TRADE WAR: A rare earth mine in Baotou, Inner Mongolia

China is gearing up to fight a legal dispute instigated by the United States, EU and Japan over China's export controls on rare earth minerals. The triumvirate of industrialized power brought the case to the WTO on March 13. China's Ministry of Industry and Information Technology said the country is prepared to fight the accusations. Mei Xinyu, an associate research fellow with the Chinese Academy of International Trade and Economic Cooperation, shared his views on the escalating situation with Securities Times on March 16.Edited excerpts follow:

Before the early 1970s, China had no rare earth exports, and the world rare earth market was dominated by the United States, Europe and Japan. In the 1970s, China began to enter the world rare earth market and its share has picked up sharply in the following decades. Today, having the monopoly over global rare earth production, China must improve the benefits from rare earth production, not only from producing individual rare earth products, but also from mastering the intensive processing of rare earth products.

China now has every reason to adopt powerful controls over its rare earth exports even if it means raising prices of these precious resources because the existing rare earth pricing mechanism is seriously flawed. As it stands, rare earth prices do not take into consideration the environmental impact of mining them, let alone the scarcity of these resources.

The problem is that the WTO rules, formulated with a heavy hand from the United States and Europe, are unfair. Western countries can easily distort them with adept tricks and accuse developing countries and regions that are only trying to protect their legitimate rights of breaking WTO rules. China is no stranger to these tricks. Therefore, during the upcoming rare earth dispute, China should be prepared in the following two aspects: doing its utmost to win the dispute while strengthening efforts in the production and sales of rare earth at home and abroad, so that Western countries cannot win even if China loses the suit.

Integrating

Our top priority should be to accelerate the integration of rare earth resources that began a year ago. This will let China have more control over the rare earth market, especially since Chinese enterprises in the rare earth mining sector reap low profits. Integrating the rare earth resources sector will require China to first integrate the domestic resources market, a problem that is rooted in south China. Central enterprises will play the major role in the integration - it's the only way this will work. This also reflects the significant goal in designing the mechanism for state-owned enterprises (SOEs).

Nevertheless, to integrate resources by central enterprises will cause local governments to suffer losses. To ensure the sustainable development in areas where rare earth mining is to be suspended, large companies should allocate an appropriate amount of funds to help the local communities restore the environment and cultivate new substitute industries.

Under the existing taxation system, however, taxes paid by outside investors undertaking trans-regional operations to local governments have remained low. Moreover, since large-scale corporations and business conglomerates need to maximize their profits, they often use transfer pricing and other ways to concentrate profits, thus reducing their tax payments and other funds that local governments rely on. Under such circumstances, conflicts between large-scale corporations and local governments are inevitable. If the revenues go to the Central Government, it can reallocate the revenues across the country by means of transfer payments, or directly return them to the local governments where resources are being exploited.

The objective of integrating resources should not waver; the Central Government's leading position in the total budgetary revenue should not be changed; and the market-oriented operations of large-scale corporations should not be violated. Under these preconditions, we should make more reasonable arrangements to the taxation system, allowing local governments to enjoy the benefits of having their land consumed by large industrial mining operations. We can achieve the result of win-win between large-scale corporations and these localities only if proper measures are put in place and observed.

Purification tech

Based on integrating domestic resources, we should also consider how other countries are mining these resources. Since Chinese reserves of rare earth only account for 40 percent of the world's total, by ignoring overseas resources China's rare earth industry is sure to take a hit at some time in the future, unable to maintain sustainable development. Moreover, if we don't take overseas rare earth minerals into consideration, our goal of raising rare earth prices and improving revenues for our rare earth industry will actually benefit the rare earth industries of other countries. In recent years, after China tightened controls over its rare earth exports, other countries have initiated 200 projects to explore their own rare earth reserves. In the United States, particularly, Mountain Pass in California - the biggest rare earth mine in the country - expects to resume operations with an annual output of 10,000 tons.

It is natural that many countries will be reluctant to sell us their rare earth, especially as these resources have become a hot commodity. To gain an advantage over global competitors, China must first enhance its rare earth separation and purification technologies, as well as its intensive processing technologies, to improve its control over the rare earth market. 

Separating the chemical properties of rare earth elements is difficult, since they are very similar and the process takes both time and skills, and separation of praseodymium and neodymium is the most difficult. A few foreign companies used to have monopolies over these technologies, which limited China to an exporter of crude ore or slag containing rare earth instead of a refiner.

China has tried to tackle this issue since 1972, when it first tried to separate praseodymium and neodymium. Chinese scientists, led by Xu Guangxian, a member of the Chinese Academy of Sciences, successfully developed the world's most advanced rare earth elements cascade extraction technology, breaking the monopoly of Western countries in this field.

With this advanced technology, China has almost risen to the level established by Western rare earth mining companies. The high-purity rare earth produced by China has swept the global market, reducing prices in the international market by 30-40 percent. Under this "China impact," some Western companies that had long monopolized the world rare earth market have cut or suspended production, and some sought cooperation with Chinese companies.

To maintain and strengthen its control of rare earth separation and purification, China should adhere to the exclusive ownership of rare earth enterprises when it seeks cooperation with other countries, in order to effectively protect Chinese core technologies in this field.