The Critical Metals Report: From your perspective as a Washington, D.C. consultant, does U.S. leadership consider China’s rare earth elements (REEs) quotas a threat to U.S. industry and security?

Jeffery Green: China continues to control 94% of world rare earth oxide production. Nearly all commercial metal production and the vast majority of permanent rare earth magnet production comes from China. Estimates today suggest that about 70% of REE consumption goes to European, U.S. and Japanese companies with operations and facilities in China.

Most of Washington misses the point that the U.S. does not have its own rare earth industry per se. The U.S. imports components and end products containing rare earths rather than the metals themselves in most industries. That produces misleading conclusions, like, “the U.S. can meet its own rare earth demand.” The reality is that U.S. demand appears low only because we’re importing the products that already contain them. We can meet our demand for the direct sales of some rare earths, like lanthanum and cerium, but we certainly can’t meet them for things like phosphors, metals and other magnets.

This has a big impact on industry and security. Rare earths consumers continue to migrate to China to obtain access to those raw material supplies. The U.S.’ inability to produce the end items containing these rare earths is really a pressing supply chain security issue, particularly when you consider the numerous defense applications for the materials.

TCMR: Is Washington largely unconcerned with the situation? There doesn’t appear to be any organized policy that addresses this situation.

JG: There are pockets of effort on the rare earth issue in Washington. I testified before the U.S.-China Commission in January that there is no single definition of strategic and critical materials. That leads to part of the problem: People are working in what we call, “stovepipes of activity.” The U.S. Trade Representative is working on a trade case that primarily focuses on consumers of the material rather than the producers. The U.S. Department of Energy is coming at it from the perspective of energy industry applications, so it’s very focused on research and development, recycling and substitution. The Defense Department, meanwhile, says, “We don’t use much of this material, therefore, we’re not that concerned about it. We think we can meet our own demand in an emergency.” So there’s no comprehensive policy.

Normally, it would be Congress’ role to set a comprehensive policy, but unfortunately, it’s a particularly difficult time for Congress to work together on any policy. Senator Lisa Murkowski has a bill that proposes to set a comprehensive policy on strategic and critical materials and advance the issue holistically. Unfortunately, the current political divide in Congress makes it very unlikely that the bill will move forward, simply because it mentions the word “permitting.” Although there’s no talk about significant permitting reform—merely establishing a working group to discuss the bottlenecks—permitting is a toxic issue right now that Congress doesn’t want to touch.

TCMR: What approach do you take to this issue when working with policymakers?

JG: When I speak to Congress, I try to start at the most upstream point of the supply chain and work back. I start with exploration companies trying to identify economically exploitable deposits that would support the establishment of a mine. At the mining level, these materials are then extracted and processed into saleable rare earth concentrates that would be further separated into oxides. Moving downstream, these go into metal production, alloy production and into the magnet market. That breaks up the rare earth supply chain into distinct phases. Most folks in Washington don’t realize that there are about four or five distinct industries at work in this space.

TCMR: It almost seems that we need the equivalent of a “rare earths czar” to oversee this issue.

JG: A large segment of the bureaucratic population in Washington believes that the free market will sort this supply chain out. They fail to look deeper at what that supply chain looks like. Even with new sources coming online, I don’t think Washington realizes that significant portions of that supply chain will still be relying on China for key processing technologies and intellectual property. Washington needs to realize that all roads lead to China.

It takes some kind of crisis to actually advance the issue in Washington. We saw a little bit of that back in 2010, the de facto embargo really brought this issue to the front pages. Since then, it’s settled down because, on the surface, it appears that a U.S. rare earth mine is coming online. The seeming urgency in this area has diminished to the point where many folks don’t feel that anything needs to be done.

TCMR: What will it take to get Congress to act on this issue?

JG: Unfortunately, this is an industry that is virtually nonexistent in the U.S. We don’t produce the metals, alloys or magnets in any great quantity. The constituency, which is the users of the products that contain rare earths, has largely been heard. A World Trade Organization (WTO) case has gone forward, and that group has a big constituency comprised of the companies that have to import rare earth products and that don’t like a two-tier pricing structure, not to mention the unreliability of the current supply chain. Its interests are being addressed by the WTO action, which seeks to establish a reliable supply of these materials.

