Thursday, September 30, 2010
Aggressiveness not in China’s long term interests
A few weeks ago two Japanese patrol vessels were “rammed” by a Chinese fishing boat near disputed islands claimed by Japan China and Taiwan. The crew of the Japanese patrol vessel arrested the captain of the Chinese fishing boat, setting off a nearly month long diplomatic crisis between the two countries. While the Japanese considered trying the captain for ramming their ships, the Chinese insisted that their captain would never deliberately commit such actions. The crisis escalated to the point where last week the Japanese learned that the Chinese had quietly, so as not to attract the attention of the WTO, told their domestic rare-earth minerals suppliers to stop exporting to Japan.
Rare-earth minerals are a number of elements that are essential to the production of things such as magnets, batteries and electronics, things Japan relies on making and exporting. Faced with the possibility of this shortage Japan quickly released the Captain back to China, in what is sure to be seen for many years to come as a humiliation by the Japanese.
The reason that the possibility of a Chinese ban on exports of rare-earth minerals to Japan was such a problem was that China currently controls about 95% of the world’s supply of these elements, an almost total monopoly. The long term problem for China now is that the rest of the world now sees that China is willing to use its monopoly on rare-earth minerals as a tool of achieving political ends; they now have a whole new set of incentives to enter the market themselves in an attempt to break up the Chinese monopoly. And it could happen; it is true the Chinese currently produce 95% of the world’s supply but this isn’t because they have all of the world’s reserves, the reason they control supply is because the minerals are very hard to extract because the extraction process is very labor intensive and extremely bad on the environment, and the Chinese are the only ones willing to undertake such costs.
However if the Chinese start to threaten the world’s supply of these metals by using them politically other countries with large reserves of the metals could start producing them, the United States and Australia together could potentially supply as much as 40% of the demand themselves under the right circumstances. And we may be approaching those circumstances. In the past few years because of export quotas on the minerals that the Chinese government has put in place, the price of some minerals has almost gone up by 300%.
If prices continue to rise and China continues to hold its willingness to supply them hostage to its political agenda, other counties like the United States and Australia would then have incentives to undertake the costs of providing them, breaking China's monopoly. So in the short run Beijing has won a victory over Tokyo in what was actually a very minor battle, but in the long run China has shown its true face and their future monopoly on rare-earths could be in jeopardy.
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