Last fall, during a diplomatic dispute with Japan, China withheld supplies of rare earths—minerals crucial to the production of hybrid cars, computers, and cell phones, in which China has a virtual monopoly. This flare-up intensified an already pressing question: Are market-driven economies in the advanced countries in danger of losing access to critical minerals to emerging market governments?1 In the short term, the answer is a decided no. But governments in rapidly expanding, minerals-hungry economies are transforming minerals markets through strategic investments and export restrictions. Governments in advanced countries need to consider policies to safeguard access, but not resort to restrictions that impair free trade in minerals or cross-border investment.
Controlling Mineral Markets
Though minerals account for only 6.5 percent of global merchandise trade, they are critical inputs in high-tech and other fast-growing sectors. Since artificial substitutes are often more expensive and less suitable for some processes, regular access to minerals from foreign suppliers is crucial to production in most countries. An open trading system that responds rapidly to price signals is the most efficient way to establish appropriate incentives for producers and consumers. For example, higher prices during periods of scarcity encourage more extraction in the short term, and increased investment, the development of artificial substitutes, improved efficiency, and conservation when longer-term adjustments are required. Moreover, confidence that minerals will be readily available on international markets enables firms to forego costly alternatives—such as excessive domestic investment in expensive domestic sources—to secure mineral supplies.
Because of the importance of these minerals, the enormous increase in demand for them from rapidly growing emerging markets has raised concerns, first over increased prices. More recently, however, fears have emerged that developing countries are taking steps to preempt access to essential minerals, which could impair other countries’ access to minerals at reasonable prices in times of scarcity.
Crucially, the supply and/or available reserves of several important minerals are located in only a few countries. As the figure below shows, for ten minerals that are needed for either high-technology goods or sectors critical to growth, more than 80 percent of the current supply comes from only three countries—often developing countries, specifically China. For five of these minerals as well as several others, reserves are similarly concentrated. Furthermore, 60 percent of metallic raw materials originate in unstable countries that are easily subject to pressures and inducements from foreign governments seeking to preempt access to minerals.
Some emerging market governments are further increasing their control over domestic mineral resources through export restrictions and impediments to foreign investment in minerals. Emerging market governments also are investing—through state enterprises and sovereign wealth funds—in mineral production abroad. Of course, advanced country multinationals that process minerals typically do the same thing—this practice is referred to as “vertical integration.” But those who envision both increasing mineral scarcity and economic and political competition from emerging markets are concerned that these new players will not simply sell to the highest bidder, but instead use their control over minerals as a political bargaining chip. Alternatively, producing countries may reserve the minerals they control for domestic processing firms, thus limiting the supply of minerals on the free market and potentially leading to very high spikes in prices during times of scarcity.
Influencing Mineral Markets
Governments can limit access to minerals through export restrictions and the nationalization of mining firms. Governments also can increase their future access to minerals through foreign investment through government-owned firms or sovereign wealth funds. While comprehensive data are lacking on most of these interventions, a few emerging markets—most notably China—have made significant efforts to increase their control over the available supply of minerals.
First, some countries use various forms of export restrictions—including outright bans, quotas, taxes, and licensing requirements—to influence the price of minerals or to ensure access by domestic firms involved in processing. World Trade Organization (WTO) agreements that limit the use of such restrictions are relatively weak: the prohibition of quantitative restrictions on exports is subject to various exceptions, and export taxes are allowed. While many countries impose export taxes, most tax rates are relatively low (often less than 10 percent), indicating the countries’ aim is to collect modest revenues from a relatively inelastic source rather than substantially restrict trade. However, a few important producers impose tighter restrictions, including higher taxes and quotas. For example, China imposed export quotas on coke, antimony, bauxite, magnesium carbonate, molybdenum, silicon carbide, tin, and tungsten in 2008. In India, state trading enterprises have the exclusive right to import and export some raw materials, including iron ore, manganese ore, and chrome ore.
Second, some governments limit foreign mining investment. China restricts foreign exploration and mining of some minerals (for example, antimony, molybdenum, tungsten, and tin) to state-owned enterprises, limits foreign surveys and mapping of minerals, and may use its discretionary authority to limit foreign companies’ access to exploration licenses. Russia, Ukraine, and India also have various measures in place that limit foreign companies’ mining activities.