What I think the government misses with the WTO case is that even if you theoretically win, there would still be no greater supply of materials. If China becomes a net importer by 2015, as predicted, there could still be no materials available for export.

TCMR: How large is the global market and production of these materials?

JG: Production in 2010 was estimated at about 120 thousand tons (Kt) rare earth oxide equivalent. That’s relevant because the estimated 2010 demand was around 160 Kt. Most folks in the industry believe that that 40 Kt supply chain gap will be closed by around 2013 with new sources of supply. That’s not really an apples-to-apples comparison because the new supply doesn’t directly correlate to unmet demand. The supply of materials like cerium and lanthanum may then be in excess, while heavy rare earth oxides like dysprosium and yttrium will be underrepresented. So overall production matching total demand in terms of tonnage alone doesn’t mean that supply and demand are equal for each of the 17 rare earths. The U.S. is estimated to increase capacity, not necessarily production, at approximately 40 Kt/year by 2012. Australia is slated to come online with 11 Kt in 2012, growing to 22 Kt in 2013.

TCMR: Considering China’s near monopoly on much of the supply and its future demand expectations, what are the implications for the rest of the industrial world?

JG: This is a big concern. First, the processors of metal will move to China to obtain the rare earth oxides required for production. Then alloy makers relocate to get the metal. Then magnet makers move to get the alloy. Over the last year or so, first-line processors or users of rare earth materials have moved production to build their components in China, where they have better access to those magnets. Eventually, assembly makers will move to get the components containing rare earths and, ultimately, end-product users will be forced to relocate to obtain access to these raw materials. The lighting industry exemplifies this trajectory; the vast majority of its production already takes place in China. Were this to unfold in the REE space, the U.S. and the rest of the world will lose economically. For the defense sector, where the stakes are much higher, this is an even greater concern. One of the other big concerns about this migration is the very real risk of intellectual property leakage.

TCMR: One could argue that this is the natural way business operates—the auto industry, for example, got concentrated in Detroit and the semiconductor industry in Silicon Valley. Isn’t it just a normal progression of events in any sort of a semi-capitalistic system?

JG: I think folks in Congress look at it from two perspectives. What’s happening may very well be normal market activity. If you have a free market and a level playing field, so be it. The concern in Washington is that the market in China has been manipulated to force the choice of China. I get very frustrated with policymakers who say we should accept a free-market solution. On the defense side, allowing that mentality to pervade government thinking is dangerous when the free market has picked a source of supply that has deliberately interrupted the flow of vital defense technologies in recent history.

TCMR: Where is this WTO case is at this point, and how do you see it unfolding?

JG: It’s still in the request-for-consultation stage, which could go on another few weeks or so. After that, the U.S., the EU and Japan will need to decide whether to bring a case forward, which is likely, based on a successful precedent in the previous raw materials case. It’s unlikely but possible that China would unexpectedly agree to change its current policies. What concerns me is that it is so focused on the consumer side of the equation. A successful WTO case might force China to drop its two-tier pricing system. But with China moving to an expected net-importer status by 2015, there may not be excess material available on the market to buy.

Even if the case is successful, China could reduce production, which it has already been doing, leaving less material available for export. It could restructure its export quota system to allow for the free trade of the more prevalent light rare earths, the ones set to be produced in California, but could restrict exports of the more scarce heavy rare earths. That could flood the market with materials that would make U.S. products less competitive and restrict the availability of materials that are critical for defense technologies.

China could also simply refuse to comply with the ruling. After all, there is no WTO police to enforce a strictly voluntary system. I think what’s missing in Washington is an appreciation that the WTO case is only one piece of the puzzle. The executive branch has done a lot of work on pressing the trade side of things. What it hasn’t focused on is ways to incentivize our own domestic production of the materials. Until that’s done, I believe we’ll remain critically vulnerable to supply disruptions that could impact our economic and national security.

TCMR: Can you further explain this two-tier pricing structure?

