Due to their special properties of magnetism, luminescence, and strength, rare earths are widely used in high-technology and clean energy products, as well as in military weapon systems. The Chinese government has made the development of its rare earth resources a top priority since the 1980s. Government support for the rare earth industry, low labor costs, and lax environmental standards enabled China to become the world's dominant producer of rare earths, estimated to be the source of over 97% of the global supply. China's rare earth policies have raised concerns among many in Congress because rare earths are important to a number of U.S. industries, including high technology (such as advanced electronics and medical equipment) and green technology (such as hybrid cars and wind turbines). In addition, U.S. defense industries rely on rare earths for a variety of weapon systems. Members have also expressed concerns that China's virtual monopoly of rare earths may impact U.S. economic and security interests because it makes many U.S. commercial and defense industries vulnerable to supply shortages and higher prices as a result of future Chinese restrictions that could occur for economic, as well as political, reasons. Several bills have been introduced in Congress to address these concerns, including H.R. It examines the level of U.S. rare earth trade with China, how Chinese policies have affected rare earth prices for U.S. firms, possible motivations behind China's restrictions of rare earth exports, and how the United States and other major users of rare earths have responded, including a WTO dispute settlement case brought by the United States, Japan, and the EU in March 2012 against China over its rare earths restrictions. However, efforts by the Chinese government in 2010 to further tighten its control over the production and export of rare earths appear to have created global shortages of many types of rare earths and sharply raised prices. The petition sought to address a number of China's policies and practices affecting trade and investment in green technologies. A USTR factsheet on the dispute listed hybrid and conventional vehicles, advanced electronics, wind turbines, energy efficient lighting, steel, oil and gas, chemicals, and medical equipment as U.S. industries affected by China's export restrictions. Many analysts speculate that the United States and other major users of rare earths (such as the EU and Japan) were waiting to see how the WTO would rule on the raw materials case before proceeding, noting that many of the export restrictions raised by the United States in the raw materials WTO case (such as export duties and quotas) are similar to those that are imposed by China on raw earths, as well as in regards to the arguments China has made to justify such restrictions (e.g., concerns over pollution and conservation of exhaustible natural resources). The report further states that DOE's strategy for addressing critical materials challenges is based on three pillars, including (1) the development of diversified global rare earth supply chains (including mining, extraction, processing, and manufacturing in the United States and abroad) in order to reduce supply risks that occur from China's position as the dominant producer of rare earth supplies; (2) the development of substitutes, including through government-sponsored research; and (3) recycling, reuse, and more efficient use of rare earths. Implications of the WTO Case on Rare Earths

To many observers, China's rare earth restrictions are representative of a series of government interventionist policies that have been implemented in recent years that attempt to pick winners and losers in the marketplace, often occurring, it is argued, at the expense of the economic interests of other countries. Such critics contend that China's policy to sharply limit rare earth exports is intended to make Chinese domestic firms the dominant producer and supplier of global renewable energy products and/or to induce foreign firms to move production to China and to transfer technology to Chinese firms as the price for a reliable supply of rare earths.
Over the past few years, the Chinese government has implemented a number of policies to tighten its control over the production and export of "rare earths"—a unique group of 17 metal elements on the periodic table that exhibit a range of special properties, such as magnetism, luminescence, and strength. Rare earths are important to a number of high technology industries, including renewable energy and various defense systems.
China's position as the world's dominant producer and supplier of rare earths (97% of total output) and its policies to limit exports have raised concerns among many in Congress, especially given the importance of rare earths to a variety of U.S. commercial industries (e.g., hybrid and conventional autos, oil and gas, energy-efficient lighting, advanced electronics, chemicals, and medical equipment), as well as to U.S. defense industries that produce various weapon systems. Many are concerned that rising rare earth prices could undermine the global competitiveness of many U.S. firms (lowering their production and employment), impede technological innovation, and raise prices for U.S. consumers. Others are concerned that China's virtual monopoly over rare earths could be used as leverage against major rare earth importers, such as the United States, Japan, and the European Union (EU).
To many observers, China's rare earth policies are part of a complex web of Chinese government industrial policies that seek to promote the development of domestic industries deemed essential to economic modernization. In the late 1980s, the United States was the global leader in rare earth production. However, preferential policies by the Chinese government and lax environmental standards there quickly enabled China to become a dominant, low-cost producer of rare earths by the late 1990s. Many analysts contend that China's recent actions to consolidate its rare earth production and restrict exports are intended to promote the development of domestic downstream industries, especially those engaged in high technology and green technology industries, by ensuring their access to adequate and low-cost supplies of rare earths. It is further argued that China's rare earth export policies are intended to induce foreign rare earth users to move their operations to China, and subsequently, to transfer technology to Chinese firms. China denies that its rare earth policies are political, discriminatory, or protectionist, but rather, are intended to address environmental concerns in China and to better manage and conserve limited resources.
On March 13, 2012, the United States, Japan, and the EU jointly initiated a World Trade Organization (WTO) dispute settlement case against China's restrictive policies on rare earths and two other minerals. This case was brought shortly after the United States largely prevailed in a similar WTO case brought against China over its export restrictions on nine raw materials. The Obama Administration has also sought to devise strategies to deal with rare earth shortages, including the development of a diversified global rare earth supply chain, the development of alternative materials, and more efficient use of rare earth, including recycling. A number of bills have been introduced in Congress that seek to address U.S. rare earths shortages. A major issue for Congress raised by the rare earths dispute is whether U.S. trade policy can effectively respond to China's industrial policies that may negatively impact U.S. economic interests, either through the WTO or other means.
This report examines the economic and trade implications of China's rare earth policies for the United States.