Perils of clashes with China over currency and rare-earth exports

Is the world heading into a dangerous storm of trade reprisals and economic sanctions?

Individually, such actions often seem worthy. The US House, for instance, passed a bill today that would make it easier for the Commerce Department to penalize China for manipulating its currency rate – an unfair way to favor Chinese exporters.

But Beijing appeared to anticipate that move this week by slapping high tariffs on imports of American poultry.

Two weeks ago, Japan helped its ailing exporters by intervening in currency markets – for the first time in six years – to devalue the yen. Many Latin American and Asian nations have also artificially altered their currency rates to create export-related jobs.

But taken together, such actions amount to a global “currency war,” warns Brazilian Finance Minister Guido Mantega. Too many nations are competing with devaluations to create a trade advantage but causing damage to the market-based system of world trade.

The United States, meanwhile, has led many nations to tighten sanctions on Iran and North Korea for their nuclear programs. But then, in a similar political move that sent shivers around Asia and into the Pentagon, China last week halted exports of “rare earth” minerals to Japanese high-tech industries in a dispute with Japan over a set of small islands. One Japanese official called China’s action a “surprise attack,” a phrase often used by the US for the 1941 Japanese bombing of Pearl Harbor.

What made China’s retaliation so troubling is that it controls 97 percent of the world’s production of these 17 exotic metallic elements, such as dysprosium. They contain unusual properties that are critical for making computers, TVs, smart bombs, fighter jets, battery-driven cars, wind turbines, and many other advanced products.

Over the past five years, Beijing has begun to slowly restrict rare-earth exports in order to force foreign manufacturers to set up industries in China, such as electric-car factories, even as the world’s appetite for these elements has grown.

Using trade as a tool or weapon can easily get out of hand, especially if a country like China has little regard for maintaining the system that governs the global economy or seeks strong leverage over other nations’ strategic industries and defenses. As former Chinese leader Jiang Zemin once said, China must use its advantage in rare-earth resources to create “economic superiority.”

In October, the Pentagon plans to issue a report on how the US should respond to Chinese control of the rare-earth market. While China commands nearly all of the world’s production, it has only about 57 percent of global reserves. The US used to be self-sufficient in rare-earth production. But it gave up production in 2002 when a Colorado company, Molycorp Minerals, was closed down because of cheaper exports from China. The company hopes to reopen in 2012 – if investors can be found. The process of extraction is costly, dirty, and dangerous.

One idea is for the US to set up a stockpile of rare-earth elements. But a report in April by the US General Accountability Office said it may take 15 years for America to revive its industry and avoid vulnerability to China’s mercantile and manipulative use of these exports. In Japan, officials want to devise alternatives to rare-earth minerals so the country can never again be held hostage to Chinese demands.

The threat of reciprocity always hangs over any nation’s trade sanctions. History shows that sanctions can sometimes lead to war, as happened in 1941 when the US stopped vital exports of oil to Imperial Japan for its occupation of China.

Sanctions have a mixed record in changing the course of world affairs. Sometimes they work, as they did in forcing an end to white rule in South Africa, to Vietnam’s occupation of Cambodia, and to Libya’s drive to build weapons of mass destruction. Often they don’t work, as was the case with sanctions on Saddam Hussein’s Iraq or military-controlled Burma (Myanmar).

China went a step too far with its rare-earth squeeze on Japan. Many nations noted it. The global economy needs safeguarding – even if China has yet to understand that.