JG: It’s basically the inside vs. outside China price. The last estimate I heard was about a 25% differential on some materials. If you move to China, you are not only guaranteed access to the materials outside of its export quota system, but you will also benefit by paying the inside-China price.

TCMR: How does the WTO case seek to resolve this problem?

JG: It looks to eliminate that two-tier pricing structure, saying that it and the export quota system is outside of the General Agreement on Tariffs and Trade. China is relying on arguments that were previously unsuccessful—saying it’s doing this for preservation of its scarce natural resources. Many trade attorneys and trade folks in Washington look at this issue and say it seems to be exactly the same scenario as the earlier case and this should be a slam dunk in the WTO. I think China will have to counter that with some different strategies.

TCMR: Did the Chinese comply on the previous WTO case?

JG: We’re at the end of the appeal process on that one right now. We’re not at the enforcement or the compliance stage at this point. So that remains to be seen.

TCMR: What about prospects for domestic U.S. production? Molycorp Inc.’s (MCP:NYSE) Mountain Pass mine in California is the only current U.S. producer of rare earths. What’s going on with that project?

JG: I personally have a lot of unanswered questions about that project. Last month Molycorp. announced the acquisition of Neo Material Technologies (NEM:TSX) and one of its divisions, Magnequench, a Canadian-based company with processing plants in China. Part of Molycorp’s supply chain now is inherently tied to some of the intellectual property and production facilities in China. It would be very interesting to know just how much of its phase 2 Mountain Pass production will be exported to China. I think it indicated that 7–12% of its production capacity is going to be exported, but I don’t think it has stated what percentage of its actual production it will export. The less of the capacity it uses, the higher percentage of the material it will actually export out of the U.S.

There’s also the question about its ability to import material into China and get it back for use in the U.S. or allied countries. China changes its export quotas yearly, so it would be very interesting to know if Molycorp has any long-term assurances from China on the ability to get those U.S. natural resources back after this year’s export quotas expire.

Lastly, there is a lot of talk about Molycorp’s magnet production plans in cooperation with Daito Steel (private) and Mitsubishi Corporation (MSBSHY:OTCPK) in Japan. It was recently asked how its new magnet facility would produce materials with technology different from Hitachi Metals Ltd.’s (5468:TKY; HMTLF:OTCPK) patented technology, what the patent numbers are and how they differ significantly from Hitachi’s neodymium-iron-boron magnets. Hitachi owns all the intellectual property on these neodymium-iron-boron magnets and has not licensed any additional producers in several years. This is a material that we can’t produce in the U.S. today and Molycorp is trying to find a work-around.

So there are a lot of questions about how this project will unfold and what it will bring to the market in the next few years at each step of the supply chain.

TCMR: You aren’t directly involved in the investment business, but from your perspective, what sort of prospects do you see for smaller potential producers of rare earths here in North America?

JG: There is certainly no shortage in companies interested in producing rare earths. At last count, there were more than 400 publicly traded or publicly stated rare earth companies. Clearly, there isn’t room in the market for anywhere near that number of producers. One of the perverse effects of a successful WTO trade case is that it actually could be a disincentive to production. The reason that we see 400 companies trying to get into the rare earth space is that the prices have appreciated to the level where many of these deposits are now economically viable. A WTO case that drives material pricing back down would probably make many of these projects uneconomic.

In the U.S., there are companies interested in all segments of the supply chain, from exploration to novel separation technologies, to producers of metal, alloy and magnets. Because the U.S. doesn’t use a whole lot of this material, there’s no really stable demand for rare earths. Until demand for rare earth magnets, metals and alloys returns to companies that actually buy that material in the U.S., rather than as a component containing rare earths, it’s going to be a very slow process to bring this industry back. To successfully reestablish a rare earth industry, we have to capture each stage of the supply chain, working back incrementally.

I’m optimistic that the U.S. government will eventually see the need for a secure domestic or allied-nation supply chain that severs our complete dependence on China, but that may take another trigger event like the 2010 embargo. It could be in the form of retaliation over the WTO case or something that no one foresees. Whatever it is, the U.S. government will finally realize that the current dependence on China is ultimately unsustainable.

