Re-posted from King & Spalding’s Trade & Manufacturing Alert
Patrick Togni | September 2012 | Trade & Manufacturing Alert
In a week that saw Apple, Inc. become the most valuable company in U.S. history, China’s Ministry of Industry and Information Technology (“MIIT”) announced new rules that will reduce rare earth minerals output in China by 20 percent. Rare earth minerals are key inputs in the manufacture of the full spectrum of high-technology goods, including tablets, mobile phones, and televisions, batteries used in hybrid cars, wind turbines, and precision-guided bombs.
The new rules will force consolidation of the Chinese rare earths industry by creating higher production output standards. Chinese government officials concede that the new production thresholds cannot be met by a significant percentage of smaller mining, smelting, and extracting companies, and that those entities will be shut down. The expected result will be a net loss of 20 percent to China’s overall rare earths production capacity.
Early indications are that environmental considerations – which were among the policy justifications for draft regulations released in 2010 – are no longer a fundamental component of the final rules issued by MIIT. This further suggests that the desired objective is to consolidate national government influence over the Chinese rare earths industry. Whatever the justification, this will have a cascading effect around the world, including upon U.S. manufacturers.
This move presents serious challenges to U.S. manufacturers who utilize rare earths in their products. Data contained in a recent Congressional Research Service report indicate that world demand for rare earths already outpaces global production, with the difference made up by small global reserves. The growth of China’s domestic demand for rare earths, which is fueled by dramatic growth in several manufacturing sectors, including green energy and consumer electronics, will compound this problem. When combined with export quotas and export tariffs imposed by China, this “perfect storm” of resource constraints could cause significant issues, especially in the short- to mid-term while other sources of global production and processing capacity may be brought online with varying degrees of success.
Earlier this summer, the United States, the European Union, and Japan requested the establishment of a World Trade Organization (“WTO”) dispute settlement panel to decide claims regarding China’s export restraints on rare earths, tungsten, and molybdenum. The WTO dispute settlement body has agreed to create a panel, but the panelists have not been chosen. As a result, any finding that China’s policies are contrary to WTO rules or its specific WTO commitments is not imminent at a time when China appears to be pushing the envelope on rare earths even further.