AMERICAN UNIVERSITY

Troubled Elements
Chinas use (and possibly abuse) of economic power domestically and abroad
Sam Ross SIS-619-015-2010F

Trade with China, has always been somewhat of a divine privilege for the other countries involved. Before China began large scale trading with the west in the 1800s, the Chinese economic policy was heavily oriented in the political frame. Trade relations with barbarians or those outside the Middle Kingdom1, were conducted through a series of rituals designed to pay tribute to China; establishing a relationship with Chinese dignitaries, followed by meeting with and showing proper subservience to the emperor for the favor of trade to be bestowed. In doing so, it established the political relationship between the two parties; China was on top, and China could take that privilege away when it felt that the other country wasnt properly respecting that sovereign role.2 Although China has gone through dramatic changes over the past two hundred years, the countrys economic policies under the Chinese Communist Party (CCP) have come almost full circle. Trade with China is a boon to those who would comply with Chinese ideals and Chinese policies. The dissent that can affect this relationship ranges from the political to the macro and microeconomic arenas. Only through following CCP policy can both parties benefit. If they dont, China makes it clear through official and/or unofficial channels that it is cutting them off. China is not the only country that leverages economic sanctions as a punishment; the U.S. does it with several countries, notably Iran. However because of its connection to and control over a variety of markets in developed countries including some vital to modernized national security needs, many countries have begun to look at Chinas rise with a level of apprehension, if not fear over the possible implications of Chinas massive presence and potential impact should the government become displeased with the state of trade.

This paper looks that economic presence, the methods of control that China actually wields on an international level, and the implications of that power, through the exploration of recent economic sanctions and examples of intimidation by the Chinese government. It also looks at the disparities between Chinas published trade policies and the actions it takes. Finally, it draws from U.S. responses to the Chinese influence on the global international economy and U.S. domestic markets to analyze the effects those actions have on a political/international relations level. Goods and Services On October 15th, 2010, United States officials brought a claim to a World Trade Organization panel that China was engaged in a process of dumping its exports on the world market, or artificially lowering the prices of goods to sell them at a cheaper price abroad than domestically. Such actions have little effect on China, a closed-market economy where the government applies heavy subsidies to affected industries, but it radically unbalances their prices in comparison to similar products from other countries and creates flux in the global economy that only benefits China. Shortly after their announcement to the WTO, U.S. market officials reported that China was quietly imposing an embargo on the exports of rare Earth elements, materials that are key components in microchips and other consumer electronics, to the United States and Europe.3 Just a month earlier, China had also cut off rare earth element exports to Japan, in an apparent (but never publically admitted to) political move. The cessation of exports was one of several actions that occurred in the wake of Japans arrest of a Chinese trawler captain for causing an incident around the disputed Senkaku/Daoyu islands.

