China Bullies Japan With Rare Earths

By Michael Auslin

China released its last Japanese hostage Saturday, marking an end to the recent East China Sea conflict, but the diplomatic waters remain choppy. Trade and Industry Minister Akihiro Ohata confirmed Tuesday that China continues to wield a de facto export ban over Japanese industry, marking a new stage in China's aggressive behavior. Tokyo and other liberal capitals have been startled by this turn of events - which means it's long past time for policy makers to plan a better response to this serious threat.

Resource bullying is nothing new. Ancient Roman armies squeezed their opponent's vital supplies. The United States cut off oil and critical resources to Imperial Japan in 1941, resulting in the decision to attack Pearl Harbor and plunging the Pacific into full-fledged war. More recently, Vladimir Putin's Russia halted the flow of oil to Ukraine in 2006 and 2009 to blackmail his smaller neighbor in a financial dispute. The move also had spillover effects, as 19 European countries discovered last year when they couldn't turn on their gas, further amplifying Russia's newfound strength.

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China's squeeze on rare earths is a more subtle means of putting pressure on an advanced society, but it's the same principle. These minerals, which include neodymium, lanthanum and gadolinium, are crucial to the production of advanced industrial products like television screens, hybrid-car batteries, and lasers, as well as military technology. While these materials are found all over the world, they are produced in and shipped overwhelmingly from China because other countries have stopped mining them. Some estimates put China's global share as high as 97%.

Ironically, Japanese companies are particularly vulnerable to rare earth squeezes because of the revolutionary "just in time" supply-chain techniques they pioneered. Although major companies stockpile these crucial materials, restricting their supply nonetheless is an unmistakable threat to Japan's economic survival. While industry isn't yet grinding to a halt, it eventually could—it's not easy to find new sources of rare earth minerals since it will take years to reactivate mines in California and elsewhere.

Japan isn't impotent against these threats. Like China, Japan could have slowed down the customs and inspections process for Chinese imports; it could have frozen Chinese financial holdings until the ban was lifted; it could have cut the billions of dollars in development aid it provides to Beijing. Had Japan taken these actions, China's response would have revealed just how strong the Chinese perceive themselves and the risks they are willing to take in forcing other countries to accept their position.

Yet this isn't the tack Tokyo chose. Instead, Minister Ohata indicated Tuesday that he's preparing to send senior trade ministers to Beijing if the situation persists. This kind of calm and rational approach suggests an admirable maturity in Japanese diplomacy, but it is also a realization of Japan's inability to mount an immediate, formidable response without adverse consequences for its own public. Tokyo also has the option of reverting to the World Trade Organization for assistance, although de facto bans are hard to prosecute.

Being reactive, however, is not a strategy for the long term. Japan, India, and the U.S. should increase their exploration and exploitation of energy resources and rare earth-type minerals if possible, thereby denying leverage to China and Russia. Last week, for example, Japan announced a $1 billion program to begin drilling for undersea methane hydrates that can supply natural gas needs. That's a good start.

Democracies should also establish plans to stockpile critical raw materials to share when necessary and limit the potential damage from interruptions in supplies. Freezing diplomatic ties, restricting financial dealings or rejecting imports are more serious steps, and allies should discuss if, how and when to use them.

Russia, China, Iran and other large authoritarian powers are constantly testing the resolve of liberal nations and undermining norms of international cooperation and behavior. Much of it can be ignored as harmless posturing. But as China showed in the past few weeks, resource bullying is a far more serious danger. Japan and her allies must work now to counter it, or risk being victimized in the future.

Mr. Auslin is director of Japan studies at the American Enterprise Institute and a columnist for WSJ.com. Originally appeared in the Wall Street Journal, published with the author's permission.

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