Obama Fights China on Rare Earths – But Dependence on the Resource Giant will Remain

WASHINGTON – The United States, together with the European Union and Japan, has carried out its threat and requested consultations with China at the World Trade Organization (WTO) on the country’s tariffs and export quotas on rare earths elements. The request is the first step in an official dispute settlement procedure. If consultations fail, the complainants can ask for the establishment of a dispute settlement panel.

For years, high tariffs and quotas on these 17 metals, with such exotic names as lanthanum, europium, and neodymium, have given the United States a major headache. In January 2012, the WTO ruled in favor of the United States, the EU, and other countries that China’s restrictions on the export of metals like magnesium and silicon conflicted with international trade law. Now the United States is hoping for a similar verdict in the case of rare earths elements.

At least on first sight, U.S. President Barack Obama’s timing could not have been better. The president is considered to be too lenient in trade matters, but this move at the WTO shows he wants to convince business and unions of the opposite. Obama also hopes to score against his Republican competitors in the presidential race. Mitt Romney, currently the front-runner in the race for the Republican nomination, has promised to defend the rights of U.S. companies more rigorously and to establish an internationally level playing field. The United States has a large trade deficit with China that in 2011 amounted to $295 billion, or 41 percent, of the total deficit ($726 billion) in trade in goods – an all time high. The United States attributes the growing imbalance to unfair trade practices like violating intellectual property rights, an undervalued currency, subsidies, and restricted market access. According to a 2011 opinion survey by the Pew Research Center, more than half of the respondents (53 percent) were in favor of tougher actions against China on trade and economic issues.

The complaint at the WTO is thus part of a larger strategy of the Obama administration: Getting tough on trade. In late February 2012, Obama signed an executive order to create the Interagency Trade Enforcement Center (ITEC) within the U.S. Trade Representative’s office to monitor and enforce trade agreements and laws. Since taking office, Obama has filed five WTO complaints against Chinese trade policies (his predecessor President George W. Bush signed seven), including its countervailing duties and anti-dumping duties on broiler products as well as on grain oriented flat-rolled electrical steel from the United States.

Rare earths elements are a particularly sensitive issue for the United States. Due to their characteristics, they are indispensable in the production of high-tech products and in green technologies, such as photovoltaic systems, wind power plants, and electric cars. China is a serious competitor for the United States in these industries. In addition, rare earths elements are critical to the defense industry, being indispensable for almost all sophisticated weapon and communication systems including radars, lasers, and missile systems. The United States thus fears a dangerous dependence on China. The country currently accounts for 95 percent of the global production of rare earths. The United States imports 100 percent of its rare earths consumption. In 2011, imports amounted to a value of $696 million, up by $161 million over the previous year. Seventy-nine percent were imported from China. The oft-cited quote “There is oil in the Middle East, there is rare earth in China,” attributed to the late Chinese leader Deng Xiaoping in 1992 does not particularly ease U.S. worries. That China does not hesitate to flex its muscles could be seen in 2010 when it – although not officially – put a ban on the export of rare earths to Japan after yet another political squabble over the Senkaku islands between the two countries. Thus the decision to take the case to the WTO.

But Obama could be disappointed. Even if the United States won the complaint (and the chances are good), a final verdict should not be expected before 2014 – much too late for an impact on the current elections. The last dispute settlement procedure on export restrictions on metals and minerals took two-and-a-half years (June 2009-January 2012). In addition, the dispute will change little with regard to the dependence on China. Just recently, the Mountain Pass rare earths mine in California, once the flagship of U.S. rare earths production, underwent expansion and modernization. However, its owner, Molycorp Inc., while expecting to be back up to full production in 2012, estimated that it will take years until domestic production will be able to sufficiently meet demand in the United States. Until then, U.S. dependence on the resource giant China will remain high.

Stormy Mildner is a member of the Executive Board of the German Institute for International and Security Affairs (SWP) and former Bosch Public Policy fellow at the Transatlantic Academy.