Japanese and western powers reacted with alarm and protest; although Japan has made a practice of keeping substantial stockpiles of rare earth elements on hand out of substantial growing demand in domestic markets, western powers keep much smaller stockpiles and hurriedly made moves to compensate for the stopping of shipments and secure additional sources from abroad. The official Chinese response to these reports of canceled shipments however, was exceptionally vague, releasing a statement that only ambiguously addressed the issue and did not associate it as a response to the WTO suit:
China will continue to export rare earth to the world, and at the same time, in order to conserve exhaustible resources and maintain sustainable development, China will also continue imposing relevant restrictions on the mining, manufacture and export of rare earths.
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Beijing also denied any accusations of embargo; rather it claimed that any changes in shipment were due to new quota laws in order to better regulate the production of rare earth elements, and prevent further environmental pollution. None of these actions, argued the Chinese government, went against WTO policy, like an embargo would have. Chinas timing is suspect. Without official announcement of an embargo, its difficult to say one is definitively occurring, especially with the tight grip the Chinese government keeps on the media within the country. Admittedly, because of this level of control, theres no way to know how exhausted the supply of the mines is, although several prominent Chinese chemists have made the argument for the lack of sustainability of mining operations in the long term.5 However, it is because of the lack of conclusive evidence that an economic blockade makes for a brutal and heavy-handed weapon. China saves face while sending a warning; if the U.S. backs off from its complaints, exports may rise again, under similar bureaucratic excuses. That was in fact, exactly what ended up happening. International traders announced on October 29 th that
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shipments had begun to resume to Western countries. Shortly after, Chinese officials announced that China's Ministry of Land and Resources, which had launched the nationwide campaign in June to clean up unlicensed mining of rare earth, would not require cuts to exports of the material, as they had originally expected.6 The Chinese government apparently believed that their message had been sent effectively. On the other hand, exports to Japan were only resumed on November 19th after Chinese manufacturing firms reported hardship from lack of Japanese components that used rare earth elements. Beijing, like it had with the West, denied any role of economic sanctions, and seems to have been protected by a veil of plausible deniability; Japanese companies reported that the shipments of the elements were blocked by extensive paperwork and inspections.7 There is little doubt that that cessation of trade was anything but political as China cut off all ministerial contacts in the wake of the Daoyu/Senkaku island incident, canceled much of the political discourse between both countries, and for a period of time demanded compensation for the detainment of the Chinese trawler involved and its crew. Likewise, it suggests that perhaps the territorial dispute demanded a larger threat, even if it was non-implicit. If Beijings lack of resources were indeed the cause of the sanctions to the U.S. regardless of that country confronting it at the WTO, the fact that resumption of trade was possible suddenly a month earlier to the U.S. comparatively to Japan in both situations is inconsistent with what China has argued. Why the fuss over the rare earth minerals? China is not the only country on the globe with known rare earth element deposits; it only possesses about thirty percent of those discovered to be marketable. However, it is one of the few countries that mine those deposits,
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for reasons that shall be explained shortly, and is responsible for 90-95% of their production.8 Because of the virtual Chinese monopoly on rare Earth elements, Chinas blockade, although temporary, has had massive impact on the market. Most correlated, it has caused a dramatic spike in the price of materials, which is expected to lead to a jump in high-tech product prices before settling back down in a few years, according to a report released by The Information Network, a market research and consulting firm for the semiconductor, computer and telecommunication industries.9 According to their findings, an extraction of the element Cerium, Ceria, which in one of its uses is part of the construction process of personal computer hard drives, has increased in price by over 1000% in the previous year, and stands to further increase in the wake of this incident. A Source of Contention One aspect of this conflict is whether the Chinese government had the right to subsidize its exports in the first place. The answer is somewhat murky. CCP influence, through the use of subsidies and other involvement by the Chinese government in Chinese industry and business domestically and abroad. This was an important part of the U.S.s complaint to the World Trade Organization in reaction to the subsidies. Essentially, the U.S. was arguing that Chinas actions in doing so were illegal under the World Trade Organizations Agreement on Subsidies and Countervailing Measures (SCM Agreement), which states that:
Two categories of subsidies are prohibited by Article 3 of the SCM Agreement. The first category consists of subsidies contingent, in law or in fact, whether wholly or as one of several conditions, on export performance (export subsidies). A detailed list of export subsidies is annexed to the SCM Agreement. The second category consists of subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods (local content subsidies). These two

categories of subsidies are prohibited because they are designed to directly affect trade and thus are most likely to have adverse effects on the interests of other Members.
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In other words, according to the agreement, export subsidies in most forms are completely banned since they can affect the price of goods from other countries dramatically. The U.S. has also raised issues about Chinas compliance with the second aspect of the policy, as the Chinese government is, by their argument, regularly giving Chinese companies an edge at home and abroad. Since the formation of the WTO, China has long been the biggest target for antidumping investigations because of these subsidies. However, as a condition of its accession to membership into the WTO, China was defined as a non-market economy (NME), or an economy where the state has intervened to offset Chinese costs and prices. As a result of this designation, on the WTO level at least, it means that China is not subject to any kind of standardized duty on its exports. 11 As a result, any country doing business with China can only guess roughly what the true costs and prices of the materials in question would be, were China not just dropping them on the world market and was participating as a WTO-defined market economy. Usually this is done by incorporating price figures on similar products produced by other surrogate countries, which China has often argued is unfair.12 This creates a lot of debate over whether or not China is actually in the position of breaking any WTO laws. NME status is not enviable; it limits Chinas ability to do trade and exposes the country to random and discriminatory practices that other nations employ for dealing with NMEs, particularly by the arbitrary comparison to surrogate countries.13 For this reason, China often feels that the global system is primed against it in an arena where it feels it has the right to be judged as an equal (if not superior) partner with industrialized Western

