China and the Geoeconomics of Rare Earths

What are rare earths? 

Most people have never heard of rare earths elements, often simply called REE, but these group of metals are essential for the high-tech industry and therefore they play a pivotal role in the contemporary economy. 

Daily products like smartphones and computers all contain rare earths, but they are also present in in green power generators like wind turbines, in medical devices and in military hardware.

The International Union of Pure and Applied Chemistry, or IUPAC, has defined rare earths elements as lanthanoids with atomic numbers 57 to 71; but elements with similar properties

like yttrium and scandium are also generally included in this group of transition metals characterized by their special electron configurations.

Contrarily to what the name might suggest, rare earths are actually not so rare. The problem is that they are hard to find in concentrations high enough to make their mining economically profitable. Rare earths elements can be used in different forms: mineral concentrates, mixed chemicals, oxides and metals, magnets, phosphors and powders. 

In the 1980s, their main use was within the metallurgic industry; but after 2010 they became mostly employed in the medical sector for lasers, X-ray machines, or MRIs; or in electronics for producing cathode ray tube televisions, or energy-efficient fluorescent lamps. 

Their magnetic properties are also very useful for the creation of wind turbines, laptops, smartphones and other hi-tech products. 

Magnets and phosphors have also application in the military sector for those technologies that require lasers or communication and transmission devices.

China’s monopoly

Until the 1980s, the world’s leading producer of rare earth was the United States. The massive Mountain Pass mine in California was the main extraction centre, but it was eventually closed mostly out of environmental concerns over the effects of the mining process. 

Yet, there was also a second important factor at play: China was emerging as a fierce competing producer. The PRC had huge reserves, and its low labour costs meant that the Chinese rare earth industry was much more competitive than the American one, to the point of ultimately overwhelming it. 

With time, China obtain a quasi-monopoly over the global production of rare earths. According to the Maastricht Economic and social Research Institute on Innovation and Technology, between 1988 and 2013 “China increased its rare earths production by 237%, while the rest of the world decreased production by 66%”.

China strengthened its monopoly by implementing four related economic measures. First, it banned foreign companies from taking part in any part of the supply chain, only leaving room for the creation of joint ventures with Chinese companies. 

Second, Beijing introduced production and export quotas for both domestic companies and joint ventures: for example, in 2018, China decided to limit the production of Rare earth elements to 45,000 tonnes for the first semester of the year. 

Third, most of the companies were merged into a single megacompany and new exploitation licenses were banned. Fourth, the PRC implemented a strict and well-controlled pricing system.

In 2013, 40% of the word’s known rare earths’ reserves were located in China; and in 2017 its share was estimated at around 80% of the worldwide production of rare earths. In this regard, former Chinese President Deng Xiaoping made a remarkable declaration: “There is oil in the Middle East; there is rare earth in China”. Apart from the purely economic implications, having the monopoly over rare earth production also gave China a notable political leverage.

Japan is a country that has directly experienced China’s willingness to use its near monopoly over Rare earth as a foreign policy tool. In 2010, a Chinese trawler collided with two Japanese coast guard ships inside of Japanese territorial waters. The Chinese captain was then captured by the Japanese authorities. This sparked a diplomatic crisis between the two countries, during which China blocked its exports of rare earth to Japan. In the short term, this affected the economy of both Japan and of its trading partners; prompting them to take countermeasures.

As a response to China’s actions; Japan, the European Union, Canada and the US submitted a case before an international court claiming that China’s export quotas were infringing WTO Law. More precisely, they accused China of charging exports duties that, in their own words “are inconsistent with China’s WTO obligations because in its Accession Protocol, China undertook to eliminate all export duties, except for those imposed on a number of products listed in Annex 6 to China’s Accession Protocol. 

The complainants argued that, with the exception of tungsten ores and concentrates (which they excluded from the scope of their claim), none of the products at issue are included in Annex 6, and China is therefore not entitled to impose the export duties on them”. Beijing replied by stating that “export duties are necessary to protect human, animal and plant life and health from the pollution caused by mining the products at issue”. 

Moreover, China defended its position by referring to the exceptions indicated in Article XX(g) of the 1994 General Agreement on Tariffs and Trade in regard to the conservation of exhaustible natural resources. In the end, the court ruled that “China’s export quotas were designed to achieve industrial policy goals rather than conservation”. The Panel also agreed with China on the “preservation” of natural resources, adding that “every WTO Member can take its own sustainable development needs and objectives into account when designing a conservation policy”. Yet, the Panel made it clear that this measure could not be introduced in order to take control of the international market for production of one specific resource.

The WTO ruling might give the impression that the environmental costs of mining rare earths elements is low, but in reality, rare earths are often mixed with uranium and thorium and therefore their extraction is far from being environmentally friendly. According to the Chinese Society of Rare Earths and Materials Department of the Ministry of Industry and Information Technology, for each tonne of rare earth produced are emitted “12,000 cubic meters of waste gas, 75 cubic meters of acidic waste water, as well as one tonne of radioactive waste residue and 2,000 tonnes of mine tailings containing thorium”. These by-products were often discharged in rivers without any treatment, thus polluting water used for irrigation of farmlands. This had heavy consequences: for instance, in the village of Baotou more than 70% of all deceases occurred in 2006 were caused by cancer; probably resulting from these polluting activities.

Rare Earths Outside China 

In spite of China having immense reserves, there are also other countries holding vast amounts of rare earths. Within Europe, the main exploitations are in Greenland and Scandinavia. The future mine of Kvanejfeld, in Greenland, contains substantial reserves of rare earths as well as zinc and uranium; and it holds a particular importance. 

In 2016, the Chinese company Shenghe Resources planned to buy participation shares of Greenland Minerals and Energy (GME), which is currently developing the Kvanejfeld site. 

The Danish government worries that Chinese interests for Greenland could be part of broader strategy aiming at strengthening its control over the rare earth international market. Moreover, Denmark is concerned over the effects that Chinese investment could have on Greenland’s economy and on the political leverage that this might give to Beijing; but also that they could boost the island’s economy and fuel its quest for independence. 

Apart from that, the Kola Peninsula in Russia and countries like Poland are also said to contain some deposits. A Norwegian company called REETec is also developing a technology to separate REE without solvents in an environmentally friendly way.

In the rest of the world, Brazil, Vietnam and India also have important reserves, but extraction is still underdeveloped because of the lack of investments and infrastructures combined with environmental concerns. 

Australia is another country with important rare earth reserves. It does not relay on Chinese investment and it refines its mineral in Malaysia, thus “exporting” the environmental costs. 

The US is also trying to revive its production: it reopened the Mountain Pass mine in 2012, but it was shut down once more in 2015 after the company managing it went into bankruptcy. In 2017, the site was bought by two American companies along with a minority stakeholder from China; and production has resumed.

Conclusion 

With their multiple applications, rare earths seem poised to represent for the 21st Century what oil represented for the 20th Century. They correspond to the definition of “critical and strategic raw materials” given by the US law, and the Chinese is naturally raising concerns in Washington; especially now that relations are strained also because of the ongoing “trade war”.

It is significant that President Trump has restrained from imposing tariffs on rare earths imports, but some fear that China may decide to play the “rare earth card” as a response to American tariffs and restrictions against Huawei; something that could have deep economic and political consequences. It is expected that the US and like-minded countries will try to find alternative sources of rare earths, but this will take time, and breaking China’s supremacy will not be easy.