Bloomberg News

Obama Says China Rare-Earths Case Is Warning for WTO Violators

March 13, 2012

Neodymium is displayed at the Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. factory in Baotou, Inner Mongolia. Photographer: Nelson Ching/Bloomberg

Neodymium is displayed at the Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. factory in Baotou, Inner Mongolia. Photographer: Nelson Ching/Bloomberg

President Barack Obama said his decision to challenge China’s export limits on rare-earth minerals at the World Trade Organization is part of his quest to make the U.S. more competitive in the global economy.

“Being able to manufacture advanced batteries and hybrid cars in America is too important for us to stand by and do nothing,” Obama said in the White House Rose Garden this morning. “Our competitors should be on notice: You will not get away with skirting the rules.”

The U.S., EU and Japan requested consultations with China, a step that will lead the governments to ask WTO judges to rule should negotiations fail to resolve the issue. China produces at least 90 percent of the world’s rare earths, 17 chemically similar metallic elements used in Boeing Co. (BA) helicopter blades, Nokia Oyj (NOKIA) cell phones, Toyota Motor Corp. hybrid cars and wind turbines. China says it curbed output and exports to conserve resources and protect the environment.

In a similar case, the WTO found in July that Chinese limits on raw-materials exports broke global rules and gave domestic companies an unfair advantage. WTO appellate judges in January upheld the ruling, which supported a complaint by the U.S., the EU and Mexico. U.S. Trade Representative Ron Kirk called that report a “tremendous victory.”

Economic Pressure

Facing pressure to lower the nation’s 8.3 percent unemployment rate heading into November’s election, Obama is leaning harder on China. He signed an executive order two weeks ago creating a panel to probe unfair trade practices by nations including China, and the U.S. has urged the Asian nation to allow its undervalued currency to appreciate.

The U.S.-China trade deficit widened to $295 billion last year and the imbalance is a main source of friction between the two countries.

China’s policy goal is to protect resources and the environment, not to distort markets, the Ministry of Commerce said in statement on website.

Under WTO rules, the four governments must hold talks for at least two months in a bid to resolve the dispute. If the talks fail, the complaining governments can ask a WTO panel to intervene.

Rare earths became a political and legislative issue in July 2010 when China moved to limit domestic output and slash export quotas by 40 percent, souring ties with major users including the U.S. and Japan, where buyers cut usage after prices soared in the first half of 2011. China said on Dec. 28 it was leaving the 2012 overseas sales caps virtually unchanged.

International Trade Rules

“China’s restrictions on rare earths and other products violate international trade rules and must be removed,” EU Trade Commissioner Karel De Gucht said today in an e-mailed statement. “These measures hurt our producers and consumers in the EU and across the world, including manufacturers of pioneering hi-tech and ‘green’ business applications.”

The U.S. Energy Department said in January that limited supplies of five rare-earth minerals -- dysprosium, terbium, europium, neodymium and yttrium -- pose a threat to increasing use of clean-energy technologies such as wind turbines and solar panels. While prices of rare earths fell in the second half of 2011, they remain volatile, leading some companies to search for ways to consider reducing reliance on the minerals, the Energy Department said.

Supply-Chain Disruption

Kirk said today that China’s policies on rare earths result in “massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace.” Today’s complaint also involves export restraints on tungsten and molybdenum, he said in a statement.

The U.S. decision to bring the case is “rash,” and the complaint is based on “unfair accusations,” China’s official Xinhua News Agency wrote today in an unsigned commentary.

China’s rare-earth policies are needed to protect the nation’s environment, which is devastated by mining, the commentary said.

Prior to today, the U.S. has filed 12 WTO complaints against China while the EU has lodged five. China has complained twice against the 27-nation bloc and five times against the U.S.

Demand for rare earths may rebound following a 25 percent slump in prices this year, Morgan Stanley said on March 5. That would benefit producers of the metals such as Molycorp Inc. (MCP), which owns the largest rare-earth deposit outside of China, located near Mountain Pass, California.

Molycorp Reaction

The WTO case may boost rare-earth producers outside China, Luisa Moreno, an analyst at Jacob Securities Inc. in Toronto, said today in a telephone interview.

“We all thought that China was being unfair,” Moreno said. “It’s different when the president of the United States comes out and says, ‘I need to talk to China about these particular elements.’ It should be fairly important.”

Export restrictions “are issues for the respective governments to work through,” Jim Sims, a spokesman for Molycorp, said today in a telephone interview. “For Molycorp, we have to prepare for and compete in the market as it exists today.”

Not all groups were pleased with the WTO complaint. Alan Tonelson, a research fellow at the U.S. Business and Industry Council, a trade group for U.S.-based manufacturers, said the WTO dispute-settlement process is too slow, and Obama should be concentrating on China’s undervalued yuan and export subsidies.

Stealing Jobs

“Unless President Obama starts fighting back effectively against these transgressions, China’s market-rigging will keep stealing hundreds of thousands of valuable jobs and untold billions of dollars’ worth of growth that the struggling U.S. economy needs right now,” Tonelson said in an e-mail.

Senator Charles Grassley, an Iowa Republican, said Obama’s ability to bring WTO complaints to protect against unfair foreign trade practices undermines the rationale for the new trade enforcement unit that Obama said is necessary to protect the U.S. economy and workers.

“It’s not clear whether a new office would lead to more cases or just create redundancy,” Grassley said in an e-mailed statement.

The raw materials covered by the complaint filed today are various forms of rare-earth elements, molybdenum and tungsten. The 17 chemical elements include lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium as well as scandium and yttrium.

To contact the reporters on this story: Eric Martin in Washington at emartin21@bloomberg.net; Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Jon Morgan at jmorgan97@bloomberg.net


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