countries, considering its status as an economic superpower. China has frequently leveraged bilateral Market Economy Status in its economic dealings with other countries; it was in fact, used as a precondition for the first two countries China signed a Free Trade Agreement with, New Zealand and Australia.14 That the U.S. and several other nations do not recognize that status is seen as an affront at best, and a discriminatory insult at worse. As the U.S. is one of the more frequent complainants in the Anti-Dumping cases that are brought against China, China perceives it as persecution; the U.S. is exploiting Chinas status to keep it down. Because the U.S. is a major trading partner for China, these actions are perceived as even more disrespectful; they cause China to lose face in front of other countries. According to Hufbauer et al., in the late 90s under Chairman Deng Xiaoping, China decided to use membership in the WTO, and globalization more broadly, as levers to transform its economy from state-run to market-driven.15 Hufbauer et al.s claims are due to frequent statements and reforms made by Deng during this decade that argued for the success of a market economy with Chinese characteristics. Therefore, from the Chinese governments perspective, U.S. claims against China at the WTO bear a major political angle associated with holding the country back domestically and abroad. To retaliate, China strikes back using the only weapon it holds in the arena of this debate, its exports. Through manipulating trade that it has an almost proprietary hold on, China flexes its soft power through steps like unofficially cutting off rare earth trade while denying responsibility, maintaining its role as a victim of unfairly imposed western policies. The Importance of Rare Earth Elements

The products at the core of this show of strength by China, rare earth elements, contrary to their classifier are not actually very hard to find. The term covers a group of fifteen metals16 found at relatively low levels throughout the Earths crust worldwide. However finding deposits that are actually have high enough concentrations to be mined and processed for commercial purposes is rather difficult. Typically, the best way to find these deposits is within large concentrations of certain minerals like bastnaesite and monazite. Bastnaesite is found most often in the U.S. and China, whereas monazite has been found in great quantities in dozens of countries around the globe. The largest mine in China is in the Bayan Obo region in Northern China (near Mongolia), and it has been the origin of many of Chinas rare earth exports since the early 1950s. Rare Earth Elements trade in the past used to be heavily based in the U.S., as commercial trade in the states demanded its growth early on. In 1953, the Molybdenum Corporation of America, the only surviving rare earth element refining operation still active in the U.S. (as Molycorp Minerals) started heavily producing bastnaesite and its refined byproduct Europium; then a vital element in the production of the cathode ray tubes in color televisions.17 Soon after, it also became the worlds primary source for other rare earth elements as well. Like the operations in China, much of this production was centered on a single mine in Mountain Pass, California. This mine is now responsible for approximately 1% of the worlds stocks of rare earth elements. Like the U.S. success with rare earth elements, China recognized the potential of such elements early on and began recovering minerals to refine into rare earth elements in the late 1950s during the development of the countrys iron and steel industries. A breakthrough in this
