Politics, markets, and rare commodities: responses to Chinese rare earth policy

This paper examines economic statecraft in the case of rare-earth elements, of which China controls over 90% of the world's current supply, and famously cut off exports to Japan during a territorial dispute in 2010. The rare-earth sanctions provide an opportunity to investigate claims of economic statecraft, power and interdependence, and the political implications of near-monopoly control of a resource critical for high-tech military, consumer, medical, and environmental industries. A vector error correction model statistically disentangles the effects of China's economic statecraft from their rare-earth quota and pricing policies. Prior to the sanctions, there was little international supply diversification. China's purported use of rare-earth elements was an economically costly diplomatic signal that demonstrated their potential leverage, but also had unintended consequences, as Japan moved to diversify rare-earth supplies and in doing so deepened diplomatic ties with China's neighbors. Economic statecraft served to heighten regional tensions and undermine the China's own end goals.