I will now conclude that discussion, going beyond that report by focusing on the controversial strategic efforts of China, the rising global industrial power which surpassed Japan as of the end of the first half this year as the world’s second-largest economy after the US, to secure access to scarce natural resources.
The thorny issues surrounding China’s natural resource nationalism are analyzed in a timely study titled “China’s Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities,” by Theodore H. Moran, which was published last month by the Peterson Institute for International Economics.
Professor Moran focuses on the strategic implications of China’s rise as a global industrial power for world natural resource markets. These implications cover both the demand for and supply of natural resources, especially energy and minerals. On the demand side, China’s ravenous appetite for natural resources puts upward pressure on prices. On the supply side, however, the Chinese government efforts toward securing natural resource sources may either solidify the highly concentrated global supply system to China’s advantage, through preferential access, or create greater competition by multiplying sources and diversifying the supplier base for natural resources. Professor Moran concludes, after examining the 16 largest Chinese procurement arrangements, through equity acquisitions in and loans to natural resource companies and long-term procurement contracts for natural resources, between 1996 and 2009, that China’s efforts have mostly expanded, diversified and increased the competitiveness of the global energy-supply system.
Professor Moran finds, however, an important exception in China’s determination to control the mining of rare earth elements, a set of 17 different chemical elements in the periodic table, namely scandium, yttrium and the 15 lanthanides, such as dysprosium and terbium, found within the same ore deposits. China is by far the world’s largest producer and exporter of such elements, accounting for at least 95 percent of their global output. Deng Xiaoping once compared China’s dominant possession of rare earth elements to the rich oil deposits of the Middle East. These precious minerals are essential in manufacturing many high-technology products, such as high-performance, lightweight magnets essential in emerging green technologies, including wind-power generation, hybrid vehicles and new types of batteries. These elements are also used in a wide range of military products, including missiles. After reducing its export of these elements for three years in a row, China set in August 2009 an annual quota for such exports. It also began to acquire aggressively, through direct investment, foreign sources of rare earth elements, such as those in Australia, raising concerns that it is bent on locking up much of the world’s deposits outside China as well.
Last month China announced that it would slash its rare earth element export quotas by 40 percent for the second half of 2010, consolidate its disparate rare earth element producers into a few conglomerates, impose a resource tax and set monthly unified prices for rare earth elements. The ongoing solidification of China’s status as a monopolistic global rare earth element supplier is comparable with the success of the OPEC cartel beginning in 1973 in shifting market power drastically from importing countries to exporting ones in the world oil market. Many experts believe that China controls the destiny of the electron economy, which depends critically on rare earth elements in the 21st century.
China is already a defendant in disputes launched at the WTO by the US, EU and Mexico last year against its export restrictions, through quotas and taxes, on various raw materials, including bauxite, metallurgical coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc, essential in making steel, aluminum, and certain chemicals. Turkey was among the several WTO members that joined the consultations and reserved their third-party rights in these disputes. Before joining the WTO in 2001, China had been required to make extensive commitments against export restrictions in its WTO Accession Protocol. It had pledged not only to eliminate export taxes on all products except those listed in an annex but also to bind those taxes to specific levels. But the raw materials whose exports it restricted through taxes were not among those listed in the annex. The US, the EU and Mexico argued that the exports restrictions on the raw materials not only kept their prices artificially low in China, subsidizing Chinese exports of downstream products, but also led to higher raw material costs in global markets, impairing the international competitiveness of foreign manufacturers of downstream products that compete with Chinese ones. China, rejecting those allegations, defended its restrictions as justified by the protection of its environment and natural resources. The WTO dispute resolution panel created last March to review the complaints against China is yet to announce its verdict.
As the global demand for scarce and exhaustible natural resources rises with world population and income growth, natural resource trade issues, especially those arising from resource nationalism, will become increasingly contentious between exporting and importing nations. The WTO report admits the existence of “regulatory gaps” and “lack of clarity” in the application of WTO rules in natural resource trade because those rules were not specifically designed to regulate natural resources trade. This deficiency raises serious challenges for the WTO. One of these challenges is to manage the regulatory failures arising from taxes and quantitative restrictions on exports designed as beggar-thy-neighbor policies to create a terms-of-trade advantage at the expense of importing countries. As WTO Director-General Pascal Lamy emphasizes in his introduction to this year’s report, not only is there “room for mutually beneficial negotiating trade-offs that encompass natural resources trade,” but that “a failure to address these issues could be a recipe for growing tension in international trade relations.” Tension could escalate into conflict, especially if the efforts to conclude promptly and successfully the stalled nine-year Doha Round, which contains a controversial proposal for a WTO agreement on export taxes, fail completely.