TCMR: No matter what happens, it’s a multiyear process at best.

JG: Yes. I don’t think this will be resolved any time in the near future. We could have a bit of a wild ride ahead of us until companies are online outside of China and producing at each step of the supply chain.

TCMR: It will be interesting to see how this all plays out. Thanks for speaking with us today.

JG: Thank you.

Prior to forming J.A. Green & Company, Green served as Staff Director to the House Armed Services Subcommittee on Readiness, and as Counsel to the full committee’s policy staff, handling all matters related to acquisition policy, industrial base issues, defense trade, and a $156 billion operation & maintenance budget.

He has written numerous articles related to the defense industry, government procurement and strategic materials. In addition to various TV appearances, he has been quoted in an array of major national news publications.

Having founded and serving on the Strategic Materials Advisory Council in 2012, he also serves as a member of the U.S. Magnetic Materials Association and the REE World Advisory Board.

After more than a year in preparation, the seven-page report predicts an end to China’s stranglehold on the elements needed for high-tech U.S. weaponry from smart bombs to lasers.

That view is “rather naïve” and ill-informed, said Ed Richardson, president of the U.S. Magnetic Materials Association and an expert in rare earth elements.

For instance, he said that even if U.S. miners are able to find enough of rare earths dysprosium and neodymium to produce military-grade magnets, the nation has lost the manufacturing capacity to refine the raw materials.

“There are no producers left in the States,” Richardson said, echoing the findings of a Tribune-Review investigation published in January 2011.

Richardson and other experts who spoke to the Trib said China and Japan control refining. That will not likely change for years, he said.

“If we want the magnets, I guess we will have to go to China,” Richardson said. “And we’ll have to ask them very, very nicely.”

“The only way we can get that material right now is from a foreign company in China,” agreed Jack Lifton, co-founder of Technology Metals Research, an Illinois company that follows the rare earth industry.

He said the report was “so lame I can’t believe it.”

Brett Lambert, the Pentagon official responsible for industrial policy, declined to comment on the report. He told a Trib reporter to call Defense Department public relations and then hung up the phone.

The Trib has covered the rare earth issue closely for more than a year, pointing out repeatedly that simply finding rare earths is only the first and easiest step in regaining the manufacturing dominance the United States once held. The other steps — refining rare earths into metals, alloys and end products such as magnets — haven’t been done in the United States since the early 2000s. The number of rare-earth scientists and engineers has declined precipitously.

Of special concern are heavy rare earths such as dysprosium, which are nearly controlled by China and will be for years, experts say. Although several mining companies outside of China have been locating new supplies of rare earths, almost all are confined to the light rare earths, industry consultant Jeff Green said.

The Pentagon report predicted that U.S. production of dysprosium will reach seven tons next year, equal to what the Department of Defense needs. Though that would leave no extra dysprosium for domestic needs, the Pentagon shows no deficit.

Even if the United States were able to produce seven tons of dysprosium next year — which Green and others say is almost impossible — it “couldn’t do anything with it,” Green maintained.

There are 17 rare earth elements on the periodic table. Commercially, they are used in hybrid cars, flat-screen monitors, wind turbines and hydrocarbon cracking, among other uses.

China, which has produced 97 percent of the world’s rare earths in recent years, began tightening the market with export and other controls in 2010. That sent prices skyrocketing and miners scurrying to find non-Chinese supplies.

Discoveries of raw rare earth supplies outside of China have depressed prices as much as 50 percent since last summer. But the experts lament that any new supply of rare earths will not diminish the technological lead established by the Chinese.

Molycorp, a U.S. company close to full production of raw rare earths at a California mine, made a $1.3 billion deal last month to buy a firm that refines rare earth products in China. Shipping rare earths to China shaves five to seven years off developing technology here, the company said.

In a letter this week, the group and other rare earth industry leaders urged lawmakers not to get complacent in light of President Obama’s request for World Trade Organization talks on Chinese export controls.