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industry came when chemist and future president of Chinese Chemical Society Xu Guangxian applied his theoretical research around extracting uranium isotopes from materials to the extraction of rare earth elements from minerals such as bastnaesite. As China had several rich deposits of these materials, the government was quick to develop the industries using Xus superior techniques. The boom in the consumer and government use of electronics in the 1980s and 1990s quickly became a goldmine for China when it was able to undercut many other countries out of the market. This was made possible when the the Chinese government recognized the potential value and utility of rare earth metals for the budding electronics industry during this period, and began to subsidize the domestic industry heavily, increasing production by over 40% annually over the decade and continuing rapid growth into the 90s.18 As need for these materials continued rising, so too did Chinas urge to dominate the industry. Chinese leader Deng Xiaoping once even proclaimed that There is oil in the Middle East; there is rare earth in China.19 However, while China prospered greatly from the trade associated with rare earth elements, Dengs remarks failed to account for the cost to China from mining the product. The process for refining rare earth elements from minerals like bastnaesite is a long and arduous process compared to the harvesting of other natural resources. The bastnaesite must first be separated from non-essential elements present within its structure to purify it, which involves grinding it into a gravel, and then separation through a chemical process. Each of the rare earth elements are then processed out separately under unique processes.20 While this extraction is costly, another major cost is environmental. Because of inefficient government oversight and rapid growth of the industry, many of the mines generate massive amounts of
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waste products which are then disposed of ineffectually and dangerously. Government statistics by the Chinese Society of Rare Earths have cited that popular methods of producing one ton of rare earth elements generates 9,600 to 12,000 cubic meters of waste gas approximately 75 cubic meters of acidic wastewater, and about one ton of radioactive waste residue (containing water), most of which are disposed without being effectively treated. 21 In fact, China has argued that exports were cut because local governments in provinces where rare elements are mined have protested that current levels are unsustainable and environmentally damaging.22 Their actions suggest otherwise though, as there are still no incentives from the CCP to encourage Chinese mining companies to become more environmentally friendly, and the timing is a little suspicious, especially considering the haste in which trade was dropped and then resumed to its original rate. To put the Chinese argument in context though, China has been imposing quotas on rare earth exports since 2005 when Xu Guangxian called for protective measures to be taken to accommodate for the polluted and unsustainable manner in which the elements were mined. Without any protections, Xu estimated, resources in the Bayan Obo mine would be depleted within 35 years,23 and its conceivable that the permanent environmental damage would continue for decades afterwards. China also sees this as a change to drastically restructure the domestic industry. With a rapidly developing society and the increasing demand for the rare earth elements and their finished products locally, China sees an increasing need to preserve and produce these products. At the September 2009 Minor Metals and Rare Earth Conference in Beijing, the Secretary General of the Chinese Rare Earths Industry Association, Wang Caifeng clarified Chinas future strategy for the rare earth element industry; that China would
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encourage the sales of finished rare earth products, but limit the export of semi-finished goods.24 The Chinese science community had recognized this as an omission in the development of their rare earth element market for years. Xu Guangxian had lamented from his position as
chair of the chemistry sector of the National Natural Science Foundation of China in the late 90s that China had let research of potential uses for rare earth elements lapse since the beginning of the

