Resource Governance: "China's quota system is transparent"

Reading time: 16 minutes
Teaser Image Caption
Iron slag pot for the processing of rare earths
January 4, 2011
Interview with Dr. Zha Daojiong, Professor at the School of International Studies, Peking University
November 23, 2010

What is China planning to do with its rare earths? Why is it using export restrictions and thus risking a WTO complaint? How important are environmental considerations in that context? What are the economic, environmental, and social conditions of rare earth production in China?

I started reading about rare earth and other resource extraction in Chinese a couple of years back, before it became such a hot issue. That said, I am a student of public policy, not a technical expert on resource extraction, as you know. From what I have read about rare earth materials, the term “rare” can be a bit misleading. There is an abundant supply of the materials, and in comparison to oil, nickel, copper and other more familiar materials, the elements in question are not as extensively used. In addition, the extraction and separation processes for turning ore into metal are imperfect and can be environmentally damaging. Worldwide, there is basic agreement about such points.

Let me try to answer your question from a couple of angles. The first is that China’s government – here I mean different ministries and think tanks, Chinese industries, and environmentalists – have been talking for many years about how the rare earth industry in China is getting out of control. At least since 2000, consensus has been gathering that something needs to be done to streamline rare earth extraction activities.

This so-called runaway situation includes several dimensions. First, there has been rampant illegal mining all across China. Of course, this is a domestic problem, but knowing about it should be useful to concerned foreign parties. The second dimension of runaway exploration is permanent and destructive damage to the environment and the ecosystem, in addition to the loss of arable land. Here I am not just talking about rivers being polluted, or the growth of trees or fish being affected, but also about entire villages in the vicinity of the mines suffering. Innocent people die from poisoning.

The third dimension of the industry’s runaway situation concerns China’s mining industry itself. The industry people complain that the sales prices for ores containing rare earth elements are too low. Frankly speaking, processing and manufacturing always lead to much higher value-added prices than extraction. I have checked studies of the evolution of this industry worldwide. Beginning in the second half of the 1990s, because of the abundant supply from China, the average prices worldwide for ores of the 17 rare earth elements dropped dramatically. They became 300 times or even 500 times cheaper.

What I am trying to say here is that there is a long and colorful history that has led to today’s situation. Decisions to curtail growth in output has not come about suddenly. I actually identified a government document that is easily accessible on the Internet. In July 2005, a number of China’s ministries formally began to regulate production of rare earth ores by imposing a quota system.

As a matter of fact, if you look at the December 2008 issue of the English-language journal Resource Geology, whose current editor is with the Geological Survey of Japan, you will see that insiders of the rare earth production industry in the Asian region do not seem to have qualms about China tightening regulations in the interest of protecting the environment.

This leads me to a third point. This time rare earth elements are attracting attention partly because of the latest round of diplomatic problems that China has had with Japan. It is up for debate as to whether or not China's quota system for rare earth elements constitutes a violation of WTO rules. There is a standard complaint – rebuttal – consultation – resolution process. Actually, around late 2009 and again in early 2010, there was talk between the United States, Japan, and some European countries about lodging a formal complaint with the WTO against China’s quotas on rare earth elements. I am not saying one thing or another about this complaint. Worldwide, we have this WTO dispute resolution system, and we should make use of that.

So, it has taken me a few minutes to answer your first question, but I think it has been necessary. To bring this to some sort of close, it is possible now for us to agree on two key points. One is that China’s management of its rare earth ore industry is not something that is politically motivated in order to cause harm to the rest of the world. We have a history that has evolved in trying to formulate and implement a policy. Besides, there is transparency in the quota system.

Point two. I suppose there is some legitimacy to China’s concerns about runaway production and costs to the environment. Of course, as I said, there are also industry people who want to sell the ores at higher per unit prices. How much damage this quota system is doing downstream to the industry and manufacturers? We don't know. If you have transparency in the quota system, then it probably gives the importers something to look forward to, a roadmap to work on. When both suppliers and importers consider it an important working principle to create no surprises, there is ample room for impassioned discussion.

What is China's long-term strategy for securing its supply of strategic minerals from abroad?

When I started to read about rare earths two years ago, part of the motivation was to look into this question of China’s interests going overseas to secure minerals important to Chinese manufacturers. Looking into supply and demand of key minerals that China needs, what I was found was that, among those minerals considered to be important to the industry worldwide, China is supplying the rest of the world with minerals rather than importing them. It is true that China is going overseas for oil, gas, and uranium. But for non-energy raw materials, it remains a question as to how critical the overseas supply is to China.

