With the Obama-Hu Jintao summit meeting slated for Jan. 19, Washington and Beijing are looking forward to the state visit with all sorts of positive preludes. Washington is preparing a “state dinner” for the Chinese leader for the first time in 13 years, to be covered with the Chinese flags and diplomatic compliments. China has also responded in kind by announcing the other day that its government agencies will enforce its intellectual property law more vigorously in the future, which was greeted by a sigh of soothing relief from U.S. corporations complaining about allegedly loose IPR enforcement in China. Apparently, from the upcoming visit, the two countries are eager to find a breakthrough for the increasing tension between the two countries spanning over North Korea, currency controls and trade surplus.

At the same time, another conflict between the two countries is brewing and that can directly affect many other countries (no surprise) including Korea. This new one concerns iPads and iPhones in our pockets. On Dec. 28, China’s Ministry of Commerce issued a new regulation that further restricts the export of rare earths from China. As the name indicates, rare earths are special minerals that are used for the manufacture of various key industrial materials, such as cell phones, LCDs, and hybrid cars. They are also core ingredients for defense-related articles such as high-performing radars and night-vision goggles. And China provides 97 percent of the global supply of these materials. So, China’s restraint on the exports of these materials could cause a direct impact on the IT and electronics industries of its trading partners.

Starting from 2009, China has been tightening its grips on the rare earths. The quota for 2009 was 50,000 tons per year, but it has been steadily scaled back. In its Dec. 28 announcement, China’s Ministry of Commerce set the quota for the first half of 2011 at 14,466 tons, which means 35 percent reduction from the same period of 2010. Moreover, China makes it known that the control over and restraint on the minerals will be further strengthened in the coming days. The United States is now claiming that the quota constitutes violation of the WTO Agreement and threatened a legal action against China if it goes ahead with the plan. In fact, in the most recent report, the USTR vows that “it will not hesitate to take further actions, including WTO dispute settlement.”

China does not budge at all. China refutes that this is purely about a policy of managing its natural resources, based on its sovereignty, to protect the precious minerals from over-exploitation. As the production of the rare earths causes harm to the environment, environmental concern is cited as another reason of the reduction of the quota, according to the Chinese Foreign Ministry spokeswoman right after the Dec. 28 announcement. It is difficult to gauge whose argument would prevail. As with any other recent U.S.-China dispute, this seems to be yet another uncharted territory. No matter how the dispute unfolds, countries may have just learned that there is another area in which China can exercise its influence in the global market.

Japan’s effort to secure reliable supplies of the minerals outside of China in the face of Beijing’s export allocation speaks volumes. Ever since its vulnerability to the heavy reliance on the rare earths from China became apparent during the territorial dispute over Senkaku/Diaoyu Islands in September last year when China retaliated with the restriction of rare earths exports to Japan, Tokyo has been to inner Mongolia searching for replacement sources and even started to explore the possibility of using robots to go down to the deep seabed of the Pacific hoping to find another source of supply in the future. Japan is even considering providing monetary support to its corporations to make them stay in Japan instead of relocating their factories overseas in search of more stable sources.

Korea is also highly dependent on its IT and electronics industries. China’s restriction of exports of rare earths and emerging disputes, therefore, should deserve our full attention. Because Korean companies usually import parts made of rare earths from other countries (mainly from Japan) for the manufacture of the final product in Korea instead of importing rare earths directly from China, we may be one step distanced from the Chinese restriction, but that is just literally one step away from the measure. It would be only a matter of time for the changes in the upstream current to affect the downstream environment.

In light of this development, it is appropriate and timely that Ministry of Knowledge Economy recently established a task force to pool the ideas to diversify the sources of rare earths for Korean companies. Securing stable sources of supply from such countries as Vietnam or Kazakhstan would be a viable option. Increasing R&D support for the companies and research institutions to help develop a new technology that can replace or reduce the utilization of the existing rare earths may be another path to proceed. For the time being, however, we will not be sufficiently insulated from the heat of the new fire. Come next June, the eyes of China’s trading partners will be glued to the Beijing’s announcement for the quota for the second half of 2011.

By Lee Jae-min

Lee Jae-min is a professor of law at the School of Law, Hanyang University. ― Ed.