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China increasing economic leverage by limiting 'rare earths' exports

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China's government cancels high-level talks with Japan, following Japan's announcement that it will hold a Chinese fishing boat captain for another ten days.

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By John Pomfret
Washington Post Staff Writer
Thursday, September 23, 2010; 10:36 PM

China's recent move to limit exports of minerals critical in the manufacture of a vast array of products such as missiles, car batteries, cellphones, lasers and computers is stoking alarm that its domination of the industry could give it enhanced leverage over the United States.

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On Thursday, some traders of "rare earths," 17 minerals that are used in small portions in almost every advanced industrial product, reported that China, which controls 97 percent of the industry, had halted the export of anything that contained traces of the minerals to Japan. The Chinese government denied the allegation.

The purported export ban was linked to a dispute between the two countries over an island chain called the Senakus in Japanese and Diaoyu islands in Chinese. Japan has detained the captain of a Chinese fishing vessel over a collision at sea with a Japanese coast guard ship. On Thursday, Chinese Premier Wen Jiabao demanded that Japan release the boat captain immediately. China also announced that it had arrested four Japanese near a Chinese military installation.

Analysts and manufacturers said regardless of whether China has indeed blocked these exports to Japan, the incident underscored China's increasing economic leverage and its seeming willingness to try to translate that into political power.

This summer, China's Commerce Ministry said that total exports of rare earths would be capped at about 30,300 metric tons - a 40 percent drop compared with last year. Most of that tonnage has already been shipped.

"The most important issue here is that China is able to wield power like this," said Ed Richardson, the vice president of Thomas & Skinner, a magnet maker in Indianapolis. "Just the reports that they might have done something like this has sent a chill through the industry. Here you have an incident over a fishing boat and this topic comes up. It's startling."

Only in the past year has the issue begun to receive significant attention in Washington. In April, the Government Accountability Office reported that it could take as long as 15 years to rebuild the U.S. rare earth industry. The GAO report also found components in U.S. defense systems that use Chinese sources for rare earth materials. And it determined that the Defense Department had "not yet identified national security risks or taken departmentwide action to address rare earth material dependency." The Defense Department, however, is studying this issue, and a report is slated to be delivered this month.

On Thursday, the House Committee on Science and Technology approved legislation that would provide funds for research and development of rare earths technologies as a first legislative step to break China's monopoly.

"Rare earth materials are essential for our country's technological competitiveness and our national security, yet China is cornering the market and we are falling behind," said Rep. Kathy Dahlkemper (D-Pa.), who wrote the legislation.

For years, China has worked to dominate the rare earths industry. Starting in the late 1980s and early 1990s, China flooded the world with cheap rare earths. It sold neodymium and samarium, which form the basis of extraordinarily powerful magnets needed for precision-guided missile systems and the batteries used in hybrid or electric vehicles. It mined europium, which forms the basis of the high-efficiency lighting industry; lanthanum, without which it would be difficult to refine gas; and cerium, which is used to polish the glass on computer screens and cellphones.

China's prices were so low that it led the once-biggest mine in the world - Mountain Pass in California - to shut its operations in 2002 after allegations of environmental violations at the facility.

"In the Western world, people were happy to give the Chinese this job," said Jaakko Kooroshy, an analyst at The Hague Centre for Strategic Studies. "Mining rare earths is a dirty business. It is environmentally really dangerous. There's radioactivity involved."


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