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Perils of clashes with China over currency and rare-earth exports

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The United States, meanwhile, has led many nations to tighten sanctions on Iran and North Korea for their nuclear programs. But then, in a similar political move that sent shivers around Asia and into the Pentagon, China last week halted exports of “rare earth” minerals to Japanese high-tech industries in a dispute with Japan over a set of small islands. One Japanese official called China’s action a “surprise attack,” a phrase often used by the US for the 1941 Japanese bombing of Pearl Harbor.

What made China’s retaliation so troubling is that it controls 97 percent of the world’s production of these 17 exotic metallic elements, such as dysprosium. They contain unusual properties that are critical for making computers, TVs, smart bombs, fighter jets, battery-driven cars, wind turbines, and many other advanced products.

Over the past five years, Beijing has begun to slowly restrict rare-earth exports in order to force foreign manufacturers to set up industries in China, such as electric-car factories, even as the world’s appetite for these elements has grown.

Using trade as a tool or weapon can easily get out of hand, especially if a country like China has little regard for maintaining the system that governs the global economy or seeks strong leverage over other nations’ strategic industries and defenses. As former Chinese leader Jiang Zemin once said, China must use its advantage in rare-earth resources to create “economic superiority.”

In October, the Pentagon plans to issue a report on how the US should respond to Chinese control of the rare-earth market. While China commands nearly all of the world’s production, it has only about 57 percent of global reserves. The US used to be self-sufficient in rare-earth production. But it gave up production in 2002 when a Colorado company, Molycorp Minerals, was closed down because of cheaper exports from China. The company hopes to reopen in 2012 – if investors can be found. The process of extraction is costly, dirty, and dangerous.

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