How China Threatens American Democracy
Beijing’s Ideological Agenda Has Gone Global
Smelting lanthanum in Inner Mongolia. (David Gray / Courtesy Reuters)
In September 2010, after Japan arrested a Chinese fishing boat captain in disputed waters in the East China Sea, Beijing allegedly retaliated by holding back shipments to Tokyo of rare earths, a group of 17 elements used in high-tech products. Arcane names such as cerium, dysprosium, and lanthanum -- elements that populate the bottom of the periodic table and whose unique properties make them ideal materials in the batteries that power iPhones and electric vehicles -- suddenly commanded global attention. It mattered little whether Beijing actually carried through with the threat (reports are murky), the damage was already done: The world had awoken to the fact that overreliance on China for rare-earths supplies could put the international high-tech supply chain at risk.
Today, China produces more than 90 percent of the global supply of rare earths but sits on just about one-third of the world's reserves of the elements -- with the rest scattered from the United States (13 percent) to Australia (5 percent). That was not always the case. A few decades ago, the United States led production, primarily through a large mine in California owned by the mining firm Molycorp. But as California's environmental regulations tightened in the 1990s, costs rose and profits declined, prompting the American industry eventually to shutter.
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In the meantime, China started assuming the role of global supplier, spurred on by the Chinese patriarch Deng Xiaoping's supposed proclamation that "there is oil in the Middle East, but there are rare earths in China." In the last few decades, Chinese production of rare earths skyrocketed, more than offsetting declining production elsewhere. And consumers grew accustomed to what seemed to be a low-cost and reliable supplier in China.
Yet behind the façade of stability was an industry marked by mismanagement. First, a perceived abundance of the resources led to a general disregard for efficient and scalable production. In the early days of the Chinese rare-earths rush, preservation of resources was an afterthought, as private entrepreneurs, sensing a lucrative market, dove in. Many of these small-scale miners operated off the books and with little concern for environmental degradation. They were so numerous that the Chinese government could not keep track of them.
Even so, their efforts added up. Between 1990 and 2000, Chinese production of rare earths skyrocketed from just 16,000 tons to 73,000 tons. And in the decade since, China has essentially come to monopolize rare-earths mining. At its peak in 2009, China accounted for 129,000 of the 132,000 tons produced worldwide -- in other words, 97 percent of total global output. Meanwhile, it exported roughly 40-50 percent of what it produced.
Yet as demand for these raw materials rose, Beijing became increasingly unhappy that it was "selling gold to foreigners at the price of Chinese radishes," as one Chinese expression had it. Nationalistic voices in Chinese op-ed pages argued that China should create an OPEC-like rare-earths cartel or strategic reserve. Those calls were colored by an unsubstantiated belief among many Chinese that Japan was keeping just such a strategic reserve of its own, in which it had squirreled away 20 years' worth of rare earths that it had imported from China.
Moreover, the same jingoistic voices complained that developed countries were "outsourcing" to China the dirty work of digging the elements out of the ground while capturing the value added from designing sophisticated products that used the rare earths themselves. These arguments struck a chord, especially toward the end of the decade when China was crafting its twelfth Five-Year Plan, in which technology and innovation took center stage. China was no longer resigned to being the world's workshop; it wanted to become the next Germany, Japan, or United States. The way to do this, Beijing rightly believed, would be to capture more value from the goods the country exports, as every successful industrialized nation has done before it. Consider the iPhone. Each unit of the device carries a manufacturing cost of $6.50, or China's value of assembling the device, a mere 3.6 percent of the total cost of production. The profit margins for Apple are near 64 percent, by some estimates. Rare earths, as Beijing saw it, would be a key ingredient in moving China up the value chain.
Consequently, rare earths took on new strategic importance in China's drive for technological leadership. In 2011, the elements were formally placed under the purview of the powerful Ministry of Industry and Information Technology (although they had informally been in that department's portfolio for some time). The MIIT is the architect of China's industrial policy and a champion of consolidation. And market-based solutions are not exactly in the bureaucracy's DNA. As evidence, in August 2009, the ministry had already unveiled a rare-earths development plan through 2015 that capped export volume at 35,000 tons and mandated a production range of 120,000-150,000 tons. Both policies were meant to put upward pressure on prices and rationalize the sector.
Those figures mean that China plans to keep roughly 100,000 tons a year of rare-earth elements for domestic consumption. (It had been using up about 70,000 out of 125,000 tons as of 2008.) To eat up all those resources, the MIIT plan also called for China to corner 70 percent of the world market on the manufacture of fluorescent lights, electric vehicle batteries, computers, and electronics -- all of which fall under the so-called strategic emerging sectors, a key pillar of the new Five-Year Plan. Not only does MIIT have control over rare-earths policy, it has also been tasked with shaping the development of these emerging sectors, which will drive demand for rare earths.
Beijing has also used the allure of abundant rare earths to entice foreign technology firms to build in China. Just this week, MIIT encouraged U.S. and Japanese firms to partner with Chinese companies on developing rare-earths environmental products. Indeed, Baotou, a city in Inner Mongolia, which is responsible for roughly half of China's total rare-earths output, has been experimenting with such a strategy. Because nearby Ordos has also become a hub for wind power, Baotou could potentially feed the nearby wind turbine factories that require rare-earth-based permanent magnets. By 2015, China anticipates installing wind farms that can generate an additional 60 gigawatts of power, solar panels that will reach 10 gigawatts, and nuclear plants that will put out 40 gigawatts. Those projects could consume as much as 40,000 tons of rare-earths magnets, according to official estimates.
The rare-earths story illustrates a larger point about China's development. Despite such well-laid plans, Beijing all too often underestimates market forces and the resistance it will face from local authorities and industries that do not share the central government's interests. For one, the market effect of capping rare-earths exports has been a precipitous rise of rare-earths prices on the world market -- exactly what Beijing intended. But higher prices since 2010 have allowed firms such as Australia's Lynas Corporation to begin developing its Mount Weld mine, which projects 22,000 tons of annual output by 2012. Molycorp has also begun reopening its mine in California, with the claim that it could reach 40,000 tons of production over the next several years. Indeed, for all China's efforts to impose more order and exert price leverage, it has unintentionally driven a revival of global rare-earths production. Over time, China will likely be just one of many global suppliers, weakening the hand that it sought so hard to strengthen.
On the domestic front, skyrocketing prices will undermine Beijing's efforts to consolidate the industry and restrict export and production volumes. That is because the industry is highly fragmented, with thousands of small producers and illegal miners seeking quick but low-margin profits -- a Chinese gold rush of sorts. Further, local authorities generally try to protect their companies and producers in their provinces, even if they are illegal, in direct opposition to the central government's wishes.
What is more, the higher the prices, the more incentive miners have to circumvent central quotas or use illegal channels to get the products out of the country. Indeed, that is already a serious problem. According to some estimates, in recent years, as much as one-third of the rare earths that left the country were illegal, mostly smuggled through Southeast Asia and bought by Japanese traders on the black market.
In an ironic twist, as producers have started to sell more expensive rare earths at home, reports have emerged of small Chinese fluorescent light companies stopping production because they can no longer afford the rare earths they need. Yet these are precisely the kind of emerging industries that Beijing's industrial policies are supposed to support. Many tend to focus on China's "aspirations," which usually come with a formidable helping of dazzling figures and objectives. But a spectacular rise, no matter how fast, has to be managed. And evidenced by its handling of rare earths, that can be the biggest challenge of all.