China Banning Rare Earth Exports to Japan Another Side to the Story

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It seems as though not a day goes by without a rare earth metal controversy involving China. The most recent dispute involves a Chinese fishing vessel collision with a Japanese coast guard ship, according to The Washington Post. But the dispute goes far beyond a collision between two boats it involves an island chain called Senakus (Japanese) or Diaoyu (Chinese). Geographically, the islands sit “140 kilometers east of Pengjia Islet/Agincourt, Taiwan[9]; 170 kilometers (106 mi) north of Ishigaki Island, Japan; 186 km (116 mi) northeast of Keelung, Taiwan; and 410 km (255 mi) west of Okinawa Island, according to Wikipedia. As to who has the more “valid claim on the islands remains the subject of controversy. Some think China and the Republic of China (Taiwan) have the greater claim, and others suggest Japan. Regardless, the dispute has escalated into an alleged rare earth export ban levied by China on Japan.

China has denied the allegations but others including The New York Times’ Keith Bradsher, reported the ban had gone into effect immediately.

Our own contacts in China tell a different story supporting the Chinese position that it had not issued an export ban on rare earth metals bound for Japan. One contact told us that the Japanese government has even confirmed this to be the case. So what actually happened? According to our source, over a year ago, any Chinese exporter could ship rare earths outside of government regulation (we previously reported on rare earth black markets in Japan, confirming our source’s account). By avoiding China’s resource tax, the Chinese authorities decided to crack down by increasing both the resource tax and export duty beginning last year. Now that rare earth metal prices have increased, nobody wants to pay more for the same materials.

Perhaps the most poignant comment on the subject came from Ed Richardson in this Washington Post article, “Just the reports that they might have done something like this has sent a chill through the industry. Here you have an incident over a fishing boat and this topic comes up. It’s startling.”

But is this startling? Ask anyone in China and they’ll confirm the lack of love between the Chinese and the Japanese. In fact, according to Paul Adkins, editor of Black China Blog, “Witness the protests here last week, when the Chinese fisherman got arrested by Japan.   Let me tell you the sentiment against Japan is palpable amongst the ordinary folk here. My Chinese friends do not approve of me even having a meeting or a dinner with Japanese clients.  To the extent that there is distrust towards Americans, there is much deeper hostility toward the Japanese here. Undoubtedly, the Chinese may end up “complicating” the export process with Japan. I recall my days as an aluminum trader that the wrong chop, or shipping goods to the wrong destination or other incorrect export policies would “accidentally get implemented.”

As a side bar note and perhaps ironically, China’s state owned aluminum company, Chalco, “rose by the most in a year in Shanghai trading after its parent announced a plan to invest at least 10 billion yuan ($1.5 billion) in rare earths, according to this Bloomberg/Businessweek story.

Unfortunately, this isn’t the end of the story.

–Lisa Reisman

Comments (5)

  1. Thaidiamond says:

    “Unfortunately, this isn’t the end of the story.”

    That’s right.

    Indeed, is not even new news. Here in Asia, we’ve been reading about similar incidents for over twenty years. The Spratley Islands are but just one other example.

    Tensions are also not confined to North-East Asia.

    On July 23rd, week’s before the recent Japanese incident, they erupted publicly on the fringes of an Asian security forum in Hanoi, where the U.S Secretary of State, said that respect for international law and established rules was key in the South China Sea. Vietnam, Indonesia, Malaysia, the Philippines, Taiwan and Brunei—all friendly with the United States—have maritime-boundary quarrels with China. An American role in enforcing the peace, Mrs Clinton asserted, was in her country’s “national interest”. The sea was “pivotal to regional stability”.

    The view from much of Asia is that China’s claim to sovereignty over almost all the sea clearly lacks international legal basis and encroaches the legitimate interest of the global community. Then again, one has to be carefully putting that to an 800 pound gorilla.

    And yes, oil and the potential for other natural “undiscovered” resources is at the heart of this. Not just around the “rocks” themselves, but the geographical and territorial extensions that sovereignty over such islands would imply.

    You may want to hear the Peterson Institute for International Economics’ report. It bills itself as a private, nonprofit, nonpartisan research institution devoted to the study of international economic policy. I find it refreshingly ideologically free—which as an investor I would define as a requirement, not a luxury.

    Anyways here’s their piece (http://is.gd/fwI3p) on the recent dispute…with some excellent geopolitical background here.

  2. admin says:

    Thanks for your thoughtful comments. We’ll check out the Peterson Institute too…LAR

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