December 28th, 2010

You’ve probably heard a lot of talk on so-called rare earths.  Rare earths are relatively unassuming minerals, down at the bottom of the periodic table.  In elemental form, they are iron gray to silvery.  They are often soft, malleable, and usually reactive, especially at high temperatures.  These minerals are also used to manufacture everything from iPhones to wind turbines and from electric cars to military hardware.  And China controls 97% of the world’s supply.

This wasn’t a big deal until this November, when China decided to restrict the export of rare earths to Japan, likely in retaliation to Japan’s detention of a Chinese captain of a fishing trawler in Japanese waters.  When Japan released the fisherman, China resumed shipments.

Before this event, no one was talking about China’s monopoly over the world’s rare earths.  And economic theory tells us that there is nothing wrong with China supplying 97% of this mineral to the world.  In fact, according to the Ricardian model of international trade, developed by David Ricardo, a father of modern economics, this is actually a good thing.  China has what we call a comparative advantage in the supply of rare earths.  By trading with countries that have a comparative advantage in other goods (for example, Japan with electronics), both countries can make economic gains.  I won’t get into the proof, but if you’re interested in learning more, read this.The whole model falls apart, however, when a country (for example China) acts not in its economic interest, but rather in its (perceived) political interest.  And this morning’s announcement from China’s commerce ministry doesn’t leave much room for optimism.  Beijing has decided it will impose a steep reduction in export quotas for rare earths in the first months of 2011 to the entire world.  I feel quite certain David Ricardo is turning in his grave.

But the buzz over these minerals, coupled with their misleading name, has created a bit of a misconception.  Rare earths actually aren’t all that rare.  Most of the elements in rare earths are fairly common, some are even abundant.  And they can be found in Sweden, Southeast Asia, Australia, the United States, and Afghanistan, among many others.

Around the world, governments are sitting up and taking note.  Japan has agreed with Mongolia to cooperate on developing mineral resources, including rare earths.  The U.S. Government Accountability Office has explored developing a domestic supply—the U.S. once had a fruitful rare earth mine in Mountain Pass, California—and Congressman Coffman (R – CO) has introduced a bill to encourage growth of a domestic supply.  Australia already has a small market and it has discussed cooperation with Europe to expand its supply.

Of course there are problems, both economic and environmental.  Despite the explosion of demand for rare earths in recent years, trade in the mineral is still barely 1% of the total market for iron.  And there are environmental hazards; mainly that rare-earth mining produces radioactive waste.

Getting mines and markets set up quickly is another story though.  So it seems, for at least a few years, there will be a shortage in rare earths, which will likely result in price increases, which may or may not have a significant effect on consumer prices.  But just in case, it’s probably time to finally buy that Prius.

Written by Ann Hollingshead

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