“It may take years for the WTO to issue a ruling and yet more time for China to exhaust the appeals process,” the letter said. “In the interim, more American jobs and technology will be shipped overseas.”

Even as companies around the world look to produce rare earths, which are essential in numerous technologies, China remains the dominant source. It is a leader in not only raw materials but also downstream products made from rare earths.

The letter added: “Even a successful WTO ruling will do nothing to aid the near-total reliance of U.S. companies on China for the technology and production facilities needed to utilize rare earth materials in manufacturing.”

China has strongly defended its export controls, saying it needs to protect the environment and secure scarce resources. Experts said the Chinese could become net rare earth importers in the next several years.

But trade attorney Terence Stewart said China follows a familiar pattern with many products and should protect its resources without hurting free trade. He said controls force prices to go up worldwide, allowing China to attract downstream users.

“This is the problem,” he said at a downtown Washington, D.C., briefing on the issue yesterday. “This is the reason that the countries are concerned. It is a broad-based problem.”

Expert Jeff Green, head of J.A. Green and Co., which represents companies in the field, has been critical of the lack of coordination in the government’s response.

“The executive branch has done their part in many respects by filing the WTO case,” he said in an interview. “In order to break the logjam with producers, the Congress is going to have to get involved to take us out of the last place in the world in terms of permitting mines and getting projects online.”

Green echoed mining industry arguments, recently displayed in a Washington Times op-ed by National Mining Association CEO Hal Quinn. The group has chafed at statistics putting the United States behind other mining economies in permitting and investment.

Quinn wrote, “If U.S. companies are to continue innovating and manufacturing the products critical to our nation’s economic future, they need reliable access to mineral raw materials.”

Last year, the House Natural Resources Committee approved legislation from Rep. Doug Lamborn (R-Colo.) and Chairman Doc Hastings (R-Wash.) to review U.S. mineral capabilities and obstacles to domestic production. A panel spokesman could not say when the bill would hit the House floor.

Several bills are pending in the Senate Energy and Natural Resources Committee, including a bipartisan proposal (S. 1113) by Sen. Lisa Murkowski (R-Alaska), the ranking member. Skeptics worry that it could lead to reforms in permitting that may soften environmental safeguards.

Murkowski “barely touches on the subject,” Green retorted at the briefing, praising the proposal’s effort to assess the permitting landscape. “And that bill has not been given an opportunity to get a markup. The politics of this, I think, make it extremely difficult.”

Magnesium and other rare earth elements have the potential to “increase combat effectiveness,” said Dennis McGinn, President of the American Council on Renewable Energy and retired Vice Admiral of the US Navy. Speaking at the Technology & Rare Earth Metals Center’s annual conference in Washington, DC last week, McGinn pointed out that portable military packs that currently weigh about 25 pounds could be reduced to about five pounds per pack with technological advancements, including making better use of rechargeable ion batteries.

Making greater use of magnesium in personnel armor protection, tanks, artillery, armored vehicles, and other military equipment has been strongly urged by many defense contractors and by the US military itself. The Department of Defense is the single biggest oil consumer in the US, which uses the most crude in the world. In 2010, the Defense Department used 125 million barrels of oil, and it is projected to spend about $150 billion over the next decade on energy costs alone. The department has, however, pledged to draw 25 percent of its energy from renewable resources by 2025, and developing more energy-efficient defense equipment that will rely heavily on metals, including magnesium, is high on the research agenda.

Decreasing military dependence on hazardous fuel convoys could also lead to fewer deaths in combat zones. According to the American Council on Renewable Energy, twelve percent of army casualties in Iraq and 35 percent of army casualties in Afghanistan in 2007 were due to fire hazards. In short, not only is it in the military’s financial interest to increase use of magnesium and other metals, but such investments could also help the government better protect its soldiers.

“A vision must be developed for creating new ground and air vehicle structural applications in addition to new personnel protection and armor applications,” according to a study on magnesium alloys in army applications by Heidi Maupin of the US Army Research Laboratory’s weapons and materials research directorate, Eric Nyberg of materials processing at Pacific Northwest National Laboratory, and Suveen Mathaudhu of the US Army Research Office’s materials science division.

