Japan has joined the United States and the European Union in filing a complaint with the World Trade Organization over China’s restrictions on its exports of rare earths — which are indispensable in the production of such high-tech products such as hybrid and electric cars, air conditioners and smartphones. This is the first time that Japan has brought a trade dispute with China to the WTO.
In the past, Japan refrained from taking such action fearing that it would create friction in bilateral business and diplomatic relations with China. Japan relies on China for most of its rare earths. The government’s action this time is understandable because rare earths are important to Japan’s manufacturing industry and China has made no visible effort to improve the situation. It is hoped that the WTO proceedings to resolve the dispute will go smoothly.
China’s position is that it is restricting mining and exports of rare earths to protect the environment and that its actions are in accordance with WTO rules. It also says that since China’s deposits of rare earths account for only 36.4 percent of the global deposits, the current practice of producing 90 percent of world supply is not sustainable. Japan should pursue dialogue with China outside the WTO proceedings as well with the aim of facilitating a timely resolution to the dispute.
In 2010, China slashed rare earths exports by 40 percent. It also temporarily suspended such exports to Japan after bilateral relations deteriorated following a September 2010 incident in which a Chinese trawler rammed into two Japan Coast Guard patrol ships inside Japanese territorial waters near the Senkaku Islands in the East China Sea. This is one of the main reasons that Japan joined the U.S. and EU in filing the complaint against China with the WTO.
Since some rare earths can be purchased inside China at about 10 percent of global market prices, the U.S., Japan and the EU are claiming that China is giving preferential treatment to domestic companies. They say China’s tax (up to 25 percent) and the quotas placed on rare earths exports are problematic.
It will likely take some time before a resolution to the dispute can be reached through the WTO. In the mean time, Japan should strive to diversify its sources for rare earths imports, improve its abilities to recycle rare earths and develop technology to produce high-tech products that don’t require rare earth materials.