China Limits Exports of Rare Earth Metals

Summary

This case explores the export quotas imposed by China on rare earth metals. The beginning of the case explains what rare earth metals are and states that they are used in a wide range of high-technology products. Extracting rare earth metals, however, can be a dirty process due to the toxic acids that are used during the refining process. This has prompted many countries to establish strict environmental regulations which have made it extremely expensive to extract the metals in these countries. In turn, this has opened the way for China to become the world's leading producer and exporter of rare metals. In 2010, China imposed tight quotas on the export of rare earth metals. According to China, the reason for the export quotas was that several of its mining operations did not meet environmental standards and had to be shut down. The effect was to dramatically increase prices for rare earth metals outside China, putting foreign manufacturers at a cost disadvantage. On the other hand, many observers believed that China was attempting to give its domestic manufacturers a cost advantage. As a result, developed countries filed complaints with the World Trade Organization. In July, 2012, the WTO launched its own investigation. The case concludes with a brief discussion of how companies and countries are responding to the continuing quota limits. Many companies have been redesigning their products to use substitute materials. At the same time, governments have tried to encourage private mining companies to expand their production of rare earth metals.

Discussion Questions

1. Which groups benefited most from China imposing an export quota on rare earth metals? Did it give the Chinese domestic manufacturers a significant cost advantage? Did it result in dramatically increased quality and environmental standards?

2. Given that 97 percent of rare earth metal production is now done in China, an increase from 27 percent to 97 percent between 1990 and 2010, do you think countries such as Australia, Canada, and the United States should reconsider their environmental restrictions on the production of such metals?

3. The restrictions imposed by China on rare earth metals has resulted in some companies (e.g. Toyota, Renault, Tesla) starting to look for alternatives. They plan to use parts that do not include rare earth metals. Is this a good solution?