Today, as in 2010, the international discussion surrounding China’s dominance of the rare earth sector is partial and problematic. It is neither in China’s nor the international community’s interest for China to be responsible for supplying the majority of global demand for rare earth elements. In fact, in 2016, China released a Rare Earth Development Plan to protect domestic rare earth reserves while growing the domestic rare earth industry.
The point of this plan — and previous policy measures — is to change China’s position in the global division of toxic labour. For decades, China’s hinterlands and labourers bore the brunt of mining most rare earths for global consumption. After watching their crops fail, their livestock die, and their relatives succumb to cancer and bone diseases, people demanded better. Government responses have included consolidating the mining industry while incentivising research and development (R&D) in high-tech applications for rare earths.
In these times, China doesn’t want to mine rare earths for the rest of the world. And if recent news coverage is any indication, the rest of the world does not want to rely on China for the global rare earth supply.
Diversifying global rare earth supply chains is therefore a point of common interest between China and other major economies. But policymakers and investors in other rare earth-rich countries are instead fixated on geopolitically-charged rhetoric rather than the realities of the sector.
Rare earth elements are not rare, but they are crucial to our contemporary economy. They are expensive to produce, and refining them generates all manner of hazardous waste. In light of this, policymakers in Australia, the United States, Japan and other China-dependent economies must be straightforward about meeting these challenges. This requires careful regulation — not less, as some argue — and investments in multiple aspects of the rare earth supply chain.
Recent proposals to simply open more mines in different parts of the world may help ease the burden on China’s environmentally-exhausted mining regions. But it will do little to diversify the global supply chain if all raw materials are still routed through China for value-added processing.
The challenge is that downstream industries that produce rare earth-bearing technological components for critical information, energy and military technologies are struggling to beat the so-called ‘China price’. This has historically been low because it excluded the environmental costs of rare earth production — something the Chinese government now estimates amounts to several billion dollars in key mining areas. Without government support, firms outside China tried cutting costs in order to ‘beat China’, sometimes resulting in environmental and safety violations.
Abundant experience has already shown that such tactics do not provide lasting solutions. Companies that opened in Australia, Malaysia and the United States after 2010 struggled to address public fears of environmental mismanagement, and also failed to capture a significant market share from China. Private investment capital was there to help, but government policy was not. Despite an explosion of investment in the rare earth sector from 2011 to 2014, governments failed to provide a policy context to support the long-term sustainable growth of mining, refining, and value-added processing facilities outside China.
The missing ingredients were market certainty and environmentally-responsible practices. Without market certainty, companies are hard-pressed to invest in environmentally superior practices because the rules of the global free trade game mean that the cheapest producer wins. When China attempted to account for the environmental cost of rare earth production by increasing the price of exports, this actually created a global market more conducive to global supply chain diversification.
But China was sanctioned by the World Trade Organization and forced to remove all quotas and price adjustments in 2014. The subsequently lowered prices spelled disaster for almost all companies outside of China. If the international business community has learned nothing else in the last 30 years, it is that in the race to the bottom, China’s economy tends to win — albeit often at the expense of its workers.
Now, with the benefit of hindsight, policymakers can do things differently than they did post-2010 and perhaps this time actually solve the problems presented by China’s control over the majority of the global rare earth supply chain. The first step is to move beyond the race to the bottom by providing market certainty for new, environmentally-responsible players in the global rare earth sector.
For example, if China’s trade partners required that that all imports of rare earth elements and rare earth-bearing components came from ISO-14001 certified companies, this would create a new bottom line by supporting clean-ups in China and the growth of a greener rare earth supply chain around the world.
Government policy will be decisive. The worn-out argument against environmentally responsible practices is that they are too expensive for the producer, and too expensive for the buyer. But there is an easy solution. Sensible tax incentives can help downstream firms cover the cost of purchasing certified environmentally- superior rare earth elements. This in turn supports innovation.
With government-mandated environmental standards and the funding to meet them, innovative firms committed to responsibly producing rare earths can actually get off the ground. Renewed public investment in R&D will help build a 21st century rare earth supply chain, generating new patents, new products, and new solutions to long-standing problems.
The fundamentalist argument against this sort of policy is that it constitutes a government handout, as though the public shouldn’t invest in the industries on which the public depends. This is nonsense. The inadequate responses to the 2010 rare earth crisis led to the current challenge, in which players in the global rare earth supply chain remain unable to create a reliable or environmentally-sound source of rare earth elements outside of China.
Neither China nor the rest of the world likes the current status quo — let’s work together to fix it.
Julie Klinger is Assistant Professor at the Frederick S Pardee School of Global Studies and Co-Director of the Land Use and Livelihoods Initiative at the Global Development Policy Center, Boston University. This first appeared in East Asia Forum.