So, there is really not much need for China to think about how to secure the supply from the rest of world. Rather, what China needs to do – very much like with the rare earth elements – is learn how to fine-tune its export of these elements or how to streamline the industry within its own borders.

How does that link with China’s role as a leader in hi-tech and low-carbon technology?

Low carbon…it is a very fashionable phrase in China now. I notice more and more products and services are being advertised as “low carbon.” But how is it actually measured? Let me be clear here, I am not being skeptical, I am just cautious about these claims. Because we don’t have an odometer-like instrument for measuring carbon emissions around us, a measurement that is readily accessible to the laymen, we run some serious risks in terms of public policy.

On the more general question about technology, it is more accurate to say that China is a leader in making investments in pursuit of clean development. Across the board, China has a long way to go before it can claim leadership in hi-tech. This is probably why the Chinese market has been so attractive to investment capital related to technology development in the first place.

What's China’s position toward the new German and European raw materials strategy?

The short answer is “I don’t know,” since there are so many Chinese and each person can have a perspective. But I did go through the German position paper. In my opinion, I think this report is very well thought-out. One of the things I think the German government is doing right is that the federal government does not intend to become actively involved on the business side in the raw materials sector, for example by forming a state-run company for exploration or raw material extraction projects. Nor does the federal government intend to stockpile industrial raw materials. I think that is wise. In the end, you have to work on the premises of a supply-demand balance worldwide. That is the first point.

The second point concerns the notion of “frontier territories” in the exploration of raw materials. I believe the phrase refers to international waters or the high seas, those areas that do not involve maritime territorial disputes with any country. This exploration can be done through international collaborations. And if we apply the notion of “common heritage of mankind” in handling the materials we find, then we can collaborate to increase the global supply.

I see a third highlight in this paper. It proposes that we look into the role of speculative capital in materials trade. This is long overdue. We often talk about governments but it is easy to forget that it is traders on the floor of stock exchanges who move the prices, clear and simple.

There are many good points in this report. But I am a little bit worried about two things:
One is that the German government is interested in building bilateral raw material partnerships. This can risk setting off a kind of competition where the supplier’s side is emboldened to cherry-pick among the offers, thus making global supply more complex. The question would be if it is necessary to have bilateral partnerships.

Another point of concern is discussing raw materials within the framework of the G20 summit. Last week, we had a telephone conference with Sciences Po, a research academy in France. Our colleagues there also talked about making commodities a subject for next year’s G20. Whether it is about critical materials or just commodities, these topics are of great interest. However, how do we frame these topics and what do we want these kinds of discussions to lead to? Those matters need to be thought out, clearly so. I think it is a good idea to think about starting with the academics and experts in having a meeting of the minds over the framework for such discussions. It is not a good idea to just test government positions. Instead, it is good for German, French, Chinese, and maybe other major economies’ academics to sit down and go thorough different definitions, different opinions, and discuss what is going on as well as what is wrong with the raw materials and commodities markets.

Only these two points. Otherwise, this is a fairly decent report.

The German raw materials strategy is only about non-energy-related raw materials. Does it reflect their worries about China's export restrictions?

That worry, logically speaking, ought not to arise as a result of China's export management – you can call those measures restrictions. Rather, the worry is understandable, given the high level of dependence on imports from China. I think that, in addition to Germany, the United States, Japan for sure, and other countries have been importing large amounts of these non-fuel minerals from China at a cheap price for a long time. They are worried about the seemingly sudden changes in China’s policy.

As I said before, knowing the evolution of China’s policy is helpful in lessening the sense of apprehension. Let me put this more bluntly: Overseas, China’s policymaking is frequently viewed as such a strange animal, whereas the real challenge is putting a policy change in the proper context of the Chinese process itself.

I must also admit that the job of explaining a specific industry policy as it flows and ebbs in the Chinese system is no piece of cake, either. But that does not mean we should give up trying.

What could the G20 do regarding this subject?

I told you that some of us just had a discussion with the French about this. I think there was a differing of views during this conference. French scholars were talking about the stabilization of commodity prices as a target of this kind of G20 conference. That is probably an impossible starting point, as even the G20 is complex enough to have powerful interests that benefit from the volatility; and, yes, those interests can exert an influence on what their government representatives say.