tech boom, and as a result was significantly behind technical industry development in other countries.25 The Chinese government had come to realize that making a change would be a major boon on the national level allowing for extensive markdown of the products and encouraging job growth domestically; a great many Chinese are unemployed. On the other side of the coin, many industrialized countries took these statements as a warning from China; that it intended to make rare earth elements and their products a proprietary Chinese industry. For the economic benefit it provided China with and with a lack of resources domestically though, western powers were taken completely off-guard though when China chose to leverage the strength of this policy through the complete suspension of exports. As a result of this action, Japan and industrialized Western powers quickly began scrambling for alternative sources of trade for these materials with, investors pouring billions of dollars into international projects to restart abandoned rare earth element mining projects around the globe. The problem lies in the fact that while abandoned rare earth element mines still litter the landscape in other countries, not all of these mines actually have been checked to see if they contain economically feasible product, and there may no longer be enough expertise outside of China to refine the potential product because the industries have been retired for so long.

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Beyond Rare Earth Elements With all of Chinas control over the rare earth element market, its no wonder that western powers freaked out in the wake of their only reliable source for product being cut off. Not only was the ban a direct response to the U.S. pointing out Chinas economic slight-ofhand, its typical of how China on the local, national, and international level has been dealing with foreign firms who would go against party policy on aspects of the economy, and has been for a long time. Like the Emperor in the 1800s, who often sought to play the U.S. off of other Western powers, or canceled trade with the economic threat of Britain,26 the CCP will likewise cancel trade with disagreeable foreign companies or play them off each other. Jim Mann reported this as far back as 1989, when reforms had just begun to take hold:
If the world was unaware of the difficulties of doing business in China, they, the foreigners living in Beijing and their companies were at least partially to blame. Few of them and certainly very few, if any, of the major companieshad been willing to voice any of their complaints publicallyChina had successfully created a climate in which favoritism was expected. If Coca-Cola complained that it was being unfairly restricted, Chinese authorities might counter by making life tougher for Coke (or better for Pepsi).
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Mann, cited in particular the experience of American Motor Companys entry into China which had been fraught with complications. The CCP believed it was the success or failure of the joint venture between AMC and its Chinese counterpart, Beijing Jeep was their domain, and would frequently react angrily when western executives were perceived to violate that sovereignty. Eventually, Chinese officials at Beijing Jeep refused to meet, answer letters or phone calls of their Western partners, shutting them out for not living up to the cost of what was expected from them to do business with China.
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Breaking the traditional muted frustration of many of those in the business community in China who had been told to not make waves at the cost of business, the AMC executives, frustrated, publically protested to the home office in a 1985 Telex communication, that they recommended a full pullout of the country by the company. Suddenly the American Motors Case became the vehicle for a full-scale reexamination of Western business prospects in China.28 History repeated itself. As in the 1800s, the western government refused to get involved, this time for a lack of official written paperwork,29 and conservative elements in the CCP did not want to make any concessions to Western businesses. At that time, reformers had a larger voice in the party, and the CCP eventually backed down and let AMC set up its factory under the auspices of doing more business with the west and repairing the image problem which had resulted from the AMC incident catching the attention of western news feeds. Zhao Ziyang, the premier at the time had an interesting argument for encouraging western investment, as Mann recounts: China couldnt afford to let the foreigners go; it had to modify its own instincts and traditions to accommodate them and to get their technology.30 This is a recurring charge against China; that Chinese firms supported by the CCP will exploit foreign ideas and technology to bolster its own domestic industries. As highlighted in Professor Daniel Chows remarks to the U.S. China Economic and Security Review Commission in 2006:
This process of absorbing technology and using it to compete with the technologys original owners and creators is being repeated in China in many industries. Chinas goal is to use this process to become competitive and dominate in all industriesOnce the advanced technology is introduced into China, China gains access to the technology. Some of this access is lawful, but much of it is through unauthorized

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copying, theft, and counterfeiting, all of which allows China to obtain technology transfer without the payment of fees.
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Chow explains that Multi-National Enterprises have long adopted a non-confrontational approach when it comes to cooperation, to the extent that theyll allow extensive piracy of their products for access to the market that China provides. He cites Bill Gates as one example for when praised China for improvements in protecting Microsofts intellectual property when, by the companys own estimates, it was losing over $10 billion in prospective earnings to privacy a year in China.32 How does this correlate with the current spat over anti-dumping and rare earth metals? On the principle of the matter, the way the Chinese government expects to do business with the U.S. and largely the global market is from a position of power. China has what western powers want and can take it away when their needs are not being met. This is a practice that Chinese businesses, with the backing of the Chinese government have long exploited. Andrew Mertha cites an example of this practice in his article Putting your mouth where your money is, with the experience of an unnamed foreign auto manufacturer that underwent a joint venture with a local manufacturer to build a factory in Northwest China. As this factory was being built, it later came out that a second unrelated factory started construction on Chinas Eastern seaboard which turned out to be literally a carbon copy of the original. Shortly after development began, the second factory requested partnership with the original, threatening to dump its products on the domestic market and price out the other if the foreign industry refused to do so.33 Credit Where Credit is Due

