U.S. Prepares For Major Supply Disruptions

Added April 3rd, 2012 by Anthony David

In continuation of the China vs. the-rest-of-the-world rare earth saga, the US, EU and Japan recently filed separate but coordinated complaints with the World Trade Organization (WTO) on the grounds that China was fortifying its stocks of those rare earth metals that were critical for the manufacture of technology products such as mobile phones, camera lenses, hybrid cars and weapons. The complaint also includes non-rare earth metals tungsten and molybdenum.

While announcing the move, President Barack Obama said, “We’ve got to take control of our energy future and we cannot let that energy industry take root in some other country because they were allowed to break the rules.”

US administration officials have been complaining that while China has access to large stocks at cheaper rates, the US is being forced to manage with small stocks at high prices. US officials claim that WTO forbids such unfair trade practices and since China is a member of the WTO, it must function within the WTO rules and regulations. In the absence of a resolution being found within 60 days, the dispute may be placed before a WTO panel for a ruling. Sanctions against China are a possible outcome of the process.

In spite of China’s repeated claims that restrictions on its export quotas since 2009 have been driven by environmental concerns and the need to conserve scarce resources, nobody has really been buying that argument. Chinese foreign ministry spokesman, Liu Weimin said at a briefing, “We think the policy is in line with WTO rules.”

He said that allegations of trade monopoly against China were groundless. It is a well-known fact that while China owns about 30% of the global rare earth deposits, it produces 97% of the global production. Liu said that sustaining that kind of production without damaging the environment is impossible. He added, “Despite such huge environmental pressure China has been taking measures to maintain rare earth exports. China will continue to supply rare earths to the international market.”

A major cause of friction between China and the US is the $295 billion trade deficit recorded last year. In fact, Obama issued an executive order in February this year to create a panel that would investigate unfair trade practices by various nations, including China. During a visit to the US in February, Chinese Vice President Xi Jinping requested the US to respect Chinese interests.

Co-incidentally, the rare earth complaint has come at a time of leadership transitions in both nations. While Obama will stand for re-election in November, Jinping is expected to take over the presidential reins in China in a power handover process within the communist party later this year.

Among other voices in both nations, China’s Xinhua News Agency said that the move by the US was rash and unfair and could damage trade ties. On the other hand, in the US, possible Republican presidential nominee Mike Romney said that Obama was not being tough enough on China. Vijay Vaitheeswaran, The Economist’s China business editor said, “The rhetoric over rare earths is overheated. There is no need for provoking a trade war over China’s stance on rare earths because simple economics and market forces will solve this problem.”

Analysts have pointed out that although the US has substantial rare earth deposits in Alaska and California, the nation appears to lack the political will to tap its own resources. However other countries have moved ahead and are seeking to become self sufficient in their rare earth supply. As Vaitheeswaran pointed out, “Restricted supply and higher prices have already spurred the development of big mines in Australia.”

Karel De Gucht, EU Trade Commissioner said that China’s restrictive policies gave the country a lot of advantage and its policies must be modified. The recent complaint follows the EU’s earlier challenge to China on nine other raw materials that included magnesium, silicon carbide and zinc. The WTO had ruled that export restrictions on these materials defied WTO rules. Since February, China has been increasing its supply.

In another development, on March 16, Obama signed an Executive Order (EO), titled “National Defense Resources Preparedness.” While the president claims the EO is a necessity to protect the country’s interest, analysts and bloggers have been creating quite a ruckus at the high handedness of the EO. Put simply, the EO empowers the president to control all civil energy supplies, which include oil and natural gas; limit and control all civil transportation, which clearly is almost 97% dependent on oil; and even re-enable a draft if the country’s military and non-military demands should require it.

Section 103C of the EO authorizes the president “in the event of a potential threat to the security of the United States, to take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology, for national defense requirements.”

The EO makes it clear that it covers “all forms of energy including petroleum, gas (both natural and manufactured), electricity, solid fuels (including all forms of coal, coke, coal chemicals, coal liquification, and coal gasification), solar, wind, other types of renewable energy, atomic energy, and the production, conservation, use, control, and distribution (including pipelines) of all of these forms of energy.”

In spite of all the criticism, it cannot be denied that this appears to be the first time that a concrete policy has been tabled should an energy crisis occur. For example, it’s a well-known fact that if Iran ever feels threatened by Israel or the West, the first step Tehran would take would be to block the Strait of Hormuz and cut off 40% of the world’s seaborne oil supply, which is about 20% of the total global supply and create a supply gap of about 20% in the US. Naturally, the results would be catastrophic for the US.

The EO does not mention rare earth metals as part of its scope but the possible effects of an oil-supply interruption are clear from the analysis of the EO. The similarity of the oil and the rare earth supply situation cannot be ignored. Should China feel threatened in any way, Beijing could very well cut off supply of rare earth metals to the western world thereby triggering a chain of catastrophic events in the global markets.

Section 303 of the EO permits the government to “enable rapid transition of emerging technologies,” which implies important technologies that have now been kept out of the market will be pushed into the market early if required. The same section states that the National Defense Stockpile could take control of strategic materials “if such transfers are in the public interest.” The provisions of the EO certainly imply that the president is well aware of the situations that could arise should the WTO complaint disfavor China.

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