Raw Materials and trade in China. Simon Newcomb, July Trade overview

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1 Raw Materials and trade in China Simon Newcomb, July 2014 Trade overview Over the past few decades China s share of world trade has experienced a massive increase in terms of its share of world trade. How high could China's market share go? Over the ten years to 2008 China's exports grew by an annual average of 23% in dollar terms which is more than twice as fast as the figure for world trade at the time. If it continued to expand at this pace, China might grab around one-quarter of world exports within ten years. That would beat America's 18% share of world exports in the early 1950s, a figure that has since dropped to 8%. China's exports are likely to grow more slowly over the next decade, as demand in rich economies remains subdued, but its market share will exports will account for 12% of world trade probably continue to creep up. Projections in the IMF's World Economic Outlook imply that China's by WTO figures:- This increase share of world trade is, of course, fantastic for China and the prospects for its giant population. Many countries, however, are experiencing a diminishing slice of the world trade pie and this can lead to complex negotiations where the boundaries between trade, economics, foreign policy and human rights can become blurred. I shall try to outline some of the main points and issues concerning trade and resources in the following paragraphs. US relations China's economy surpassed that of Japan in 2010 as Asia s largest economy and became the second largest after the United States and is projected to become the world's largest economy by This situation is not wholeheartedly welcome and foreign hostility to China's export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China drains much-needed demand away from a depressed world economy. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

2 China s control of her currency is only possible due to the fact that the state remains in control of the economy and trade to a very high degree. This fact presents a gulf in ideology between US/Western notions of free trade and the Chinese position. China views the position very differently and there is a great deal of evidence, if figures from are viewed, that, rather than being a drain on global demand, China helped pull the world economy along for much of the recession. Resources China has substantial deposits of coal, oil and metals. As the map below shows, these resources are very well represented in the North Eastern regions around Beijing, Shenyang, Harbin, Dalian and Manchuria

3 Source maps-of china.net Rare Earths controversy China has deposits of every one of the 150 minerals found so far in the natural world. 135 of these minerals have substantial deposits in China. Ranking first in the world, in proven deposits, are 12 minerals: tungsten, antimony, titanium, vanadium, zinc, rare earth, magnetite, pyrite, fluorite, barite, plaster stone and graphite; ranking second and third are six: tin, mercury, asbestos, talcum, coal and molybdenum; and ranking fourth are five: nickel, lead, iron, manganese and the platinum family.

4 China is certainly one of the world s most resource rich countries ranks third in the world in the deposit of 45 important minerals. It is one of a few countries where mineral deposits are rich and the many varieties are fairly complete. China has also been accused of attempting to restrict the supply of some of these crucial minerals. The memo below is quite revealing and worth a read:- EUROPEAN COMMISSION MEMO Brussels, 26 March 2014 World Trade Organisation (WTO) panel today confirmed that China s export duties and quotas imposed on rare earths, as well as other two raw materials, tungsten and molybdenum, are incompatible with China s WTO obligations. The report released today concludes the dispute settlement panel proceedings launched jointly by the EU, US and Japan in March Which raw materials are at issue in this case? Rare earths are 17 chemical elements in the periodic table, specifically 15 lanthanides (lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium), as well as scandium and yttrium. Rare earths are used in virtually all high technology applications which we use in our daily life: computers, cameras, phones, TVs, energy-efficient bulbs, etc. There is also at least a thousand car parts that use rare earths.

5 More specifically, rare earths are used to produce highly efficient magnets, metal alloys, phosphors, optical material, batteries, ceramics and special abrasive powders. These are, in turn, key components in many products such as wind power turbines, energy-efficient products, flat screens and displays (LED, LCD, plasma), hard drives, camera lenses, glass applications, industrial batteries, and medical or water treatment equipment, to name just a few. China is a monopoly supplier of rare earths with more than 90% share of world production. Tungsten and molybdenum - two other substances involved in the case - are also crucial materials for European industrial production. Tungsten is a very hard metal used in cemented carbide and high-speed steel tools. It is used in lighting, electronics, power engineering, coating and joining technology, the automotive and aerospace industries and medical technology. China is by far the largest tungsten producer in the world, accounting for about 90% of total world production. Molybdenum is a metallic element which is mainly used as an alloying agent for making alloys stronger and more heat-resistant due to molybdenum's high melting temperature. The alloys are further used for filaments for light bulbs. The iron and steel industries account for more than 75% of molybdenum consumption. China is the lead producer of molybdenum worldwide and accounts for 36% of global production. What is at stake? China's export restrictions on raw materials have a global impact and affect a significant share of EU trade, employment and production. They limit the availability of components for EU industry and increase the price. The Chinese export restrictions offer a competitive advantage to Chinese industries that benefit from lower input prices. In some cases, a non-chinese buyer has to buy its raw materials at a price that is more than twice that paid by a Chinese firm. In some cases, the raw materials at stake can amount to a considerable share of the total production cost. Rare earths represent for example more than 50% of cost for wind turbine components and 50% to 60% for a LCD display. Therefore, the price difference can carry a decisive competitive disadvantage for components makers outside China. For other final products, such as mobile phones, the impact on the price would be only several euros per item. However, even in such cases, there is most of the time no viable substitute for rare earths. For other final products, such as mobile phones, the impact on the price would be only several euros per item. However, even in such cases, there is most of the time no viable substitute for rare earths. A brief summary of the wider argument is as follows:- The World Trade Organisation's appeals body has recently upheld a ruling that China restricted exports of certain raw materials to protect its domestic manufacturers. China had appealed a WTO ruling in July that it broke global trade rules. The US, Europe, and Mexico argued that China's export block on such things as magnesium and bauxite drove up prices but China had argued that its export limits on nine raw materials were needed to protect the environment. In a statement the appeals body said China must now "bring its export duty and export quota measures into conformity with its WTO obligations". The issue has caused tension between China and some of its major trading partners.

6 In a statement, US Trade Representative Ron Kirk called the ruling "a tremendous victory for the US... particularly its manufacturers and workers". While the case requires China to comply, the EU "continues to be deeply troubled by China's use of export restrictions'' for other rare earth and industrial raw materials, the European Commission said in a statement.but China's WTO mission in Geneva said it "deeply regrets'' that the appeals body upheld major parts of the earlier ruling's conclusions., China said it would abide by the organisation's findings Chinas global resource reach China also has also been developing a global reach with regards to resource procurement. The Wall Street Journal produced the following map:

7 The situation with African resources has been well documented and the Wall Street Journal used the IMF data to present the situation. China is clearly following the previous post colonial model of trading primary materials for manufactured goods. This situation has lead to accusations of a new era of neo colonialist expansion. China counters these arguments by emphasising some of the obvious benefits to African countries of this trade. The Chinese are going to Africa in ever greater numbers and finding it a comfortable place to visit, work in and trade. An estimated 1m are now resident in Africa, up from a few thousand a decade ago,. Chinese are apparently the fourth-most-numerous visitors to South Africa. Among them will be China s new president, Xi Jinping, who is also going to Tanzania and the Democratic Republic of Congo on his first foreign outing as leader.