourcing:
''The embargo is expanding,'' beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.
But there is a fourth official:
A few shipments are still being allowed out of the country for reasons that remain unclear: a fourth rare earth industry official said on Wednesday that one of the 32 authorized rare earth exporters in China had been allowed to export one container of rare earths to the West on Tuesday and hoped to be allowed to ship another on Thursday. [5]
Thin sourcing, but enough for a Paul Krugman column, indignant statements by the German government, threats of a World Trade Organization (WTO) investigation, a promise to make rare earth an issue at last weekend's Group of 20 meeting in Seoul, and a call for the US government to make availability of rare earths for military applications a national priority.

As to the facts of the case, as the headline in Business Week put it: EU Can't Confirm China Is Blocking Rare-Earth Exports. [6]

The business press, as opposed to their cousins on the foreign relations side of the street, have done a much better job of providing context for the rare earth furor. Bloomberg reported on October 21:
Rare-Earth Furor Overlooks China's 2006 Industrial Policy Signal

Japan said China halted shipments of rare earths last month after a collision in disputed waters between a Chinese trawler and the Japanese Coast Guard led to the fishing-boat captain's detention. Chief Cabinet Secretary Yoshito Sengoku said Oct. 20 that the import situation ''hadn't changed'' weeks after the captain's release.

Nobel Prize-winning economist Paul Krugman wrote in the New York Times on Oct. 18 that ''the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.''

China started to rein in mining of rare earths in May 2009, setting production quotas to help bolster prices. The caps and subsequent export restrictions did just that. Cerium oxide, used for polishing semiconductors, soared sevenfold in the past six months and other elements have more than doubled ...[7]
The real story appears to be that China has been successful in rationalizing its rare earth industry and pushing up global prices in the past six months.

In the early years of the 20th century, China mastered the rather tricky technology of processing rare earths into usable oxides and the industry exploded in an unorganized, unregulated Wild West fashion.

Export - and hard currency - was the goal for many of the small companies that got into the business. China fought a price war with itself, prices collapsed, and big Western producers pulled out of the market.

The perception that China is a rare-earth cartel, maliciously hoarding a scarce raw material just to bring the vulnerable high-tech and defense industries of its rivals to their knees, is misleading.

China is itself the world's leading consumer of rare earths, accounting for over half of world consumption. China itself has long pointed out the imbalance in rare earth trade.

China holds less than half of global reserves but, as prices cratered, it has conducted as much as 97% of the cross-border business. [8]

It wants to raise prices; it expects that mines in the United States and Australia will go into production as a result; and it hopes that, as its domestic consumption (and profits through value-added processing) grow, foreign customers will turn to other countries to meet their need for less profitable rare earth oxides.

With the improvement in prices, US and Australian mines are slated to bring as much as 40,000 metric tons of material to the market by 2012 - equivalent to China's total exports in 2009.

So, policymakers and legislators can relax. The invisible hand will take care of the supply issue. Derek Scissors of the Heritage Institute, usually no friend of the People's Republic of China, was quoted in the Wall Street Journal as writing:
There are legitimate concerns over Chinese dominance in rare earth minerals but the near-frenzied nature of some of some assessments is unjustified ... The long-term problems stemming from Chinese control will be resolved by the market; only the short-term problems are potentially threatening, and those remain vague ... In the long-term development of rare-earth products, the next few years will just be a blip. [9]
For an insider's look at the China's role in the rare earth markets, one need look no further than Ross Bhappu, chairman of the American rare earth play, Molycorp. Molycorp's Mountain Pass mine in California was the world's leading producer of rare earths until 2002, when runaway Chinese exports and the need for costly environmental upgrades shuttered the mine. On October 18, Forbes reported:
For his part, Bhappu does not believe the Chinese want to politicize rare earth minerals. In fact, earlier this year he helped host a Chinese delegation at Molycorp's Mountain Pass mine. ''It has been surprising, the Chinese are extremely supportive of us starting this mine, they have told us they don't want to be the world's sole supplier,'' says Bhappu. ''They are concerned they are going to consume everything they produce internally and they won't have excess production to export." [10]
The key factor in the rare earth ruckus is indicated in Bhappu's statement, ''They are concerned they are going to consume everything they produce internally and they won't have excess production to export.''

Japan produces no rare earths but consumes a considerable amount in its electronic and automotive industries. Virtually all of Japan's rare earth imports come from China. Japan's anxiety over China's rare earth industrial policy - and Beijing's published policy to limit exports - is a matter of public record that well predates the Diaoyutai/Senkaku dustup. 

Continued 1 2  

Japan poured oil on troubled waters
(Oct 2, '10)



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