The current irritant in Sino-Japanese relations is Beijing's alleged embargo on exports of rare earth oxides.

However, Japan's accusation appears to be little more than a cynical repackaging for political gain of its unsuccessful year-long campaign to persuade China to loosen its publicly announced quotas on rare earth exports.

This incident represents another effort by Seiji Maehara, Japan's neo-conservative foreign minister, to reposition China as freedom's existential antagonist in Asia - and Japan as America's indispensable ally.

Maehara's attempts to drag Washington into the disputes on Japan's side may not be especially appreciated by the Barack Obama administration, which now sees itself returning to Asia on the coattails of Japanese adventurism.

A distinctly under-reported or misreported aspect of the dispute over the Diaoyutai/Senkaku islands on East China Sea between China and Japan in September was the fact that the Obama administration had passed a message to the Japanese government immediately prior to the conflict that it was not interested in openly backing Japan in disputes over the islands.

As Japan Times reported in August:

[The Obama administration has decided not to state explicitly that the Senkaku Islands, which are under Japan's control but claimed by China, are subject to the Japan-US security treaty, in a shift from the position of George W Bush, sources said Monday.

The administration of Barack Obama has already notified Japan of the change in policy, but Tokyo may have to take counter-measures in light of China's increasing activities in the East China Sea, according to the sources. [1]]

These ''counter-measures'' apparently included Maehara's deliberate decision to escalate the matter of the collision between the Chinese fishing boat and two Japanese coast guard vessels on September 7.

Even before Maehara became foreign minister, he employed his position as minister of land, infrastructure, transport and tourism - which has jurisdiction over the Coast Guard - to insist, over the hesitation of the cabinet, that the Chinese captain be arrested and tried in a Japanese court.

When Maehara visited the United States in October as foreign minister to rally support for his confrontational stance, the Obama administration pointedly declined to issue an unambiguous statement backing Japan over the Diaoyutai/Senkaku islands issue.

Fortunately for Maehara, US unwillingness to publicly rebuff its ally was spun into claims by the Japanese and US media that America had affirmed that the Senkakus were covered by the US-Japan Security Treaty. [2]

Maehara's run of good luck, at least in certain quadrants of the world media, has continued with sloppy and sensational international reporting of the Japanese government's most recent allegation: that China is embargoing rare earth exports to Japan.

Here's how the issue shook out in the Japanese media in late September:

[Economy, Trade and Industry Minister Akihiro Ohata said Friday he has heard from some trading firms that Chinese exports of rare earths to Japan, or related procedures, have been halted, and that the ministry is confirming the situation.

While noting that the Chinese Commerce Ministry has denied setting such an embargo, Ohata speculated that the possible export problem may be linked to a widening row with China stemming from a ship collision incident in the disputed East China Sea.

In a hearing by the trade ministry a day earlier, one trade company said its Chinese partner told the company that ''its (rare earths) exports were halted.'' Another trade firm said it heard from a Chinese exporter that ''new applications are not allowed,'' according to Ohata. [3]]

It was a case of anecdotal evidence countered by an explicit Chinese denial that only acquired sufficient legs through the speculation of a Japanese government official.

The story of Chinese economic perfidy was, however, too good to pass up. An article by Keith Bradsher in the New York Times on September 22 took the story global:

[Industry officials said that mainland China's customs agency had notified companies that they were not allowed to ship to Japan any rare earth oxides, rare earth salts or pure rare earth metals, although these shipments are still allowed to go to Hong Kong, Singapore and other destinations. But no ban has been imposed on the export to Japan of semi-processed alloys that combine rare earths with other materials, the officials said. China has been trying to expand its alloy industry so as to create higher-paying jobs in mining areas, instead of exporting raw materials for initial processing. [4] ]

It should be noted in passing that the reported ban was on rare earth oxides, not semi-processed rare earth materials, an indication that selective industrial policy, not diplomatic consideration, was probably at work.

Bradsher doubled down with an October 19 article asserting that China had extended an unofficial embargo on rare earth exports to the EU and the United States. The sourcing:

[''The embargo is expanding,'' beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities. ]

But there is a fourth official:

[A few shipments are still being allowed out of the country for reasons that remain unclear: a fourth rare earth industry official said on Wednesday that one of the 32 authorized rare earth exporters in China had been allowed to export one container of rare earths to the West on Tuesday and hoped to be allowed to ship another on Thursday. [5] ]

Thin sourcing, but enough for a Paul Krugman column, indignant statements by the German government, threats of a World Trade Organization (WTO) investigation, a promise to make rare earth an issue at last weekend's Group of 20 meeting in Seoul, and a call for the US government to make availability of rare earths for military applications a national priority.

