The rare-earth medals consist of seventeen elements which are becoming increasingly important in the global economy. These elements are used in the production of all sorts of high tech devices ranging from computer disc drives and navigation systems to high tech wind mills and aircraft controls. Despite their name, these elements are not all necessarily rare. Some of the elements can be found and mined on several continents, however the elements are currently expensive to mine and process. To keep up with the economy and live comfortably, it is advised to have alternative source income and you could have that simply by playing some fun sports betting games via https://tenocation.com/.
In 1979 China’s leaders created a program that would provide low cost loans to the rare-earth medal industry in China. These government supported loans allowed China ‘s producers to supply the medals at lower costs than producers in other countries, and production in other parts of the world halted.2 This led to the current situation in which China produces 97% of the world’s supply of rare-earth medals. Recently China has been limiting its exports of rare-earths to the rest of world, citing increased domestic consumption and the possibility of domestic reserves running out as reasons. These actions have caused prices to rise for rare-earths in the importing countries. In a related action, China also temporarily stopped shipping rare-earths to Japan due to a dispute over a detained Chinese boat captain. This was a major problem for Japan, the world’s largest importer of rare-earths.2 China is also attempting to increase its monopoly over the rare-earths by purchasing foreign sources of rare-earths.
The United States has seen the problems that a Chinese monopoly of rare-earths can present and is taking steps that will hopefully reduce the world’s dependence on Chinese exports of rare earths. The House of Representatives recently passed the Rare Earths and Critical Materials Revitalization Act of 2010 which will help increase domestic production of rare-earths. This act will allow loan guarantees for companies working in locating and developing rare-earths in America. One of the main concerns that have prompted the United States to take this step is that rare-earths are vital components in some of the United States’ defensive technologies. China limiting supplies of exports has opened up new opportunities for US rare earth mines that were shut down during years of cheap Chinese supply. Now that prices are starting to rise again, US mines are seeing profitability in resuming production.1
As a partial solution to Japan’s problem of limited supplies of rare-earths from China, Australia has stepped in and pledged to be a long term supplier of the crucial elements to Japan. As part of the partnership between the two countries a Japanese government affiliated company will supply some of the investment funds to kick start Australia’s rare-earth production.3 Australia hopes to be one of the major players in the rare-earth market by 2024. This growth will be facilitated by Chinese restrictions on exports which will raise prices, increased consumer demand and the fact that Australia has 40% of the world’s supply of rare-earth deposits.4
Rare-earths are highly important to the technology based economy of Japan, which needs them for many of its exports, but cannot produce them domestically. The extent of the problem of relying on China for all of its rare-earths was realized when China recently cut off that supply over a political dispute. Although China denies that it cut off the supplies, the shipments stopped coming into Japan and supplies in Japan plummeted. China was not afraid to use its monopoly power to manipulate relations with other countries. Due to these events, Japan was prompted to enter into an agreement with Australia to ensure future supplies of rare earths.5
Europe has also seen the problems that can stem from China’s reduction in rare-earth exports. The European Union has pledged to file a complaint to the World Trade Organization against China along with the United States if China’s export restrictions are found to violate international trade regulations. Europe also sees opportunities for investment in African countries which could then export rare-earths to Europe at fair prices. Finally, the EU is looking into new restrictions on the export of old technological equipment. Instead of exporting the old computers and cell phone parts, they hope to be able to recycle them to reclaim the rare-earth elements that they contain.6
China’s government was able to build an almost complete monopoly in the rare-earth elements industry by giving its country a comparative advantage in the market. The Chinese government provided subsidized loans to the rare-earth production industry which caused a buildup of capital that was highly suitable for the production of rare earths. By having this glut of suitable capital, China was able to produce rare-earths at cheaper prices than their competitors around the world. Since China was able to produce the elements at the lowest cost, other countries started to specialize in the production of other commodities and import their rare-earths from China.