In its quest to make greater use of magnesium and other rare earth materials, the Department of Defense is finding an unlikely ally in many environmental groups that are looking to minimize damaging environmental impact through energy efficiency, as well as in the Department of Energy. Energy captured by wind turbines, for instance, is stored as hydrogen and uses magnesium as the metal and mineral oil as the liquefying agent. The blades in the turbines in turn may potentially use magnesium as a sturdy and lightweight metal that is a quarter of the weight of steel and a third lighter than aluminum.

It is “ironic,” though, that the Department of Defense and environmentalists are taking the lead in developing magnesium and other rare earth in the US, said Carol Raulston, senior vice president of communications at the National Mining Association.

After all, it was growing pressure from environmentalists concerned about the negative impact of rare earth mining, together with increased price competition, that led to a steep decline in magnesium mining in the US in the first place. China now dominates the magnesium market, cornering well over 90 percent of total global supply. Today, US Magnesium is the sole manufacturer of the metal in the country.

Jeff Green, President of industrial consulting group J.A .Green & Company, agreed, stating that the US needs to define its strategy regarding rare earth supply instead of simply leaving it to the market forces that have led to China’s overwhelming dominance in the industry.

Confused?

Industry insiders say you should be.

Rare earths are the glue that holds together much of the modern world’s most advanced technologies: guidance missile systems, flat-screen TVs, cellphones, generators in windmills and motors in hybrid cars.

But experts say both sides of the country’s political divide have gone out of their way to oversimplify and underestimate the magnitude of what faces the nation.

Mining and separating rare earths is the first step in making high-tech gadgets, but it’s the step that most mesmerizes policymakers. The hard parts are making separated rare earths into powders, metals, alloys and magnets, said Jeff Green, a Washington-based rare earths consultant.

“The politicians don’t have any idea of what’s going on here,” said Jack Lifton, a director at Illinois-based Technology Metals Research. “The issue for the U.S. is not the production of rare earth concentrate; we don’t need to worry about that. The problem is we don’t have the ability to process what we have.”

The Obama administration’s $34 billion energy loan guarantee program is a case in point, Lifton said. Solar, wind and electric cars don’t use raw rare earths. They use refined products such as permanent magnets, and America has lost the ability to make those products.

The government denied an energy loan to Molycorp, a Colorado-based company with the world’s largest rare earth mine in California, but gave millions of dollars to Solyndra, a now-bankrupt American solar panel maker. The Tribune-Review reported last fall that Solyndra imported a substantial amount of solar cells from China.

“Rather than supply Solyndra with loan guarantees, if we had put the money into magnets, we would have an industry today,” Lifton said.

Daniel McGroarty, a rare earth consultant for Carmot Strategic Group, agreed.

“Having raw rare earths is only the beginning of the process,” he said. “China holds the latter part of the supply chain. We have to reclaim all of the steps if we want to reverse China’s dominance. The challenges are formidable, and we have little time. We have let a lot atrophy.”

McGroarty said the Department of Energy has been the most insightful of all federal agencies. Yet he has questions.

“The rare earth manufacturing industry did not move to China overnight,” Green said. “It took years.”

‘Mine-to-magnets’ plan

More than a year ago, the Tribune-Review outlined how America reached this position.

A decade ago, Molycorp extracted rare earths from its California mine, refined them into oxides and then sent them to companies that performed the critical manufacturing steps.

One of those companies was Indiana-based Magnequench, which made bonded neodymium-iron-boron magnets once produced by General Motors.

In the early 2000s, Molycorp, faced with fierce price competition from China and environmental concerns, closed its Mountain Pass mine. Magnequench soon looked for other suppliers and relocated to China. Then Hitachi Metals pulled out of Edmore, Mich., in 2005, leaving America bereft of neo-magnet manufacturers.

Few worried. Foreign-made magnets were cheap.

But China began limiting raw rare earth exports. Companies scrambled. Molycorp reopened its mine and planned to sell thousands of tons a year.

China, meanwhile, kept improving its manufacturing skills at making powders, metals, alloys and magnets — arts largely lost in America.

