China Reducing Rare Earth Exports to US?

US-China trade tensions have intensified in recent days. At the end of last week, the US began an investigation into whether China is violating international trade rules by subsidizing its clean energy industries. This also involved whether its rare earth export quotas since 2005, with already high export taxes, are illegal.

The NY Times reports that in response, not only has Chinese officials taken to the media to criticize the US stance, but more important, appear to have blocked shipments of rare earth elements to the US and Europe. Although reports suggest there have been some delays in recent weeks, developments this week are more ominous. Industry officials quoted in the NYT report characterized it as a widening of the embargo first aimed at Japan.

In July China said it was cutting this year's rare earth export quotas by 72%. Officials have hinted that there would be a further reduction in quotas in 2011. Current talk puts next year's quota reduction in the neighborhood of 30%.

From recent industry conferences, it is clear the Chinese officials think that quotas are both defensible and necessary. Quotas have been declining for several years, but this year appears to be the first time where a shortage was created outside of China.

It is not clear whether the rare earths issue is industry specific or whether it is part of a intensifying trade spat. While yesterday's unexpected PBOC rate hike and the CNY performance are the key talking points, this issue is worth monitoring.

Turning to the currency, briefly, there is talk in the market that the US is seeking quantitative targets for the CNY. The talk suggests that Geithner is seeking a 3% CNY appreciation before the G20 meeting on Nov 11 and another 3% by President Hu's planned visit to the US in mid-Jan.