China Proposes Rules to Regulate Rare Earth Production

Huan Zhu -

On January 15, China’s Ministry of Industry and Information Technology (MIIT) issued the Draft Rare Earth Management Provisions (公开征求对《稀土管理条例（征求意见稿）》的意见) and solicited public comments, which are due by February 15. This draft comes after Chinese President Xi Jinping visited a rare earth factory in May of 2019, sparking concerns in the West about China possibly “weaponizing” the rare earth supply and destabilizing the global market.

Rationale for a New Rare Earth Management Law

“Rare earth elements” refers to 17 elements that are crucial for a number of industries, including electronics. These elements are only found in a few places around the world, and China has been a major producer and exporter of the rare earth.

China’s draft Provisions on rare earth management may be a response to tensions with the United States. The language of the Provisions implies that they seek to manage the whole production chain, because the draft obliges companies to follow the new Export Control Law and other export and import regulations in relation to rare earth. Some view this as retaliation for U.S. recent export restrictions. Because rare earth materials are critical elements for batteries and electronics, a shortage in their supply may impair U.S. production of semiconductors and electronic vehicles.

The draft could also be an attempt by the Chinese government to better manage the industry and promote high quality development. An explanatory document issued along with the draft points out that illegal mining, production and sales of rare earth disrupts the market and destroys China’s ecological environment. The proposed regulation is designed to improve the administrative supervision of rare earth mining and production and to ensure a healthy development of the rare earth industry, which will ultimately protect the environment and preserve this non-renewable resource, according to the explanatory document.

This is not the first time the Chinese government has tried to manage rare earth production. Beginning in 2007, the Chinese government started using directory plans for rare earth production. These plans are usually issued by the MIIT on an annual basis, and create a cap for rare earth mining and production for that year. Such practice is formalized in the Interim Measures for the Directory Production Plan Management (稀土指令性生产计划管理暂行办法)  issued in 2012. The Interim Measures focuses on the production planning and allocating process. In comparison, the new draft Provisions focuses more on managing the production chain than the planning process. While both regulations have some overlap, it is unclear whether the draft, once finalized, will replace the Interim Measures.

The Draft Provisions

The draft Provisions have 29 articles, covering administrative authority, approval and quota system for rare earth mining, smelting, and smelting separation, as well as recycling and tracking of rare earth products. Specific terms of the Provisions are discussed below.

The quota system

The draft creates a quota setting process. Compared to the Interim Measures, which set out rules on the establishment and supervision of the production plan for rare earth mainly by the MIIT, the current draft further entails the procedure of formulating the general quota. Rather than being set and monitored solely by the MIIT, the new draft makes it an inter-agency effort. Under the draft, government agencies in charge of industry and information technology, reform and development, and natural resources (likely the MIIT, National Reform and Development Commission, and Ministry of Natural Resources), shall draft a general quota for rare earth mining, smelting, and separation (Article 8). While drafting the quota, agencies shall consider elements including regional economic policy, industrial capacity, and the quota implementation in the previous year (Article 9). The quota shall be published after the approval of the State Council. Measures can be taken to restrict or suspend rare earth mining, smelting, and separation if necessary to protect natural resources and the ecological environment (Article 8).

It is worth noting that the draft sets out rules on forming the general quota, without touching upon how the quota will be allocated.

The draft also states that companies shall conduct rare earth mining and refining in accordance with the quota plan, or conduct refining using imported rare earth (Article 10). Companies shall publish a list of rare earth mines and refineries every year.

Approval system

The draft uses a different approach to govern rare earth manufacturers and miners as compared to the Interim Measures. The Interim Measures establishes eligibility for entities that can apply for quota, and prohibits any rare earth mining and manufacturing without a quota. The draft does not require application of a quota, but requires rare earth mining, smelting, and separation projects to obtain an approval first (Article 7). The draft prohibits any individuals or entities from purchasing or selling rare earth products that are exploited or refined without a license (Article 11). 

The draft also sets forth rules on rare earth reserves (Article 16). Rare earth elements that go into state reserves shall be part of the quota for that year, and cannot be used without approval. The language indicates that the draft focuses on increasing the state reserves rather than releasing the inventory.

Supply chain management 

The draft also establishes new rules on supply chain management of rare earth (Article 14). In this regard, it requires the Ministry of Industry and Information Technology, Ministry of Natural Resources, Customs, and other agencies to establish a tracking system for rare earth products. Rare earth mining and refining companies shall keep records of production and sales data, as well as package and invoice information, and save all the information in the tracking system. The packager of rare earth products shall meet the national standard and identify its producing companies.

In addition, the draft sets forth a random inspection procedure (Article 17) and has a provision to encourage the recycling of rare earth products (Article 12).

Punishment

Any violations of the provisions mentioned above will be subject to penalties (Article 18-27). Compared to the Interim Measures, which provides mainly for warnings and suspension of business, the draft imposes tougher punishment. Punishments under the draft range from suspending/closing business, confiscating illegal products and illegal income, and fines as high as 5 times of the illegal income or 1 million yuan if there is no illegal income. 

Impact on the global market

China is the world’s largest rare earth supplier, accounting for 85% of global production. A large portion of China’s production goes overseas. However, China’s rare earth production and exports have been declining in recent years. It has been estimated that Chinese rare earth production will decline to less than 50% of world output by 2025.

The draft Provisions, once finalized, may further limit production and therefore boost the price of rare earth products in the short term. However, because the draft Provisions do not set a quota directly, the impact will depend on the actual quota announced by the agencies later and on the implementation of the rules. Over the past decade, China’s quotas for rare earth production have been shrinking. If the new quotas do not deviate much from the current trend, the risks of disrupting the global rare earth market will be limited. 

In the meantime, the United States has been stepping up efforts to develop rare earth projects domestically. In recent years, the Trump administration issued some executive orders to boost rare earth domestic production. New legislation has been introduced in Congress to help revive U.S. rare earth mining. U.S. allies such as the EU and Australia are also making efforts to reduce reliance on Chinese rare earth imports. If countries are successful at finding alternative sources, the impact of the new Chinese Provisions on the global market may be limited. 

Violation of the WTO?

There is a history of trade disputes related to Chinese rare earth regulation. On its face, a production quota would not violate trade rules, but if China implements the new Provisions in such a way that it acts as a de facto export restriction, it could be a violation of the same provisions China’s previous measures were found to violate. In 2012, the European Union, Japan, and the United States brought a WTO complaint against China’s rare earth export duties, quotas, and other restrictions. After a ruling in 2014 that China violated its obligations under the Accession Protocol, Working Party Report, and Article XI of GATT, China removed its export duties and quotas, as well as other export restrictions.

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