Supply Chain Lessons from Rare Earth Dispute with China

“Rare Earth Element supply is a supply chain risk management issue, with national security implications…If President Obama and Congress are betting our future on building a green economy, I hope they understand that it’s most critical components are Made in China.”

I wrote those words more than 2.5 years ago in “Our Green Economy is ‘Made in China’,” and after years of rising tensions over this issue, the United States, the European Union, and Japan filed a formal complaint yesterday with the World Trade Organization, accusing China of keeping prices low for its domestic manufacturers and pressuring foreign firms to move their operations to China. Here is an excerpt from President Obama’s statement yesterday:

This morning, we’re taking an additional step forward [in helping American companies that are facing unfair foreign competition]. We’re bringing a new trade case against China – and we’re being joined by Japan and some of our European allies. This case involves something called rare earth materials, which are used by American manufacturers to make high-tech products like advanced batteries that power everything from hybrid cars to cell phones.

We want our companies building those products right here in America. But to do that, American manufacturers need to have access to rare earth materials – which China supplies. Now, if China would simply let the market work on its own, we’d have no objections. But their policies currently are preventing that from happening. And they go against the very rules that China agreed to follow.

Being able to manufacture advanced batteries and hybrid cars in America is too important for us to stand by and do nothing. We’ve got to take control of our energy future, and we can’t let that energy industry take root in some other country because they were allowed to break the rules. So our administration will bring this case against China today, and we will keep working every single day to give American workers and American businesses a fair shot in the global economy.

China argues, as reported in the Reuters article, that the export curbs are necessary “to control environmental problems caused by rare earth mining and to preserve supplies of an exhaustible natural resource.”

The environmental angle is an interesting one. Back in the late 80s, the world’s number one rare-earth mine was Molycorp’s Mountain Pass mine in California, which was shut down in 1998 due to environmental issues (radioactive waste water leaks). Molycorp is in the process of restarting operations at the mine, but as reported in a Wall Street Journaarticle this week, the company plans to ship minerals from the California mine to a processing plant in China that it will soon own as part of its deal to buy Neo Material Technologies Inc. Why ship the minerals to China? Because, as the WSJ article highlights, “Western nations, including the U.S., remain reluctant to permit often-polluting rare-earth processing. Molycorp itself last year dropped plans to build a rare-earth magnet plant in the U.S. in partnership with Hitachi Ltd. of Japan.”

(Interestingly, a similar situation is occurring with oil, where the US is increasing its domestic production of crude, yet losing refining capacity by closing plants and not building any new refineries in decades. In effect, we’re trading foreign dependency on crude oil for foreign dependency on gasoline and other refined oil products).

Obviously, if your supply chain is dependent on these rare earth elements, you have a vested interest in how this plays out. But there are lessons here for all supply chain executives to take, regardless of industry.

1. Is there a “rare earth element” equivalent in your supply chain? In other words, is there a raw material or component that would significantly impact your operations if supply was disrupted? Do you need to diversify your supply base, or where your materials are sourced from or your final products produced?

2. Keep an eye on trade disputes, which may result in increased duties and taxes. Last month, President Obama signed an executive order creating the Interagency Trade Enforcement Center to “bring the full resources of the federal government to bear to investigate and counter unfair trade practices around the world.” And China is not the only target. Last week, for example, the US filed a dispute against India “concerning [India’s] import restrictions on agricultural products from the United States.” The typical response is for targeted countries to file disputes of their own, increasing the likelihood of a trade war.

3. Environmental policies and practices affect supply chains, both directly and indirectly. There is much talk about bringing manufacturing back to the US, but if nobody wants some of these operations “in their backyard” and it takes years of environmental studies to break ground, then what options do companies really have? And if doing right by the environment means incurring higher costs, or limiting the use of natural resources, or not conducting business in certain countries, or even not making certain products any more, are we as consumers willing to accept the consequences? What if China’s argument for limiting the supply for rare earth elements is an inconvenient truth?