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Congressional Research Service, China’s Rare Earth Industry and Export Regime: Economic and Trade Implications for the United States, April 30, 2012
Over the past few years, the Chinese government has implemented a number of policies to tighten its control over the production and export of “rare earths”—a unique group of 17 metal elements on the periodic table that exhibit a range of special properties, such as magnetism, luminescence, and strength. Rare earths are important to a number of high technology industries, including renewable energy and various defense systems.
China’s position as the world’s dominant producer and supplier of rare earths (97% of total output) and its policies to limit exports have raised concerns among many in Congress, especially given the importance of rare earths to a variety of U.S. commercial industries (e.g., hybrid and conventional autos, oil and gas, energy-efficient lighting, advanced electronics, chemicals, and medical equipment), as well as to U.S. defense industries that produce various weapon systems. Many are concerned that rising rare earth prices could undermine the global competitiveness of many U.S. firms (lowering their production and employment), impede technological innovation, and raise prices for U.S. consumers. Others are concerned that China’s virtual monopoly over rare earths could be used as leverage against major rare earth importers, such as the United States, Japan, and the European Union (EU).
To many observers, China’s rare earth policies are part of a complex web of Chinese government industrial policies that seek to promote the development of domestic industries deemed essential to economic modernization. In the late 1980s, the United States was the global leader in rare earth production. However, preferential policies by the Chinese government and lax environmental standards there quickly enabled China to become a dominant, low-cost producer of rare earths by the late 1990s. Many analysts contend that China’s recent actions to consolidate its rare earth production and restrict exports are intended to promote the development of domestic downstream industries, especially those engaged in high technology and green technology industries, by ensuring their access to adequate and low-cost supplies of rare earths. It is further argued that China’s rare earth export policies are intended to induce foreign rare earth users to move their operations to China, and subsequently, to transfer technology to Chinese firms. China denies that its rare earth policies are political, discriminatory, or protectionist, but rather, are intended to address environmental concerns in China and to better manage and conserve limited resources.
On March 13, 2012, the United States, Japan, and the EU jointly initiated a World Trade Organization (WTO) dispute settlement case against China’s restrictive policies on rare earths and two other minerals. This case was brought shortly after the United States largely prevailed in a similar WTO case brought against China over its export restrictions on nine raw materials. The Obama Administration has also sought to devise strategies to deal with rare earth shortages, including the development of a diversified global rare earth supply chain, the development of alternative materials, and more efficient use of rare earth, including recycling. A number of bills have been introduced in Congress that seek to address U.S. rare earths shortages. A major issue for Congress raised by the rare earths dispute is whether U.S. trade policy can effectively respond to China’s industrial policies that may negatively impact U.S. economic interests, either through the WTO or other means.
This report examines the economic and trade implications of China’s rare earth policies for the United States.