China is planning to ban exports of technology for refining rare earth minerals. Such a move, if taken, is likely to backfire even more spectacularly than its previous attempts to weaponize the trade in rare earths itself.
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In 2010, a dispute between China and Japan over which country owns a group of islands off the northeast coast of Taiwan caused Beijing to impose export restrictions on all 17 rare earths. That was a problem for Japan, which depends on elements like neodymium, dysprosium and terbium as essential components of equipment such as motors, LEDs, lasers and fuel cells. At the time, China had a near monopoly of the world’s production of the metals. Without alternative sources of supply, Japan’s hi-tech industry would be crippled.
There was a big lesson from that crisis: Given Beijing’s willingness to use rare earths as a geopolitical weapon, source diversification was an absolute necessity.
Japan Oil, Gas and Metals National Corp. or Jogmec, a state-owned enterprise set up to guarantee the country’s access to essential materials, funded Australian producer Lynas Rare Earths Ltd. at well below market rates to encourage the creation of a non-Chinese supply chain.
Thanks to that investment, Lynas now produces nearly 20,000 metric tonnes a year of rare earth oxides from its Mount Weld mine in Australia and processing plant in Malaysia, more than enough to meet all of America’s demand let alone the 500 tonnes or so needed for defence-critical applications.
Last month, it signed a contract to build a new facility processing 5,000 tonnes a year of rare earths in Texas, jointly funded with the US Department of Defense. The Pentagon also last year helped fund a series of other projects to guarantee more processing in the US, including from the large Mountain Pass mine in the Mojave Desert where listed MP Materials Corp. operates.
The result of all this has been dramatic. From 98% of global mined production in 2010, China’s market share had fallen to 58% by 2020. Mount Weld and Mountain Pass alone now account for nearly a quarter of global rare earths supply.
Meanwhile, the US Pentagon also set up a government stockpile of rare-earth elements analogous to the US strategic petroleum reserve, and announced plans to buy about 5,000 tonnes last year. Separately, major importers brought and won a case against China at the World Trade Organization over rare earths, as well as tungsten and molybdenum, two other elements where it had an outsize share of supply.
Occasional sabre-rattling over the past year has already driven up the valuations of non-Chinese producers, making it even easier for them to fund expansions of mining and processing capacity. Lynas last August raised $335 million, selling new shares to pay for a processing facility in Australia and upgrades at its Malaysian plant. The market capitalization of MP has surged more than tenfold since it went public via a SPAC deal last July.
Nothing about this turn of events should surprise anyone.
When Arab countries used their dominance of oil exports to push up the price of crude oil in the 1970s, the outcome was not a permanent Gulf stranglehold on energy, but a rush to diversify. Rich countries retired their oil-fired power stations and built coal and nuclear generators instead, while new wells were tapped in the North Sea, Siberia, Mexico and Texas.
When former US President Richard Nixon imposed an export embargo on soybeans shortly before the 1973 Arab oil embargo to help rein in galloping domestic inflation in the US, there was a similar outcome. Japan, which depended on America for about 92% of its soybean supply, helped establish a Brazilian industry to diversify its import base. It’s now the bigger global producer of such oilseeds.
The world depends on sprawling supply chains of scarce materials for a range of essential products, from electric vehicle (EV) batteries to fertilizer and MRI scanners. Most of the time, we pay little attention to the interdependency that’s built into these trade networks, because no player is reckless enough to damage its own position in the market by using it as geopolitical leverage.
As China itself is striving to demonstrate in the far more technically complex market for semiconductors, though, political restrictions on exports will only cause major importers to re-configure their supply chains to be more resilient. Beijing’s control of rare earths is as much of a paper tiger as it ever was.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.