Sino-Japanese tussle over rare earths is just a hiccup

China is in the ascendancy and it does not seem to be shying away from staking out what it considers to be its ‘territory’ when and where it considers this to be necessary. This is true both in more geostrategic spheres, such as territorial ‘claims’, as well as in economic matters.

At times, nonetheless, the dividing line between both seems quite blurry, so that some observers find it hard to differentiate between them. Having said that, while currency and trade frictions with the United States and, increasingly with Europe, have at times been pronounced, at the regional level there seems to be relative calm in this regard, although recent Chinese ‘assertiveness’ in some of those other spheres has at times ruffled some of its neighbours´ feathers.

So again, on the whole, and at the regional level, economic relations between the different countries in East Asia seem to have become quite constructive, as opposed to the frictions seen at the beginning of the last decade.

Of particular importance, regional trade has ‘taken off’ in the last few years, in large part as regional production chains have converged on China as a sort of ‘assembly point’ for later ‘re-export’. This probably explains why such a large share of China´s current account surplus is with the US. Additionally, this scheme of things may be overstating Beijing´s export prowess, while at the same time understating its creativity at integrating competitors into its supply chains (or vice-versa).

This neat little relationship, nonetheless, is prone to some serious hiccups. One of these occurred in the past month of September, when a Chinese fishing trawler collided with two Japanese coast guard vessels, off of two islands located in the South China Sea, which are claimed by both countries and Taiwan. Thus, what at first sight might appear to not be a very important incident turned into quite a vocal exchange between diplomats from both countries and coincided with the apparent imposition, by China, of additional export controls on shipments of ‘rare earths’ to Japan.

Rare earths are a group of 17 chemically similar metals whose use is critical in everything from hybrid vehicles, to wind turbines, cell phones or military radars. So important are they, in fact, that cutting off their supply could lead to important disruptions in the production of all of those products. China, for its part, denied those charges, and alleged that those measures had been undertaken with no other purpose in mind than to conserve those resources and reduce the harmful environmental effects which their production entails.

The US, China, and the European Union, however, argued that those controls harmed its manufacturers and were meant to contain prices for local firms, granting them an unfair advantage. In this regard, Ron Kirk, US trade representative, is on record as having stated that, “China’s policies provide substantial competitive advantages for down-stream Chinese industries (…) the export restrictions have also caused massive distortions and harmful disruptions in supply chains throughout the global marketplace.”

In its initial verdict, just issued on 5 July, the World Trade Organization (WTO) sided with the latter. Of note, this decision could have implications for other countries which have recently sought to limit commodity exports, contributing to price spikes in some of these.

All of the above, nonetheless, has taken place against several other trends which, hopefully, may be pointing to a climate more conducive to ‘free trade’, such as the very significant reduction seen in the Chinese current account surplus in the last few years and the rise seen in the Yuan-US dollar exchange rate.

As well, one must point out that the US, EU and Mexico (and not Japan) brought their complaint before the WTO in 2009, well before this diplomatic spat. Furthermore, recent news points to a growing probability that China, Japan and South Korea could soon sign a ‘free trade’ agreement.

Complaints against China at the international trade arbiter, however, have seen a sharp rise in the last three years. And some of its trade partners further afield, such as the US or Europe, still have some misgivings as concerns China´s currency and trade policy. In this regard, for example, at least part of the recent appreciation in the Yuan versus the US dollar has been compensated for by its depreciation versus the Euro, a fact which has drawn criticism.

Even so, long term forecasts by economists do point to a China that plays a constructive role in regional and world growth. That, certainly, is the hope. Time will tell who is right, the pessimists or the optimists.