What can or could the G20 do? I think we need to begin by having a meeting of the minds about what is happening in this field of commodities trade. Also, do you really want this to be perceived as dealing with just one member state – in other words, do you just want to talk only about rare earths? Rare earths can be a legitimate topic, but if it is only about rare earths because of the dependency on Chinese exports, then it is easy to make Chinese officials feel cornered. You need to include discussions about food, iron ore, and other things that the Chinese also care about. That is one thing – the scope of materials to cover in discussions. Secondly, designed policy goals should not be set for the stabilization of commodity price; rather, fact-finding should be conducted. In addition, there is a very import dimension to talk about. It is the speculation of funds and the role of capital and hedge funds. If those issues were all included in the G20 framework, there would be a better chance for a more meaningful discussion under the G20.

What is China’s vision for a fair and sustainable global resource management?

I do not think there is a shared vision from China, as we have so many different interests as well. Thinking about international conversations about global resource management, for China, I myself feel it is a good idea to include discussions about two issues.

One is what to do to make the extraction process – in terms of technology or extraction methodology – more environmentally friendly? In the case of China, more than the environment is at stake: We have to save human lives in the mining process. The German raw materials position paper talks about representative government, it talks about the Extractive Industries Transparency Initiative, it talks about Africa. Yes, those are very important issues. But, we really still need some help or more foreign involvement to make the extraction process better here in China.

A simple fact many Chinese raise is, yes, we need the money from exporting raw materials, but why is it us, who have to pay for it, with land loss, environment degradation, and many miners dying? Is the export of blood-tainted raw materials not a legitimate concern? Can we involve some foreign participation to make the extraction process more environmentally friendly, less fatal to the miners and the villagers? So that is a sort of vision for China.

The second issue is the obvious trend of resource nationalization. It has become more pervasive, even worldwide. Because of the stage of industrial development it is in, China needs these raw materials: energy-yielding and non-energy-yielding. When China tries to expand in the international commodities markets, it meets very little sympathetic support, like last year when Chinese State owned Chinalco tried to invest in Australian mining concern Rio Tinto. If you then turn around and look at the large amounts of raw materials China produces and exports in the global chain, there exists a very sharp contrast. So, who makes the rules of the game, what is the real benchmark when it comes to market-entry rules governing cross-border investment in the resources sector?

When Chinese companies complained about difficulties of getting into other markets, usually there is not much sympathy. But when China starts doing something like streamlining rare earth extraction, there is an international outcry. Where is the fairness on such issues? Probably we can start talking about setting guidelines or basic rules under the WTO for cross-border investment in non-fuel raw materials. For the past 30 years or so, China has invested a lot in the cheap, polluting, and dangerous production of materials to supply the rest of the world. We need to do something to make mineral extraction in China less polluting and less dangerous.

What's the role of resource efficiency, substitution, and recycling of mineral resources in China? What concrete policies exist (compared to Germany / EU)?

As in other countries, China has its programs for remanufacturing, recycling, and other forms of conservation. Xunhuan Jingji – or circular economy, a notion of eco-industrial development that connects water and waste management, as well as efficient use of energy and raw materials – has become an established policy framework.

I am not in a position to compare China’s path with that of Germany’s but, for sure, it will be very interesting to try and see how the approaches of China and Germany converge. On that basis, we can find ways to learn from each other.

What do you think about China's engagement in Africa?

There is a lot of thinking about what China is doing in Africa. I joined a group of Chinese scholars for a two-week study trip in Sudan this past summer. We visited the China National Petroleum Corporation and other Chinese companies. In the oil sector alone, there are over 30 companies from 20 different countries that are also involved in some segment of the long industry chain. Still, nobody mentions countries other than China when it comes to talking about international actors with an effect on life in Sudan.

It is very important to do a comparison of how much has been produced in Africa and the destinations of those exports. So far, no quality data about this has been produced. The difficulty is that there are so many countries in Africa with different capacities of bookkeeping. So people just start speculating.

German and African interests need to think out of the box to get some basic ideas about what China is doing in Africa. Rather than just relying on NGO literature, serious research has to be done. Along this line, I must say that on China’s side as well, we need to be clearer about what Chinese companies are doing in Africa. The difficult situation now is that we do not really have quality statistics about the African minerals industry overall, but we are very busy talking about what we will do.

 

 

 
 

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