Rare earth metals are a set of 17 chemical elements in the periodic tableand include scandium, yttrium, cerium, and lanthanum. Small concentrationsof these metals are a crucial ingredient in the manufacture of a widerange of high-technology products, including wind turbines, iPhones, industrialmagnets, and the batteries used in hybrid cars. Extracting rareearth metals can be a dirty process due to the toxic acids that are usedduring the refining process. As a consequence, strict environmental regulationshave made it extremely expensive to extract and refine rare earthmetals in many countries.Environmental restrictions in countries such as Australia, Canada, andthe United States have opened the way for China to become the world’sleading producer and exporter of rare earth metals. In 1990, China accountedfor 27 percent of global rare earth production. By 2010, this figurehad surged to 97 percent. In 2010, China sent shock waves through thehigh-tech manufacturing community when it imposed tight quotas on theexports of rare earths. In 2009, it exported around 50,000 tons of rareearths. The 2010 quota limited exports to 30,000 tons. The quota remainedin effect for 2011 and was increased marginally to around 31,000 tons in2012 and 2013.The reason offered by China for imposing the export quota is that severalof its own mining companies didn’t meet environmental standards andhad to be shut down. The effect, however, was to dramatically increaseprices for rare earth metals outside of China, putting foreign manufacturersat a cost disadvantage. Many observers quickly concluded that the impositionof export quotas was an attempt by China to give its domestic manufacturersa cost advantage and to encourage foreign manufacturers tomove more production to China so that they could get access to lower-costsupplies of rare earths. As news magazine The Economist concluded,“Slashing their exports of rare earth metals has little to do with dwindlingsupplies or environmental concerns. It’s all about moving Chinese manufacturersup the supply chain, so they can sell valuable finished goods tothe world rather than lowly raw materials.” In other words, China may havebeen using trade policy to support its industrial policy.Developed countries cried foul, claiming that the export quotas violateChina’s obligations under World Trade Organization rules. In July 2012, theWTO responded by launching its own investigation. Commenting on theinvestigation, a U.S. administration official said that the export quotas werepart of a “deeply rooted industrial policy aimed at providing substantial competitive advantages for Chinese manufacturers at the expense of nonChinesemanufacturers.”In the meantime, the world is not sitting still. In response to the highprices for rare earth metals, many companies have been redesigning theirproducts to use substitute materials. Toyota, Renault, and Tesla, forexample—all major automotive consumers of rare earth products—havestated that they plan to stop using parts that have rare earth elements intheir cars. Governments have also tried to encourage private mining companiesto expand their production of rare earth metals. By 2012, therewere some 350 rare earth mine projects under development outside ofChina and India. An example, Molycorp, a U.S. mining company, is quicklyboosting its rare earth production at a California mine. As a consequenceof such actions, by early 2014, China’s share of rare earth output hadslipped to 80 percent. This did not stop China from announcing quotalimits in 2014 that seemed to be in line with those of 2013.

Questions:

1.Which groups benefitted the most from China imposing an exportquota on rare earth metals? Did it give the Chinese domesticmanufacturers a significant cost advantage? Did it result indramatically increased quality and environmental standards?

2. Given that 97 percent of rare earth metal production is now done inChina, an increase from 27 percent to 97 percent between 1990 and2010, do you think countries such as Australia, Canada, and the UnitedStates should reconsider their environmental restrictions on product ofsuch metals?

3. The restrictions imposed by China on rare earth metals has resulted insome companies (e.g., Toyota, Renault, Tesla) starting to look foralternatives. They plan to use parts that do not include rare earthmetals. Is this a good solution?