Third, a few governments recently nationalized domestic mining firms to improve government control and government access to rents. In some cases, the nationalized firms were formerly government-owned before being privatized a decade or more ago. Venezuela, Bolivia, and El Salvador, for example, either assumed control over mining companies or revoked permits previously awarded to foreign companies.
Finally, a few emerging market governments support foreign investment in mineral production through state-owned enterprises or sovereign wealth funds. For example, Chinalco, the Chinese state aluminum company, acquired Peru Copper in 2007 to obtain rights to copper ore. Recent examples of Chinese investments to secure minerals rights also include iron ore in Guinea, Liberia, Sierra Leone; copper in Zambia; and uranium in Niger. Russian metals companies, such as Norilsk Nickel and Rusal, are investing heavily abroad to ensure access to raw materials as well.
Despite these efforts, however, fears that China or Russia will dominate mineral markets are overstated, as concentration alone does not necessarily confer the ability to maintain prices at well above market levels over a long time. In the 1960s and 1970s, for example, producers’ associates for various minerals tried—and failed—to influence prices (even OPEC has experienced considerable difficulties in keeping oil prices at high levels at various times). Furthermore, developing country purchases of foreign mineral-producing firms, while growing, remain tiny. For example, in 2010, only 6 percent of buyers in global mining mergers and acquisitions were Chinese, and few Chinese buyers have secured controlling stakes in global mining corporations. And alternative supplies and artificial substitutes, though expensive, also tend to limit the long-term effectiveness of using minerals as a political tool.
Finally, though the largest Chinese firms that account for the bulk of outward foreign investment are state enterprises, their investment policies—attempting to secure long-term access to resources through acquisitions and new investments—are indistinguishable from those of advanced country multinationals. It is worth remembering that increasing Soviet influence in Africa—combined with the run-up in mineral prices from 1978 through 1980—prompted alarms over a “resource war” and calls for strategic stockpiling of minerals in industrial countries. The subsequent recession promptly reduced prices and evidence of a threat to trading in minerals never materialized.
React, Don’t Overreact
Given the history of state intervention and opaque relationships between state enterprises and government in China and Russia, advanced country governments should take steps to sustain an open minerals’ market. Indeed, the European Union (EU) launched the Raw Materials Initiative in 2008, in part to secure commitments in Economic Partnership Agreements that the country will not impose export restrictions on raw materials (most African countries have entered into negotiations for such agreements with the EU). The U.S. Critical Materials Strategy, meanwhile, focuses on ensuring access to minerals used in clean energy technologies.
Moreover, the WTO recently endorsed the claim by the United States and EU that China’s restrictions on minerals exports are inconsistent with the country’s WTO obligations (China is appealing this ruling).2 However, even a favorable WTO ruling would simply allow the United States and the EU to impose tariffs on Chinese goods, doing little to free up minerals trade.
Importing countries should work to maintain an open trading system in minerals by strengthening WTO disciplines against export restrictions and supporting international agreements that maintain openness to foreign direct investment. Thus advanced country governments should think carefully before blocking investment in domestic mineral production simply because the investor is a state enterprise from China—and recent calls by U.S. senators to block all Chinese mining investments in the United States are at best misguided. Importing countries can also encourage research in mineral substitutes—perhaps paid for by taxing the purchase of minerals.
Importing countries may also need to maintain stockpiles of critical minerals for military purposes, and perhaps to avoid potential disruptions in market access. More efforts may be needed in this regard, as the value of the U.S. mineral stockpile fell from $3.3 billion in 1999 to $1.2 billion in 2009, despite rising prices. However, the maintenance of large stocks would be expensive, and could potentially reduce the supply of minerals available to other countries during periods of scarcity, thus further reducing reliance on the global trading system.
Most importantly, the current threat to minerals access does not justify retaliatory steps that impair the system of open trade and investment on which global prosperity depends. For the moment at least, countries should continue to act on principle—and leave future dangers for the future.
William Shaw is a visiting scholar in Carnegie’s International Economics Program.
1. We only consider non-energy minerals, not the issues surrounding government interventions in coal, oil, and gas markets.
2. The claim is that China’s quantitative export restrictions violate the general GATT prohibition of such measures, while its export taxes violate China’s accession commitments.
