A move by three parties to curb quotas on rare earth elements (REEs) may have an unintended consequence: It could force foreign factories into China.
On Tuesday, the US, Japan, and the EU filed a complaint with the World Trade Organization (WTO) in an effort to force China to export more REEs, which are used in the development of green electronics. Though the amount in any electronics product is minuscule, China controls an estimated 90 percent of the world's viable REE mines. The consulting firm Design Chain Associates says REEs aren't actually rare — they are just very expensive to mine, and China has subsidized many of the mining operations. (See: The Truth About Rare Earths, Part 1 and The Truth About Rare Earths, Part 2.)
The New York Times reports that many foreign companies have established operations in China, so they can source low-cost REEs locally.
In addition to imposing quotes on REE exports, China has made exporting the minerals more difficult. For example, according to the NYT, it has begun requiring its rare earth exporters to obtain a certificate of environmental compliance before making any shipments. That could strengthen China’s claim that its quotas are an environmental necessity. The mining and processing of rare earths certainly have many toxic and even radioactive byproducts. That is one reason the West and Japan were reluctant to produce them for decades.
China denies claims by Western officials that Beijing has waved the environmental flag to disguise another motive: forcing Western and Japanese factories to move to China to gain access to an uninterrupted supply of low-cost rare earths.
There has already been a backlash in the US about the loss of manufacturing jobs. The Obama administration has pledged to revitalize US manufacturing, in part through the development of renewable energy technologies. If factories are forced to source REEs in China, it will have a dampening effect on onshoring efforts. (See: Why Minerals & Metals Matter to Midterm Elections.)
There are commercially viable REE sources in the US, but the mining operations are costly and time-consuming to ramp up. In the meantime, China has pledged to defend its quotas, in part because of environmental concerns.
As my colleague Bolaji Ojo points out, this is largely a problem of our own making. (See: Don’t Blame China for Rare Earth Crisis.) Experts such as DCA raised the REE red flag more than a year ago. Challenging China through the WTO is unlikely to help. It's more likely China will dig its heels in. Foreign companies will yell “Unfair!” and wonder how they lost yet another competitive advantage.