When it reformed in 2010, Molycorp sold itself to investors with a “mine-to-magnets” plan to produce rare earths and take steps needed to make commercial products.

The problem, said Green, was that rare earth engineering largely had relocated to China.

‘A vulnerable position’

Molycorp promised last year to overcome this obstacle. But last week, Molycorp appeared to throw in the towel, said Ed Richardson, president of the U.S. Magnetic Association.

Molycorp acquired Neo Material Technology, a Canada-based company with its major manufacturing facilities in China. One of Neo Material’s China-based subsidiaries that Molycorp most wanted is Magnequench, the former American company that makes refined magnet powders, Richardson said.

Things had come full circle.

Except now, Richardson said, “the United States is in a vulnerable position with China.”

President Obama, he noted, spoke of green energy and made no reference in his Tuesday speech to the importance of rare earths to national defense. Richardson said Republican lawmakers are not fully aware of the situation either.

Sen. Lisa Murkowski, R-Alaska, sent out a news release with a simple solution: “If the president wants to address China’s dominance in critical minerals production, he should support changes to U.S. federal minerals policy to allow domestic mining.”

But senior administration officials said in a March 13 press conference that the administration still holds out hope that China will agree to bring its export restraints into compliance with its WTO obligations during the upcoming consul- tations, especially in light of the strong legal victory the U.S. won from Appellate Body in the raw materials case.    Such a settlement of the long-standing dispute would be preferable for U.S. businesses and workers than a drawn-out WTO proceeding, stressed one senior official. If consultations fail to settle a dispute, complainants can seek a dispute settle- ment panel 60 days after the consultation request has been filed.

President Obama in separate Rose Garden comments touted the decision as a step to fight for fair economic competi- tion and America’s energy future.

At issue in the dispute are both the export duties and export quotas that China imposes on rare export quotas on rare earths, tungsten, and molybdenum. Also being challenged are other Chinese export restrictions on those tariff lines that China imposes through “export procedures and requirements,” according to USTR.

China committed as part of the terms of its WTO accession to eliminate export duties for all products other than those listed in a specific annex, USTR pointed out in its announcement, and none of the products under challenge are included in that annex.

Article XI:1 of the General Agreement on Tariffs and Trade (GATT) generally prohibits restrictions on exports other than taxes, duties and charges, USTR stressed in announcing the case. In addition, it pointed out, China’s WTO Accession Protocol contains broad commitments not to restrict the right to export goods.

According to USTR, China unfairly imposes export restraints on rare earths, tungsten and molybdenum, as well as many intermediate products processed from these raw materials. In all, USTR said in a March 13 announcement, China’s export restraints on the materials at issue in this dispute cover more than 100 tariff codes.

“Because China is a top global producer for these key inputs, its harmful policies artificially increase prices for the inputs outside of China while lowering prices in China,” USTR said. “This price dynamic creates significant advantages for China’s producers when competing against U.S. producers — both in China’s market and in other markets around the world.”

The policies also create “substantial pressure” on U.S. and other foreign downstream producers to move their operations, jobs, and technologies to China, according to USTR.

New action on these restrictions has been expected since the WTO Appellate Body ruled against Chinese export restrictions on other raw materials in December in favor of the U.S., EU and Mexico.

The Appellate Body’s support for the U.S. legal arguments in that case, China — Measures Related to the Exporta- tion of Various Raw Materials, specifically ruled that China cannot escape the commitment it made in its WTO accession protocol to abandon export restraints by resorting to an exception under GATT Article XX by insisting they are meant to preserve natural resources. This bolstered confidence among government litigators that a similar case could be mounted against Chinese rare earth export restraints.

The determination to pursue the case was also strengthened by China’s reluctance to drop its export restraints after losing the raw materials case, a factor mentioned by EU Trade Commissioner Karel De Gucht in a separate statement announcing the decision to seek WTO consultations.

“These measures hurt our producers and consumers in the EU and across the world, including manufacturers of pioneering hi-tech and ‘green’ business applications,” De Gucht said. “Despite the clear ruling of the WTO in our first dispute on raw materials, China has made no attempt to remove the other export restrictions. This leaves us no choice but to challenge China’s export regime again to ensure fair access for our businesses to these materials.”

