By Leslie Hook in Beijing and Mure Dickie in Tokyo

Published: October 20 2010

China has denied that it is violating World Trade Organisation rules in its strongest statement since the US announced an investigation last week into Beijing’s rare earths and green technology policies.

“China will continue controlling measures on exploiting rare earth, its production and exports and these measures are not in conflict with WTO regulations,” the ministry of commerce said on Wednesday. “China will continue to supply the world with rare earths.”

However Japanese officials said exports of rare earths – 17 elements vital to technological products as diverse as wind turbines, car batteries and sophisticated radar systems – have still not returned to normal after they were halted during a diplomatic dispute last month. The New York Times reported on Wednesday that China had halted rare earths shipments to Europe and the US.

China’s exports of rare earths oxides to the US are extremely small as the US has no capacity for rare earths refining but nonetheless the New York Times article about halted shipments is certain to raise the temperature in Washington. A lobbyist in the US capital described a “flurry of activity” as more congressmen try to become involved with the rare earths bills that have been introduced.

Europe, in contrast, imports more rare earths and has more rare earth production facilities than the US. Japan is the world’s largest importer of rare earths.

Japanese officials, meanwhile, said Chinese authorities have blocked shipments of rare earths to Japan, a move they believe is linked to a bitter diplomatic dispute over contested islands in the East China Sea.

Yoshito Sengoku, Japan’s chief cabinet secretary, said on Wednesday there did not appear to have been any relaxation of Chinese curbs in spite of a recent easing of diplomatic tensions. “That is to say that they have been halted,’’ Mr Sengoku said.

Tokyo has considered trying to take action against China at the WTO over the apparent disruption of exports. However, one official familiar with the matter said on Wednesday that any complaint on rare earths shipments to Japan would be unlikely to succeed given the lack of direct evidence of involvement by Chinese authorities.

Instead, Tokyo is focusing on promoting the development of alternative sources of rare earths, while encouraging development of alternative materials. “To depend wholly on China for some materials is quite risky and everyone has come to know that risk,” the Japanese official said.

Chinese officials have expressed anger over the US investigation. Rare earths is the very first policy area covered in the petition from the Steelworkers Union that sparked the US trade representative investigation.

“China uses export quotas, taxes, and licensing procedures to restrict exports of these [rare earth] minerals to users in the US and other countries,” the petition said. “Government officials in China have stated explicitly that the purpose of their export restraints on these minerals is to spur investment in downstream processing of such minerals within China instead of other countries.

Analysts in China said they have not heard of shipments being systematically blocked to Japan and Europe. An article in the China Daily on Tuesday said exports would be cut further next year although this was later denied by the ministry of commerce, which said it was investigating the matter.

At least one rare earth shipment to Europe has been delayed, the Financial Times has learnt but the purchaser believes this was due to “port administration” problems.

“We are told that material will continue to be shipped to Europe,” the industry executive said. “It appears that current delays at dockside result from actions of local customs officials rather than any centralised government policy.”

Yin Jianhua, an analyst at Antaike, a consultancy, said government attention to smuggling might be slowing deliveries. “The government is trying to control smuggling, which is taking place because exporters are trying to get around the quota restrictions”

A common smuggling method is to misrepresent shipments of rare earths as shipments of ferroalloys, Mr Yin said. “Customs officials can’t easily tell the difference.”

Some 20 per cent of Japan’s rare earth imports from China are on the black market, according to a recent policy paper by John Seaman from the Institut Français de Relations Internationales.

An official who answered the phone at Baotou Rare Earths Co International Trade Company said his company’s sales of rare earths were not publicly disclosed and referred the Financial Times to government statements on the matter. He declined to comment on whether deliveries were being made to Japan. Two other employees at Baotou and Baotou subsidiaries declined to comment.

http://www.ft.com/cms/s/0/4cc15faa-dc3e-11df-a9a4-00144feabdc0.html