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Modern day issues of trademark and copyright violations are another large issue of contention between the U.S. and China, and something that Mertha believes can be correlated extensively with U.S.-China trade relations on a much broader scale. Mertha believed that the behavior China displayed in the hammering out of common Intellectual Property rights between the two countries in the mid-90s bore a great deal of similarity to conduct during past economic brawls with the U.S., describing this common theme as transnational trade deterrence, or the explicit or implicit threat of local Chinese governments to deter foreign firms operating within their borders from making their dissatisfaction with local government performance widely known.34 Because the success of foreign firms within its borders is beneficial to China, the government will allow for its presence but will apply pressure to squeeze out as much benefit domestically at the expense of the foreign vendor. Because room is left for some benefit to the vendor, such as the size of the Chinese domestic market and cheap labor, firms are hesitant to make waves despite unfair treatment. Mertha argues that China as a nation adopts a similar approach, in response to international pressure to modify aspects of its economics and economic system is exceptionally good at picking its battles, selectively tackling aspects of the issue it knows it can win or redirecting attention from its element of strategic importance. This can be seen in the governments defense of environmental and sustainability concerns in regards to the decreasing quotas of rare earth minerals; it redirects the blame of the problem to greedy foreign powers. Likewise, Beijings approach during intellectual property rights (IPR) negotiations in the mid-1990s was equally defensive, demonstrating an apparent unwillingness or inability to exact concessions not directly related to the initial catalog of US
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demands.35 Although the negotiations concluded, Beijings redirection was successful at keeping most issues of trademarks off of the agenda, which was the larger intellectual property rights issue facing U.S. complainants. To understand the significance of this action, we must first define the problem this was organized around. Like with the rare earth minerals, U.S. holders were concerned with levels of control exerted by the Chinese government; increasing with the rare earths and decreasing with IPR. There were two problems involved in this instance: trademark counterfeiting and copyright violation. The former is the action of producing and distributing goods of any value under a brand name without permission to be doing so. Examples of this would be counterfeit Gucci purses; the name sells the purse, but the product is sold without the companys approval of that use of the name or the product itself. Copyright violation or infringement is the use of a work defined as intellectual property outside of the permission or laws associated with its use. An example of this would be movie piracy. Enforcing anti-trademark legislation would have been much more difficult and costly to domestic industries in China that produced these knockoffs compared to trying to shut down piracy operations which quickly self-replicated. China has a lot of problems with piracy and infringement. Trademark knockoff products are sold domestically and abroad and movie stores in China frequently have backrooms with illegal products. For a long time though, these problems were not addressed by the U.S. government because the process of prosecution relies on individual agents and firms to report instances, many of which have been coerced by the Chinese government in some manner from doing so. As one representative from a U.S. beverage company explains in an interview with Mertha:
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[We do] not get too directly involved with the Chinese government in complaining about the trademark issue. First of all, [we need] to maintain good relations with the Chinese government. The rules are always changing and the government can announce an audit if [we rub] them the wrong wayIn short [we do] not want to put [ourselves] on any Chinese governmental blacklist.
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China depends a great deal on maintaining a healthy market for counterfeit goods, and perceives it needs a strong power position in its dealings with foreign countries. Counterfeit goods that break trademark supply many goods beyond knockoff handbags, such as medicine, clothing and other necessities to a public that cant afford a great deal,37 and provides technology that Chinese companies require to compete in a global market. Chinas strategy then is to protect that system it pulls as much benefit out of foreign competitors, which only take money out of their system and raise prices for Chinese civilians, as possible with as few of the disadvantages as they feel they can afford. In its most general form, deterrence is simply the persuasion of ones opponent that the costs and/or risks of a given course of action he might take outweigh its benefits explain Alexander George and Richard Smoke in their book Deterrence in American Foreign Policy: Theory and Practice.38 Referring to the U.S. and Soviet Union conflict during the cold war, George and Smoke saw a strategy which nation-states, from as the ancient Roman Empire to Napoleon had used for centuries to avoid public conflict which stood to inflict large damage to both sides. In the case of the Soviet Union and the U.S., deterrence was mutually assured destruction; if the Soviets launched an atomic attack upon the United States, the nuclear destruction of the Soviet Union would be assured. China cannot afford to alienate the U.S. as a major trading partner. Thus, it sees deterrence, which can be applied subtly, as a way to develop an element of control trade with the United States. The inherent message of the deterrence policy is the same: if you do x, I
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shall do y to you,39 with the insinuation that the cost of doing y will be greater than the benefits of doing x. On the domestic level, China holds a great deal of power over foreign merchants. There is a lot of business opportunity in China, which the CCP is more than willing to let foreign agents take advantage of, at the cost of following any and all demands of the CCP. Otherwise, they will be blacklisted, closed off from the bounty of the heavenly kingdom. Likewise, the CCP also feels it has the right to employ the same deterrence on an international level. By questioning the CCPs right to dump materials on the market, the U.S. was not only openly challenging Chinese economic policy, but forcing them to lose face on a global scale as well. Because the Chinese response of y had to be something that would be significant enough to deter the U.S. from pursuing these claims presently and in the future, the CCP chose to make its threat a show of force. If the U.S. was going to challenge Chinas role in global economics, China would remove its exports from global economics and would radically destabilize parts of the global economy. Deterrence on this economic level is what George and Smoke would define as a lower-level conflict, because its not an open conflict; China has taken no position of openly sabotaging the global economy, nor doubtlessly intends to. Deterrence of lower-level conflict, they establish, cannot be implemented by threatening a specific level of damage; and it does not involve a single kind of military power.40 Chinas goal is political, to deter the U.S. from taking positions against its interests as an economic superpower through the threat of chaos that their threats to discredit China in the world market could lead to. The Political Angle