As to the facts of the case, as the headline in Business Week put it: EU Can't Confirm China Is Blocking Rare-Earth Exports. [6]

The business press, as opposed to their cousins on the foreign relations side of the street, have done a much better job of providing context for the rare earth furor. Bloomberg reported on October 21:

[Rare-Earth Furor Overlooks China's 2006 Industrial Policy Signal

Japan said China halted shipments of rare earths last month after a collision in disputed waters between a Chinese trawler and the Japanese Coast Guard led to the fishing-boat captain's detention. Chief Cabinet Secretary Yoshito Sengoku said Oct. 20 that the import situation ''hadn't changed'' weeks after the captain's release.

Nobel Prize-winning economist Paul Krugman wrote in the New York Times on Oct. 18 that ''the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.''

China started to rein in mining of rare earths in May 2009, setting production quotas to help bolster prices. The caps and subsequent export restrictions did just that. Cerium oxide, used for polishing semiconductors, soared sevenfold in the past six months and other elements have more than doubled ...[7] ]

The real story appears to be that China has been successful in rationalizing its rare earth industry and pushing up global prices in the past six months.

In the early years of the 20th century, China mastered the rather tricky technology of processing rare earths into usable oxides and the industry exploded in an unorganized, unregulated Wild West fashion.

Export - and hard currency - was the goal for many of the small companies that got into the business. China fought a price war with itself, prices collapsed, and big Western producers pulled out of the market.

The perception that China is a rare-earth cartel, maliciously hoarding a scarce raw material just to bring the vulnerable high-tech and defense industries of its rivals to their knees, is misleading.

China is itself the world's leading consumer of rare earths, accounting for over half of world consumption. China itself has long pointed out the imbalance in rare earth trade.

China holds less than half of global reserves but, as prices cratered, it has conducted as much as 97% of the cross-border business. [8]

It wants to raise prices; it expects that mines in the United States and Australia will go into production as a result; and it hopes that, as its domestic consumption (and profits through value-added processing) grow, foreign customers will turn to other countries to meet their need for less profitable rare earth oxides.

With the improvement in prices, US and Australian mines are slated to bring as much as 40,000 metric tons of material to the market by 2012 - equivalent to China's total exports in 2009.

So, policymakers and legislators can relax. The invisible hand will take care of the supply issue. Derek Scissors of the Heritage Institute, usually no friend of the People's Republic of China, was quoted in the Wall Street Journal as writing:

[There are legitimate concerns over Chinese dominance in rare earth minerals but the near-frenzied nature of some of some assessments is unjustified ... The long-term problems stemming from Chinese control will be resolved by the market; only the short-term problems are potentially threatening, and those remain vague ... In the long-term development of rare-earth products, the next few years will just be a blip. [9] ]

For an insider's look at the China's role in the rare earth markets, one need look no further than Ross Bhappu, chairman of the American rare earth play, Molycorp. Molycorp's Mountain Pass mine in California was the world's leading producer of rare earths until 2002, when runaway Chinese exports and the need for costly environmental upgrades shuttered the mine. On October 18, Forbes reported:

[For his part, Bhappu does not believe the Chinese want to politicize rare earth minerals. In fact, earlier this year he helped host a Chinese delegation at Molycorp's Mountain Pass mine. ''It has been surprising, the Chinese are extremely supportive of us starting this mine, they have told us they don't want to be the world's sole supplier,'' says Bhappu. ''They are concerned they are going to consume everything they produce internally and they won't have excess production to export." [10] ]

The key factor in the rare earth ruckus is indicated in Bhappu's statement, ''They are concerned they are going to consume everything they produce internally and they won't have excess production to export.''

Japan produces no rare earths but consumes a considerable amount in its electronic and automotive industries. Virtually all of Japan's rare earth imports come from China. Japan's anxiety over China's rare earth industrial policy - and Beijing's published policy to limit exports - is a matter of public record that well predates the Diaoyutai/Senkaku dustup.

In 2009, as Chinese quota reductions were beginning to bite, the Wall Street Journal reported:

[The Japanese government is working on a "growth blueprint" that would exploit the prolonged weakness of the US dollar and mount a state-backed resource grab for rare technology metals around the world.

Tokyo is understood to have placed a high economic priority on securing global rare earth rights for Japanese companies because of the looming prospect of a resource war with China.

