Obama, Congress Urged To Go Beyond Trade Case To Secure Critical Inputs

Staff Writer, Inside US-China Trade

U.S. producers and users of rare-earth inputs for high-technology manufacturing continue to support the filing of a challenge of Chinese export restraints at the World Trade Organization, but argue that this will not, in and of itself, resolve the issue of an insecure supply of critical inputs for the U.S. industrial and defense base.

To address this issue, the Obama administration and the U.S. Congress must move beyond simply studying the issue and adopt policies and initiatives to promote a diversity of domestic and foreign supplies of rare earths and other strategic materials from more secure sources, according to Jeff Green, president and founder of J.A. Green & Company.

The company coordinates Washington lobbying work on behalf of a coalition of companies that mine rare earths or make or use downstream products that incorporate them.

These new policies must include catching up with Europe and Japan in identifying which critical materials must be secured, as well as providing incentives for fostering domestic and foreign production and cooperation, he said.

“A WTO case is important and we should demand that China comply with its WTO obligations,” Green said. “But a WTO solution alone can just drive prices down in a market where it takes higher prices to incentivize production.”

The Office of the U.S. Trade Representative has held off on making a decision on whether to challenge Chinese export restraints on rare earths until the WTO Appellate Body takes final action on a Chinese appeal of an apparent U.S. win in an earlier challenge over similar export restraints imposed on raw materials that serve as inputs to industry.

On Jan. 12, the U.S. and China issued a joint statement in Geneva effectively setting a deadline for the AB to rule. They said they would deem the AB decision, which has been delayed 90 days because of complex circumstances, as valid under the terms of the Dispute Settlement Body (DSB) if it is issued by Jan. 31.

If the AB upholds the comprehensive win delivered to the U.S. position by the original dispute panel, that could prompt the U.S. and others to move forward on a rare earths export restraint challenge, industry sources predicted.

The highly imbalanced nature of the current global supply structure for rare earths, wherein China controls 95 percent of current production, makes a successful WTO challenge of its policies valuable for the future even if such a legal process is long and drawn out, several industry sources argued.

“Bringing a WTO case on rare earths would be helpful, even if it takes three years to get a result, because Chinese dominance of supply is a long-term problem that is not going away anytime soon,” said Peter Dent, the vice president for business development for Electron Energy Corporation, which makes rare-earth magnets in Pennsylvania. “Even if non- Chinese production is increased in coming years, China will still have a lot of market muscle, especially in the heavy rare earths, at least through the end of the decade. A successful WTO challenge can put pressure on China to alter its policies related to export taxes and quotas,” he said.

The most pressing near-term action is for the administration to develop a government-wide definition of strategic or critical materials, they said.

The Energy Department last month announced its list of critical materials for industrial use, they said. The next step toward this goal is for the Department of Defense’s Strategic Materials Protection Board to complete a report that is supposed to identify materials whose long-term secure supply is critical to national security, he said. According to Greene, that report is two years overdue.

On the legislative front, most industry groups support the Critical Minerals Policy Act (S. 1113) introduced by Sen. Lisa Murkowski (R-AK) in the Senate, as well as the Rare Earths Supply Chain Technology and Resources Transformation Act (H.R. 1388) offered by Rep. Mike Coffman (R-CO) in the House.

A vital next step, said Green, will be for Murkowski and Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM) to agree to mark up Murkowski’s bill, which is backed by a bipartisan group of 19 Senate co-sponsors.

S. 1113 sets out a comprehensive set of policies to address each part of the supply chain — from mining and processing to manufacturing and recycling — that relies on minerals that the U.S. Geological Survey determines to be critical to the economy.

There is growing unease among industry sources and analysts that the U.S. political process is moving too slowly to address security of supply issues as compared to Japan and Europe, whose governments already have identified critical materials and have begun initiatives aimed at diversifying supply and promoting recycling. But they remain hopeful that the issue can be addressed in the coming year on a bipartisan basis, even though 2012 is an election year.