Responses to the administration’s action were largely positive in Congress.  House Ways and Means Committee Chairman Dave Camp (R-MI) and trade subcommittee Chairman Kevin Brady (R-TX) both voiced their support. “The United States should not hesitate to enforce its rights at the WTO, and I hope the Administration will bring additional cases to address China’s barriers,” said Camp in a statement. “I look forward to consulting closely as this – and other WTO cases – move forward.”

Ways and Means Ranking Member Sander Levin (D-MI) and trade subcommittee Ranking Member Jim McDermott (D-WA) also applauded the step, but went on to press for further trade action by Congress, such as currency legislation.

In the Senate, Finance Committee Chairman Max Baucus (D-MT) wholeheartedly supported the move, but former Ranking Member Charles Grassley (R-IA) used the occasion to strike out against Obama’s recently established Inter- agency Trade Enforcement Center (ITEC).

The filing of this case and one last week against Indian poultry practices demonstrates that the administration can pursue WTO cases without creating a new bureaucratic entity like the ITEC, Grassley said.

“The cases show the United States is already capable of bringing enforcement actions without a new layer of govern- ment,” Grassley said. “It’s not clear whether a new office would lead to more cases or just create redundancy.”

Private-sector reactions struck a similarly positive tone, with the U.S. rare-earths industry praising the move. But one lobbyist who has been pressing for more U.S. government action to diversify the supply chain of rare earths and other critical materials stressed that the U.S. has a “larger problem” due to its lack of a supply chain to process and utilize rare earths.

“While this is a positive development for consumers of rare earth, it should not be the last move by the U.S. Govern- ment to secure a rare earth supply chain,” said Jeff Green, CEO of Jeff Green & Company, which is pressing for execu- tive and legislative branch action on behalf of a consortium of miners, processors and users of rare earth materials. “Actions are needed to not only enforce trade obligations, but to stimulate development of a non-Chinese rare earth industry.”

Green noted that because China is moving toward becoming a net importer of rare earths, “a WTO case that may take years to resolve may have limited effect, but is still a worthwhile endeavor to force compliance with trade obligations.”

Offering a positive reaction were two business groups that are often at odds on China trade issues, the Ameri- can Iron and Steel Institute (AISI) and the US-China Business Council (USCBC).

“Tungsten and molybdenum are important raw materials in making steel and other products, and China’s export restrictions have distorted the world market for those materials, to the detriment of American manufacturers and Ameri- can workers,” said AISI President and CEO Thomas J. Gibson.

“The United States has a variety of tools to use when it believes China is not complying with its WTO commitments, including bilateral discussions at U.S.-China government meetings throughout the year,” said USCBC Vice President Erin Ennis. “When it is clear that good-faith bilateral discussions have not yielded the desired results, the U.S. has every right to utilize the WTO dispute settlement system.”

She added that a “well-focused” U.S. WTO case should be viewed as a “normal” part of any nation’s WTO member- ship, and said USCBC, whose membership is largely multinational corporations with business operations in China, supports U.S. efforts to seek improvements in China’s exports of rare-earth minerals.

But she also noted that the 60 days’ consultation process allows time to yield a result that “advances free trade and international best business practices.”

According to the EU’s March 13 announcement, rare earth elements are a set of 17 chemical elements in the periodic table, “specifically 15 lanthanides (lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium) as well as scandium and yttrium.”

These elements possess “unique magnetic, heat-resistance and phosphorescence properties” that allow them to be used “to directly produce highly efficient magnets, metal alloys, phosphors, optical material, battery material, ceramics, [and] special abrasive powders.” These are “key components” of downstream and consumer goods such as “wind power turbines, catalysers (for car and oil cracking), energy-efficient bulbs, engines for electric and hybrid vehicles, flat screens and displays (LED, LCD, plasma), hard drives, car parts, camera lenses, glass applications, industrial batteries, medical equipment or water treatment,” according to the EU release.