Moving up the Supply Chain: China’s S&T Policy and Rare Earth Industry

IMGXYZ4105IMGZYXFrom computer to missile manufacture, rare earths play a significant strategic civil and military role. These elements and their related industries represent the latest manifestation of China climbing and dominating the supply chain. Such shifts have implications particularly in the wake of 2010 recriminations over the Diaoyu/Senkaku islands dispute, followed by limits on rare earth exports from China to Japan. Given the geopolitical implications of this strategic industry, rare earths are destined to shape China’s science and technology policy and foreign relations. 

In the sixth installment of the “Arms Control’s Future” and “China and South Asia’s Future” seminar series for rising scholars, the Carnegie-Tsinghua Center for Global Policy hosted a roundtable discussion with Nabeel Mancheri, a researcher at the National Institute of Advanced Studies, Indian Institute of Science Campus in Bangalore, and a visiting fellow at the Chinese Academy of Social Sciences. Mancheri discussed China’s strategic and economic impact on the rare earths industry and implications for India and the world. Carnegie’s Lora Saalman moderated.

Cultivating the Rare Earths Industry

• Near Universal Importance: Mancheri highlighted the near universal importance of rare earth materials, which are used in numerous civil products, such as battery alloys, polishing powders, liquid crystal displays (LCDs), hybrid cars, and light emitting diodes (LEDs). They also, he added, have a strategic role in such military applications as guidance and control, targeting and weapon systems, nuclear enrichment, and communication platforms, including:
  
  
  • Tomahawk cruise missiles and smart bombs
  • Joint direct attack munitions and joint air-to-ground fin actuators
  • Predator unmanned aircraft and jamming devices
  • Electromagnetic railguns and Ni metal hydride batteries
  • Area denial systems and long range acoustic devices on Stryker vehicles
  • Air-based lasers and FCS vehicle-based lasers
  • Nd YaG lasers, permanent magnets, and space launch vehicles 
• China’s Unparalleled Position: Mancheri detailed the growth of China’s rare earth industry from their discovery in the 1950s to its role as a producer and consumer of the world’s intermediate- and high-end technological products. Citing glass as an example of the interconnectedness of this production web, Mancheri noted how this one substance in the rare earth element network has 24 separate links to such strategic industries as Nd YAG lasers that can be used in uranium enrichment. Behind such synergies, he noted the integral role of Deng Xiaoping and his 863 Program as well as the father of China’s rare earths industry Xu Guangxian. Their initiatives, Mancheri added, have gone hand-in-hand with the rise of industrial systems, materials, and coordination among various state and non-state agencies. Very few companies outside China, he said, are producing these materials with the same scale and efficiency. Mancheri added that China’s rare earth extraction know-how is currently unparalleled, with the necessary production, infrastructure, and distribution channels already in place. 
   
• Green Technology Development: China’s near monopoly on rare earth extraction, Mancheri added, has also given it a leg up on non-traditional strategic industries, placing Beijing in a central position to impact “green” economic development in everything from wind turbines to LED lighting. With sixteen state-owned industries tapping into research and development in such areas as electric and hybrid vehicles and clean energy technology constituting twenty percent of global consumption of rare earth materials, China is uniquely placed to dominate these spheres, he said. To this end, Mancheri noted that China has been doubling its wind energy output every year since 2005 and became the world's top investor in clean energy technology in 2009. 
   
• Geopolitical Implications of Restrictions: Both the civil and military centrality of rare earth elements have contributed to concerns in the West over the extent of Chinese control and restrictions, explained Mancheri. A Chinese participant added that some countries, like Japan, are up to ninety percent reliant on China for rare earth supply. Mancheri said that Japan’s dependence has contributed to the effectiveness of China’s restricting of exports in the wake of the 2010 fishing boat incident and territorial disputes. One of the Chinese participants noted that this was not a decision on the part of the Chinese government, but rather had its origin in market forces. Another Chinese expert stated that China has abided by its World Trade Organization obligations. He attributed China’s dominant position to other countries’ decision to not exploit their own rare earths reserves, citing sizeable U.S. and Russian stores. The closure of U.S. and other rare earths mines had little to do with China and more to do with their own calculations of economic and environmental risks, argued one Chinese participant. 

Regulating the Rare Earths Industry

Mancheri distinguished between “low” rare earths, which are found in large amounts throughout the globe and governed by a low price, and “high” rare earths found in trace amounts and garnering a high price. He noted that China’s restrictions have, thus far, targeted the former, but if these limits begin to spread into the latter, the impact on global markets and strategic industries could be catastrophic. 

• China as a Model: Mancheri lauded China’s approach as the result of both careful thought and consideration at the highest policy making levels, coupled with “tremendous pragmatism, discipline, and calculated risk taking” on the ground. Given the strong role of rare earth elements in modern technology, maintaining strict control would propel China into becoming an even greater political, economic, and military power, he added. China would continue to manage rare earths production and exports to leverage its own strategic supply position creating downstream manufacturing industries and jobs within the country, said Mancheri. 
   
• Work-in-Progress: Chinese commentators stressed that the rare earths industry remains a work-in-progress, with a long time before China achieves its “high-end” production aims.  A Chinese participant noted that China’s efforts to pursue a profit motive are normal. Yet, he questioned their wisdom, arguing that Beijing has unwisely assumed the burden of an environmentally damaging industry that other countries have gladly relinquished. He claimed that China has been liyong (used) by the international community, with its population left to suffer the consequences. He advocated Beijing extricating itself from its role as primary rare earths producer, suggesting that some of its emerging restrictions are part of this process. 
   
• Lessons for India: Mancheri contrasted China’s experience with that of India, which faces layers of licenses and certificates from state agencies prior to the installation of mines and plants. New Delhi can learn from Beijing with a top-down approach to the implementation of policies of strategic importance, combined with a horizontal flow of information through the entities involved, he said. At the official level, he noted the obligation of the Ministry of Science and Technology to identify and prioritize national strategic and scientific priorities, train experts, and incentivize research and development. 
   
• Moving Forward: Indian Rare Earths Limited plays a central role and has a duty to better coordinate with the leading institutes and universities in India to formulate policies on research and development, stockpiling, recycling, and education, argued Mancheri. By prioritizing a “multi-departmental strategy,” that includes a role for the private sector and foreign direct investment, India should emphasize down-stream industries including mastery of intermediate and final products, he said. When a debate emerged over the difficulty of a democracy like India undertaking such reforms, Mancheri noted an inefficient bureaucracy imposes a greater hurdle to science and technology reforms and advances.

Discussants: Zou Yunhua, Vinayak Chavan, Jiang Yuechun, Ren Jingjing, Clive Crook, Chris Janiec, Mariya Kuznetsova, Vasilis Trigkas, Helen Liu, Frauke Heidemann, Patrick Renz