As China has hardened its stance on exports, Japan has begun a frantic search for supplies elsewhere. The government's new plan will allow the Japan Oil, Gas and Metals National Corporation (Jogmec) to funnel capital towards Japanese companies wanting to pounce on rare metal mines in South America and Africa. [11] ]

A report by Agence-France Presse in August 2010, just before the trawler incident, makes it clear that Japan's rare earth concerns were an ongoing problem relating to China's announced quotas, and not the result of a sudden, Diaoyutai/Senkaku-inspired embargo:

[Japan is urging China to expand, not restrict, its exports of rare earth minerals essential for the production of many electronics and hybrid cars, officials said Friday.

China, which accounts for 97 percent of global rare earths production, has announced it will cut its export ceiling to 8,000 tonnes in the second half of this year, about 70 percent down from the same period last year. [12] ]

The Chinese feeling is that the current policy is a necessary reaction to foreign exploitation of China's disorganized and mismanaged rare earth policy of a decade ago. When prices crashed, Japanese companies swooped in to take advantage of this once-in-a-lifetime opportunity and began amassing rare earth stockpiles at bargain-basement prices.

China's father of rare earth science, Xu Guangxian, alleges that Japanese industry has already stockpiled sufficient rare earth inventories to tide them over for the next 20 years. [13]

Coincidentally, China's domestic reserves of rare earths may not even last 20 years at the current rate of depletion, which has injected an atmosphere of urgency into the Chinese government's efforts to conserve and profitably exploit this non-renewable resource through export controls, price controls and industrial policy.

Even if Xu's estimates are on the high side, it is unlikely that Japan faces a pressing rare earth problem except at the hands of Japanese middlemen keeping the product off the market in anticipation of even higher prices thanks to the manufactured crisis.

Furthermore, in addition to licensed exports, perhaps 25% of the rare earth oxides that found their way to Japan over the past decade were allegedly smuggled, presumably through trading companies willing to falsify export declarations (for instance by misidentifying rare earth oxides as other mineral products).

This provides some necessary context to the New York Times report.

Efforts by Chinese customs to crack down on genuine fraud - either as a response to commands from China's Foreign Ministry or simply as part of an ongoing effort to cut down on rare earth-related smuggling at the behest of the Chinese Ministry of Commerce - might be enough to put a crimp in Japan's rare earth import program, which is already laboring under lowered quota limits.

In fact, it might be speculated that as Japanese importers responded to reduced quotas by redoubling their purchases of smuggled products, Chinese exporters were happy to oblige them, and the customs service was dispatched to suppress the burgeoning trade in illicit rare earth exports.

It appears that China, per its announced policy of the last three years, is rationalizing its rare earth industry and fighting illicit trade in a piece of industrial policy apparently within WTO guidelines.

This is a more compelling reading of the record than to assume that China is willing to endure a firestorm of unfavorable publicity around the world in order to a) impose an embargo on a material which the target country already has stockpiled and b) keep the embargo secret from the same government it is trying to punish while c) creating an environment in which foreign processors will pour into the market with the support of producing and consuming governments within two years to break the Chinese monopoly.

If this is the case, it would appear rather dubious and provocative for the Japanese government to intentionally foment friction with China by misrepresenting Japan's ongoing rare earth anxieties as the result of a Chinese sneak attack over the Diaoyutai/Senkaku islands.

However, Foreign Minister Maehara is no stranger to dubious and provocative activities. Maehara at one time served as the president of the Democratic Party of Japan (DPJ).

However, in 2006 he incautiously accused a leading Liberal Democratic Party (LDP) politician of corruption based on an e-mail that turned out to be forged, and compounded the problem by continuing with his attacks for a week even after he was privately aware that the e-mail was fake. [14]

Maehara was forced to resign the presidency and surrender the opportunity to lead the DPJ to its electoral triumph in 2009. Since then, Maehara and his patron, Katsuya Okada, have been eager participants in non-stop battle against rivals in the DPJ, a circus of serial conniving that has earned the beleaguered party the reputation as being as faction-ridden as the LDP but considerably more inept in the handling of its official and political business.

Maehara's political platform relies on repurposing the DPJ away from its socialist and pacifist roots to a supporter of revision of the Japanese constitution to allow military operations and arms sales overseas.

He is an eager and consistent proponent of a closer US-Japanese alliance, sides with the US on the hot-button issue of relocating the Futenma Naval Air Station on Okinawa, and is presumably more welcome in Washington than DPJ moderates.

Maehara is also widely known to be a ''China hawk'', which makes his position as the face of the Naoto Kan administration's foreign policy rather problematic.