China has started imposing restrictions on the exports of rare-earth elements to prevent the depletion of their supplies and to help establish technological manufacturing in China. With free trade, the domestic prices of a country’s export commodity will rise, because of the increased demand from beyond the country’s borders. By restricting exports China is able to reduce domestic prices for rare-earths. The producers of rare-earths that can no longer sell as much of their product overseas will then be willing to sell their supply domestically at a lower price than they would have received overseas in free trade. It should also be noted that while this reduction in exports will reduce domestic prices, it will also reduce domestic production of rare-earths. This occurs, because the producers will no longer be able to market their products to the highest bidders. Instead if they produce more, they will have to sell it at the lower domestic prices. These cheaper domestic prices will increase the domestic production of the high tech products that often require rare-earths as inputs. This occurs, because the rare-earths become an input in these products and the input is relatively cheaper in China. This relatively cheaper input tends to give China a comparative advantage in these products and allows China to produce them relatively cheaply.
The restriction of exports of rare-earths means that the Chinese trade offer curve of these elements from China becomes a straight line at the quota point. Changes in the terms of trade will not have any effect on the amount supplied beyond this point, due to government restrictions. This is analogous to creating a tariff which would shift the trade-offer curve to the lower position shown in the graph. This will lead to higher prices for rare-earths in other countries as shown by the terms of trade passing through this new equilibrium point. The producers in the rest of the world will be paying P’ for the rare-earths, but the producers will only be receiving P. The difference between P and P’ is an economic rent, which is captured by the merchants. These economics rents occur, because overseas manufacturers demand more than they can import at the world trade prices, so they drive up the prices. However, these higher effective prices for imports from China will also serve to reverse the problem of firms in other countries being unable to compete with China’s cheap rare-earths. Now that supply is being restricted from China, domestic firms will see the prices that they are competing against rising, and they will become increasingly able to compete against Chinese production. This production will also be helped along by act that was recently passed in the US to allow for subsidized loans for rare-earth production. This will lead to an effect that will be very similar to when China was subsidizing loans for Chinese production of rare-earths. American producers will see the effective cost of rare-earth capital falling, which will allow them to become more competitive in the production of rare-earths.
China’s new export quota will tend to shift income towards Chinese laborers in the high tech industry. By limiting exports of rare-earth medals, they will become a relatively abundant factor of production in China. This will make rare-earth medals relatively cheap in China, which will mean that China will find it easier to export the high tech devices that they are components of. This increase in production of high tech devices will tend to increase the wages of the labor that possesses the necessary skills for the production of the devices. This obstruction of the free flow of rare-earth medals across international borders will cause more high tech devices to be produced in China. If the price and availability of these rare-earths causes production to move to China, it may mean that more efficient production elsewhere is being abandoned for the artificially cheaper Chinese production.
This inefficient production will induce higher prices for high tech goods all over the world. Countries other than China will be paying more for the inputs to their high tech goods, and Chinese manufacturers will be able to produce relatively inefficiently and still effectively compete in the international market due to their relatively cheap inputs. This will tend to shift welfare away from consumers, who will have to pay more for their high tech devices. China was previously flooding the market with rare-earths to gain an almost complete monopoly. Because of this, it may be the case that China’s trade offer curve was intersecting the rest of the world’s trade offer curve in the inelastic portion. If this is true, then China may be able to improve its overall welfare by imposing a quota which is analogous to an optimum tariff. This would allow the terms of trade to shift favorably in their direction allowing them to consume on a higher community indifference curve, despite engaging in less international trade. This move would take welfare away from China’s trade partners.
On the other hand, it will open up new opportunities for production of rare-earths in countries other than China. Japan and Europe do not have enough natural deposits to supply their own rare-earths, but African countries and Australia may benefit from these new higher prices of rare-earths. As Europe seeks to fill its appetite for rare-earths, it will provide investments into Africa which will allow African countries to build up suitable capitol for rare-earth production. This new capitol will allow African nations to supply additional rare-earths to Europe, and this added supply will tend to reduce the prices. Japan is using a very similar course of action, except its new source of rare-earths will be Australia. America was once the world’s largest supplier of rare-earths, so it will be able to produce some of its rare-earths domestically without outsourcing. Once these new sources of rare-earths hit the market, it will reduce the amount that Chinese exporters are able to charge for their rare-earths. As stated earlier, Chinese manufacturers will no longer be able to charge as much for their domestic sales of rare-earths. Once these new supplies become available they will no longer be able to charge inflated prices for their exports. These factors will tend to reduce the profitability of rare-earth production in China and will reduce the income of the Chinese rare-earth production capital.