We are going through an unprecedented period: from exchange rate wars to raw material wars!

China's blocking the export of rare earth minerals to Japan in order to exert political pressure became the top agenda item of today. Do you monitor the rare earth minerals debates? I found it quite interesting.

Let me begin with the background of the issue. In late September, Japan caught a Chinese fishing trawler claimed to be poaching. The control of the waters was disputed, just in the case of the disputes between Turkey and Greece on the Aegean Sea. So, Japan detained the captain and China claimed his release. In the meanwhile, China blocked the exports of rare earth minerals to Japan in order to exert political pressure on the latter. This was how the issue became public.

Rare materials, though not rare in terms of their reserves, are hard to extract. Therefore, China carries out the 97 percent of total rare earth materials production of the world since 1990s. Although the country has 57 percent of the world reserves, it uses the advantage of cheap labor force. Since 2009, Chinese public corporations seek to buy Australia and US based firms, which have a mining license but suffer from China's competition. That China does not act with pure good faith is told along with 'spinning of fate' stories. In the meanwhile, China buys research labs on rare mineral chemistry and transfers them into the country. Chinese go too far. They go too far in implementing a successful industrial policy.

So, what are these mentioned minerals and what are they used for? I learned recently that there are seventeen rate earth minerals among which are Lanthanum, Europium and Yttrium. I did not enjoy Chemistry when I was in high school. But I learn that these minerals are used in many applications from catalytic converters to batteries for electricity vehicles; medical devices to the high-tech devices used in defense systems. In the annual meeting of Communist Party of China, neither political nor economic reforms were on the agenda. The only decision announced after the meeting was that China will start to concentrate on high-tech production. The announcement that export quotas will be reduced by 30 percent also disturbed everyone.

Then, why are there disturbing for the rest of the world? This is for a couple of reasons: first, if we are talking about rare earth elements, we should expect hike in prices in the coming period. Second, it is a strategic element. For instance, it is used in missile mechanisms. Third I think we are not accustomed to countries but US to exert its economic power in this realm. At least the US is clearly not accustomed to this. China's action is sort of an economic sanction, is not it? Does not it resemble the economic sanctions imposed against Iran and proved efficient? Fourth, it is the free market in itself underlying China's monopoly. Fifth, we are going through a period where new barriers to free movement of capital are probable.  Of course this will imply new state subsidies to boost production. Sixth, every illness has a cure. For instance, did you know that rare earth minerals are abundant at the Moon? We can witness soon that the production is shifted to the moon and the first extraterrestrial colony formed of Chinese workers are shipped there. It is possible. Is not it?

Let us finish with a lesson concerning Turkey: Hike in raw material prices imply a larger current account deficit.

We are going through an unprecedented period: from exchange rate wars to raw material wars!

This commentary was published in Radikal daily on 23.10.2010