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Chinas behavior around the rare earth elements has lead a call to rally Western and Japanese governments together, as officials from all of those countries have raised significant concerns over the strength of Chinas soft power and influence over the global economy when it felt provoked, with Japanese officials referring to the events as the beginning of an economic war. When the Chinese ban on rare earth element exports expanded to include the U.S. and Europe, many lawmakers in the U.S. agreed with this definition. Shortly after the ban began, The U.S. began to focus on talks with East Asian allies to reduce trade imbalances and to place heavier pressure on China to behave more selflessly within the global economy within its privileged position. During a recent tour of Asia, U.S. President Barak Obama skipped over visiting China, and perhaps more significantly, announced a new massive trade deal with India, a country that spars with China on a regular basis. He also tried to usher in a Free Trade Agreement with South Korea, but that didnt work out. Every indication though, was that the U.S. was using economics as a demonstration of the benefits of working with U.S. interests rather than against them. CCP officials meanwhile have been making arguments that more of the process of manufacturing of rare earth products should be done domestically in China, providing financial incentives for businesses to bring their industry to the country. By their nature, these sudden shifts in production come off as a threat by China to the rest of the world. In addition to the financial impact on thousands of industries worldwide that depend on China fulfilling previously agreed upon quotas to meet demand, current employees of those companies that are forced to move their base to China are at risk for losing their jobs. As previously mentioned, the companies themselves also leave themselves open to potentially increased risk of Chinese
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espionage of their products. Besides the economic risk to U.S. firms, what is of equal concern to U.S. lawmakers is that these benefits are might also represent a risk to U.S. national security. Politicians have frequently argued that the real threat behind Chinese encroachment on American territory in the world market and geographically is not the economic powerhouses of Chinese businesses, but the CCP as a shadowy man behind the curtain with a potentially dangerous agenda. This fear was reflected when Chinese telecommunication giant Huawei Technologies was attempting to develop a market for its communication technology in the United States through a cooperative deal with domestic company Sprint Nextel. But the deal, which would provide Sprint Nextel with $3 billion dollars of advanced communication equipment and good prospects for a future deal in which Huawei would become one of Sprint Nextels has all but been held up by concerned U.S. government representatives. Around October 28 th, 2010, three U.S. senators drafted a letter to US Federal Communications Commission (FCC) Chairman Julius Genachowski to investigate and/or block the deal as it would leave Sprint Nextel potentially subject to significant influence by the Chinese military which may create an opportunity for manipulation of switches, routers, or software embedded in American telecommunications network so that communications can be disrupted, intercepted, tampered with, or purposely misrouted.41 What the Congressmen were concerned with was that Beijing looking for an opportunity to get more heavily involved in U.S. markets and infrastructure, which would potentially be a national security risk. In addition, Cisco Systems and Motorola have both been involved in legal suits with Huawei in the last decade over claims of corporate espionage and patent
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infringement. Although Cisco settled its claim, Motorola is actively continuing its suit in which it alleges that a group of Chinese-born Motorola engineers developed contacts with Huaweis founder and conspired to steal technology from Motorola.42 Although only allegations at the moment, it draws back to Manns and Merthas claims that China is not afraid to co-opt foreign technology by any means necessary. Because of unknown concerns of the U.S. Department of Defense, Sprint was eventually forced to drop the deal. The congressmens letter drew on several important points; Huawei had connections with the CCP and the Chinese Peoples Liberation Army (PLA). The CCP claim has come from several investigations into possible subsidizing of the industry giant by the CCP government. The more tenuous military connection comes from several unnamed Department of Defense and other national security agencies around the globes analysis of the security role that Huawei plays in China, and the makeup of its board which has included several retired military officers. Ignoring the military connection until it can be proven43, the subsidy claim has a bit more weight to it. Going Global As China joined the WTO in 2001, it was formulating new plans to gain greater access to and position over other developed nations, culminating in a new operational strategy: zou chuqu or walking out. This was to be done through forming greater globalized markets and establishing Chinese companies with global recognition, one of which was Huawei Technologies.44 In 2004, Huawei received a $10 billion credit line from the state controlled China Development Bank to fund overseas expansion, and financially propping it up

