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Are there hidden costs to over-dependence on China? Japan just found out.

America and other countries rely on China's cheap exports of raw materials and finished goods. China just choked off Japan's access to raw materials. What will it do next?

By Matthew E. KahnGuest blogger / September 27, 2010

Japan's Prime Minister Naoto Kan speaks during a Sept. 24 press conference in New York. China and Japan are important neighbors with key responsibilities and must cooperate with one another, Kan told reporters.

Brendan McDermid / Reuters

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The world relies on China to produce cheap exports. While economists celebrate comparative advantage because it makes us richer and able to afford to purchase a broader set of items we want, can we be overly reliant on a trade partner? Japan is learning that the answer is "yes". In a diplomacy spat with Japan, China appears to have suspended its export trade in rare metals to Japan.

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So what? "China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths ..
Japan has been the main buyer of Chinese rare earths for many years, using them for a wide range of industrial purposes, like making glass for solar panels.

They are also used in small steering control motors in conventional gasoline-powered cars as well as in motors that help propel hybrid cars like the Toyota Prius.
American companies now rely mostly on Japan for magnets and other components using rare earth elements, as the United States’ manufacturing capacity in the industry became uncompetitive and mostly closed over the last two decades. " (source Bradsher's NY Times Piece cited here

This is an interesting case. Japan has learned that it made a strategic mistake by not diversifying its supply chains. Today, China seems to be almost a monopolist here. Knowing that China plays tough and uses is trade leverage to achieve its political goals (such as claiming disputed Asian islands near China) --- China knows that it can use the threat of cutting off exports to get what it wants.

An economist would ask; "why didn't Japan anticipate this?" There are some good game theorists in Japan. A threat isn't credible or effective if Japan has alternative trading partners or if it can "grow its own stash".

Now, I realize that this is easier said than done but I can't believe that the geology is such that these minerals are only found in China. If this is the case, then the nerds need to get back to work to figure out what other substances could substitute for them in the products in question.

The NY Times piece suggests that rich nations such as USA and Japan need to do more mining to have their own stash. Would environmentalists support this?

We want it both ways. Low pollution here (no mining and mountain top removal) and no political hassles there (no threats by major export partners to cut off the flow of goods).

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