He is part of a cross-party grouping of younger politicians who are impatient with the post World War II narrative of war guilt and the limits of Japan's ''peace constitution''. They support Japan's re-emergence as a military power, and concentrate on treating China as the dangerous economic and military competitor they believe it to be.

Maehara has done little to disguise his hostility - in a recent exchange in the Japanese parliament he contemptuously referred to the Chinese response on the Diaoyutai/Senkaku Islands as ''hysterical'' - and the Chinese government has taken note.

The Chinese Foreign Ministry took the rare step of calling out Maehara by name, a not-too-veiled indication to Japanese politicians and businesspeople that they consider Maehara the root of China's problems with Japan - and a hint that his removal from the foreign minister slot would go a long way toward regularizing Sino-Japanese relations.

On October 25, Asahi reported:

[A view spread among Chinese officials [after the Diaoyutai/Senkaku incident] that "Maehara started attacks on China."

When Maehara took office as foreign minister later that month, Chinese media warned that "a hard-liner became a foreign minister."

Senior Chinese officials seldom criticize Japanese counterparts by name in public.

Hu Zhengyue's remarks about Maehara on Thursday could mean, in the view of the Chinese, that only Maehara as an individual is making matters worse, not the entire government. [15] ]

Asahi also reported on possible divisions inside the DPJ that China will probably find comforting:

["[Maehara's comments are] dangerous. Kan is troubled by Maehara's running wild," a source close to the prime minister said. ]

On the other hand, Maehara has acquired considerable public popularity - and, one would assume, a certain immunity to the wrath of Kan - through his China bashing.

Perhaps as the hapless DPJ flails its way toward its next electoral disaster, it may also find Maehara's vigorous China policy a political lifeline.

In any case, the political benefits of confrontation with China are probably too irresistible for Maehara to ignore.

The next occasion for Sino-Japanese friction has already manifested itself with a familiar flourish of self-righteous innuendo: Japanese allegations of illicit Chinese drilling in the Chunxiao/Shirakaba undersea oil and gas field.

Considering the Japanese government's penchant for stirring up trouble with China, it is somewhat ironic that the evidence of the alleged misdeeds is ''turbid waters''. As reported by Kyodo News on October 23:

[The government is considering sending an advanced seismic survey ship to areas near an East China Sea gas field over which both Japan and China have claimed exploration rights to verify the suspected start of drilling by Beijing at the site, government sources said Friday.

In mid-September, the government confirmed that China has transported what appears to be drilling equipment to its offshore facility in the gas field, but Beijing has denied drilling in response to Tokyo's repeated inquiries through diplomatic channels.

Nonetheless, the government believes it ''highly likely'' that China has started drilling there given turbid water in the surrounding sea areas, according to a senior official of the Agency for Natural Resources and Energy, the owner of the research vessel. [16] ]

It remains to be seen if the third ride on the anti-Chinese merry-go-round is as productive for Japan's Foreign Ministry as the first two.

Notes
1. US fudges Senkaku security pact status, Japan Times, Aug 17, 2010.
2. Japan poured oil on troubled waters, Asia Times Online, Oct 2, 2010.
3. Some trading firms say rare earth exports to Japan halted, Japan Today, Spe 24, 2010.
4. China Said to Widen Its Embargo of Minerals, NYTimes, Oct 19, 2010.
5. China Said to Widen Its Embargo of Minerals, NYTimes, Oct 19, 2010.
6. EU Can't Confirm China Is Blocking Rare-Earth Exports,Bloomberg,Oct20 7. Rare-Earth Furor Overlooks China's 2006 Industrial Policy Signal, Bloomberg, Oct 22, 2010.
8. Outline on the development and Policies of China Rare Earth industry, Reitausa.org, Oct 7, 2010.
9. A Call for Calm on Rare Earths, Wall Street Journal, Oct 7, 2010.
10. The Money Man Behind America's Rare Earth Minerals, Forbes, Oct 18
11. Japan moves on rare earth metals, Wall Street Journal, Dec 10, 2010.
12. Japan urges China to boost rare earth exports, Google.com, Aug 19
13. China's Rare Earth Elements Industry, Institute for the Analysis of Global Security (IAGS), Mar 2010.
14. Maehara quits the helm at DPJ, Japan Times, Apr 1, 2006.
15. Maehara remarks stir China's angst, Asahi, Oct 25, 2010.
16. Japan eyes sending seismic ship to verify China's drilling in gas field, Japan Today, Oct 23, 2010.

Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.

http://www.atimes.com/atimes/China/LJ29Ad03.html