Baotou, Inner Mongolia. Photo by Fanghong
GOADED by the domestic news media, many people in China are pressing their government to place economic restrictions on Japan to teach them a lesson. They are specifically asking the government to limit the export of rare earth minerals, as it did after the September 2010 incident. Those restrictions exposed the fecklessness of Kan Naoto and his Cabinet and caused it to back down.
If that were to happen again, however, the ones who might be taught a lesson would be the Chinese. The incident two years ago made Japanese companies aware of China risk, and they immediately took steps to protect themselves from similar measures in the future. In the aggregate, Japanese industry has responded in several ways. Some companies have stopped using the minerals, while others began large programs to recycle them or make arrangements to purchase the minerals from other countries. The Japanese have also discovered resources on their own.
Reports the Epoch Times:
After a boat collision incident in September 2010 in the disputed Senkaku Islands, China stopped exporting rare earths to Japan for two months. Japan says that was the first time China imposed an economic sanction upon it since the installation of Sino-Japanese diplomacy.
Soon after, Japan altered its policies and began to seek new sources for rare earths in order to decrease dependency on China. In 2011, Japan imported 15,400 tons of rare earths from China, a 34 percent decrease from 2010.
According to the Nikon Keizai Shimbun, Japan imported 49.3 percent of its rare earths—a total of 3,007 tons—from China the first half of this year; this is the first time that imports from China have fallen below 50 percent of Japan’s rare earths import since 2000.
China Securities Journal reported on Sept. 27 that most of Japan’s new sources provide light rare earths such as cerium and neodymium, satisfying 60 to 80 percent of Japan’s demands for those materials. However, Japan is still dependent on China for 90 percent of its heavy rare earths.
The China Securities Journal report says that Japanese industries like Toyota have been developing mines in Canada with local industries, and are expecting to provide heavy rare earths, including dysprosium, to Japan by 2015.
Last year’s 34% decline in imports continues to worsen this year, as they were down 43% in the first half. The general export framework is 30,966 tons, and it’s possible that target won’t be reached. Further, prices are plummeting due to overproduction and higher inventories. The mining companies are already hurting, and they would be further hurt by new restrictions.
Then again, the Chinese government might have painted itself into a corner. Japan, the EU, and the U.S. complained to the WTO about the Chinese actions in 2010, and the WTO began a study this August. Later that month, Premier Wen Jiabao said at a forum with visiting German Chancellor Angela Merkel: “China does not intend to curb exports of rare earths.”
Journalist Miyazaki Masahiro wrote the following column that further outlines the views of some in Japan.
China’s economic sanctions on Japan will be tantamount to a declaration of economic war. The first battle in the bilateral dispute over the Senkakus will take place over rare earths.
They are an indispensable material in advanced engines and cell phones. China’s restriction on rare earth exports succeeded in convincing two Japanese companies to move their processing plants to China, one of which was Showa Denko. But Japan looked elsewhere for sources of supply, including the U.S., Kazakhstan, Malaysia, and Australia.
Companies took measures to disperse risk, a core part of security, albeit belatedly. As a result, China lost an important customer that bought the minerals at good prices. This is causing concern in Baotou, a city in the Inner Mongolia autonomous region.
China instituted some economic sanctions in concomitance with the September anti-Japan riots. They’ve purposely dragged their heels on customs inspections, delayed the import of automobile parts, and used other methods to hinder manufacturing by Japanese companies. Production at the Toyota Lexus plant came to a standstill. If materials do not reach Sumitomo Chemical and other plants, operation will stop there, too.
The Chinese newspapers are calling for the government to institute the measures that leverage the following.
* Japan’s reliance on Chinese markets in bilateral trade is 30%.
* The reliance is 49.3% for rare earths.
* A free trade agreement between China and South Korea will result in tariffs disadvantageous to Japan.
* The number of Chinese tourists will decline to Japan.
* China has 18 trillion in Japanese bonds, making the country Japan’s largest foreign investor.
…First, Japanese exports to China facilitate the operation of the Chinese manufacturing industry, and include machinery, robots, and raw materials. If Japan stops exporting construction equipment and cranes, the impact will be on China. If companies such as Juki stop exporting sewing machines, it will have a negative effect on companies in the apparel industry, throwing many people out of work. (A lot of equipment is already old and needs to be replaced.)
Second, Chinese rare earth exporters are already complaining. Inner Mongolia’s industrial structure is weak and depends on rare earths and coal. If Japan stops buying, they’ll have to start dumping or find new buyers.
Third, even if China and South Korea sign an FTA, Japan will shift its manufacturing to its Korean plants and ship products to China as being Korean made. The impact will be slight.
Fourth, Chinese tourists have a bad reputation in Japan, and the tours are discounted, so the operators don’t make a profit. The lodging industry is unhappy about the theft of equipment and materials by tourists and would rather they not come. Most of the hotels with large losses from group cancellations are Chinese-operated. A large segment of the Japanese tourist industry is glad there are fewer Chinese tours.
Fifth, China buys Japanese bonds because of their value as a financial instrument. A China selloff in the market wouldn’t result in making them less popular as an investment.
Here are some of the changes that have occurred since last month:
* Adidas closed its factories in China.
* Toyota halved its Chinese production and there was a sharp decline in sales of Japanese cars. Nissan has also reduced production and operations.
* Japan has found other sources for rare earth minerals.
* The Philippines is ready to welcome any company leaving China.
* Yamada Denki (consumer electronics) will cut back on the stores they open in China, and convenience stores are doing the same.
* Upscale French hotels are turning away Chinese customers.
* The Chinese travel industry is upset at the large falloff in tours from Japan.
There are 14,600 Japan companies with a presence in China, but the growth trend will now come to a stop. Toyota, Nissan, and Honda have cut production, which means their plant operations will also be scaled down. That will result in large layoffs. Japanese parts companies and other subcontractors will think about leaving. Combined with the large number of strikes throughout the country, that will result in the further curtailing of plant operations.
Most Japanese industries are examining a scenario of reduced production, partial withdrawal now, and complete withdrawal in a few years.
The insurance industry will either raise insurance premiums as a result of the riots or stop selling policies altogether.
Notes commentator Seki Hei (Shi Ping):
“The Chinese government has the obligation to maintain law and order and protect the safety of foreign and domestic companies and their employees. But they have in fact completely abandoned their responsibility and allowed illegal acts of destruction and looting. In short, this country has the potential to become a lawless zone.
“Further, the Chinese government has no intention to assume responsibility and compensate the Japanese companies for the damages. They don’t even apologize. Rather, they said that the responsibility is entirely with the Japanese government. This is now a lawless state divorced from international standards.”
I doubt that Japanese companies will be able to establish themselves in this lawless country with peace of mind.
A week after this article appeared, the Philippine government made offers to 15 Japanese companies to relocate. Also Oclaro, a Japanese manufacturer of optical and laser components, announced it will move its operations from China to Malaysia.
But look what all those Japanese companies would miss if they decided to relocate.