“Growing dependence on foreign nations like China for so many strategic materials creates a strategic vulnerability and needs to be addressed at a higher level” than just the interagency process, which has so far led to research and development studies, said Green in a Jan. 13 interview. “It’s inadequate to just study when China continues to become more and more dominant in key materials.”

“The fact that the United States is still studying the problem rather than taking actions similar to those being taken by Japan and Europe does not reflect well on us,” Dent agreed in a Jan. 16 interview.

“It should be a wake-up call to see how other countries relentlessly exploit the resources of the world to their own advantage in a mercantilistic way, while we just leave it up to the market to sort out on its own. We need to view this as a supply chain security issue and take appropriate action,” he said.

Dent said China’s latest public announcement of its intentions with respect to managing rare earth exports, issued late last year, indicates a further narrowing of the overall quota by 4,000 tons in the first half of the year along with the suggestion that supplies would then be stepped up during the last half of 2012 so that 2012 overall levels remain on par with those that existed in 2011.

Prices for many rare earths have dropped significantly over the past six months, but some U.S. industry sources argue they would have declined further if not for Chinese government intervention.

“What we are suspecting and seeing in the rare earths marketplace is that the Chinese government has moved beyond its policy of export taxes and quotas to a policy of enforcing minimum prices,” said Dent. “A number of the rare earths have come down 15 to 30 percent in price, and then flat-lined. The prices should have continued to fall, but they didn’t. That’s because the Chinese government would not let them fall further.”

Critical materials that merit policy action to secure supply extend well beyond those elements categorized as “rare earths” to a broader range of inputs that are vital to industrial and defense supply chains.

For instance, the mineral vanadium is a key ingredient for one type of battery that China plans to incorporate into storage options for alternative and traditional energy over the next five years, according to a company executive who attended a conference on renewable energy integration and storage in Beijing last month.

As China’s central government seeks to meet its goal of obtaining 11.4 percent of its energy from non-fossil sources by the end of 2015, compared to 8 percent today, it should be expected that it will take actions, such as export restraints, to secure supplies of the inputs required to store that energy, said American Vanadium Vice Chairman Ron MacDonald in an interview after attending the conference.

For this reason, MacDonald visited Washington last month to relay updated information to policymakers that he believed should be considered as they determined whether vanadium is deemed a critical material by U.S. government agencies.

In a related development, J.A. Green & Company last week announced the creation of a nine-member Strategic Materials Advisory Council, whose aim is to “facilitate constructive dialogue between the U.S. government and industry, leading to sound public policy that safeguards our national interests and supports a robust industrial base.”

The council is comprised of experts “with first-hand knowledge in the supply chain, from mining and extraction to manufacturing of high tech products,” according to a Jan. 12 announcement.

The group will identify strategic and critical materials used in defense and energy applications, and inform members of the executive branch, Congress, industry and the public about the role strategic and critical materials play in the U.S. industrial base.

It also will offer policy recommendations and “risk-mitigation strategies” to counter industrial-base and nationalsecurity threats, while also promoting a “proactive and forward-looking approach by the U.S. government and industry “to avoid disruptions in future developments that depend upon strategic and critical materials.”

The only lobbyist on the council is Green, and he said the group’s function is not to lobby, but to provide “thought leadership” on the issue of the need for a U.S. strategy toward securing critical materials.

Others on the council are ex-Acting Assistant Secretary of the Army for Acquisition, Logistics and Technology Dean Popps; retired Vice Admiral Barry Costello; retired U.S. Air Force Major General Jeffrey Reimer, former Defense Logistics Agency Administrator for Strategic Materials Cornel Holder; Founding Principal of Technology Metals Research and President and Director of Innovation Metals Corp. Gareth Hatch; ex-U.S. Geological Survey rare-earths commodity specialist James Hedrick; Co-Founder and Director of Technology Metals Research Jack Lifton; and former House Armed Services Committee policy staff director Stephanie Sanok.