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significantly to do battle with other global contenders including Cisco.45 This level of credit has not only continued, but increased since then, rising as high as $30 billion in 2009.46 It is presumed that with all of these financial subsidies, Beijing commands great influence over Chinese companies abroad, and will flex that muscle in order to support Chinese soft power and image abroad. One of the ways this has been propagated is from looking at Chinas role in aid in Africa. Since the 1950s, China has invested significant resources in Africa, despite being a developing country itself. It can be argued in fact that soft power through aid was how the Beijing government won international legitimacy on the world stage over the rival Republic of China government which had been forced into exile in Taipei. As Deborah Brautigam argues in The Dragons Gift, diplomatic recognition from African countries played a central role in the 1971 UN vote that gave Chinas seat to Beijing [from the Republic of China].47 This diplomatic recognition came as a result of three things: Checkbook diplomacy, liberal attitudes toward aid in comparison with Western countries and eventually, whether any given African country would agree to fall in line with Chinas One China policy. To begin with the first two, China has extensive resources and has used them to start thousands of turn-key industries in Africa, as well as providing billions in general infrastructure aid which is funneled through Chinese banks and industries. In this way, China has framed much of its economic trading with Africa as compensatory trade, or aid and equipment meant on fostering industries that farm natural resources in Africa. Under this model, the host country than trades back an equivalent of the natural resource as payment for the loan after the industry has been developed and is prosperous. Because of the nature of this relationship, it automatically
22

promotes good business relationships between the two countries, and many of their representative countries on both sides. Adding to the goodwill associated with the financial, Chinese aid also comes with fewer conditions than Western aid, depending more on the host country to define their needs. As Brautigam points out, Beijings engagement with Africa involved a well-thought-out and long-term strategy, which largely included the goodwill of the mutual benefit of its aid policies, was brought about primarily to address its own political and economic challenges.48 More than that, it shows how China can leverage economic power with the carrot as well as the stick; go along with Chinas demands and benevolence will rain down upon you. Consequences The ban on Rare Earth Element turned out to be a temporary spat between the powers; China has resumed most shipments of Rare Earths, although there still are warnings of decreasing exports as the CCP government revamps the current system. But the rest of the world which lay idle as China became the overwhelmingly primary producer of these minerals has been shocked awake, perhaps too late. Hurst quotes Scott Honan, a Manager at the Mountain Pass mine in California in her analysis of the rare earth elements earlier this year before the conflict as stating that No one, that Im aware of, could come in and start up another [rare earth element] mining operation, say, next year.49 Operations in this area have doubled in effort since the crisis, but Washington has recognized that it has a problem. For Beijing however, this has been business as usual for a long time, dependent on the silence of trading partners who were desperate for access to one of the greatest rising markets in the world. If they are raising the bar by using the same strategies in such a blatant manner,
23

its because they have begun to sense a greater freedom to do so from the global status their economic prosperity has provided. Through aid projects in Africa and around the world, conducted in a means that deliberately contradicts the Washington Consensus approach to aid, the Chinese government is also building up a coalition of political goodwill which they have already used at least once to their advantage on the global scale. Its apparent that China perceives the next generation of power relations to be built not solely on military might, but more heavily on economic interest. Washington realizes this and also recognizes that theyre currently at a disadvantage in many ways in this arena. In a New York Times interview in the past month, Jeffrey A. Bader, a major China policy adviser in the White House, said that Chinas muscle-flexing had became especially noticeable after the 2008 economic crisis, in part because Beijings faster rebound led to a widespread judgment that the U.S. was a declining power and that China was a rising power.50In this respect, there is a sense that the U.S. also recognizes a current conflict of public opinion based on economic policies, and one that has the potential to sway in favor of Beijings message. Beijings goals do not come off as malicious, just realist. Theyre looking for the best opportunities for Chinas continued growth and opportunities for its people, and theyre willing to take any steps to retain their control over the market. In the process however, the steps its taking are a disruption to the global hegemony that focuses on defining its process of leaping forward onto the world stage as breaking the rules. Until western powers find ways to accommodate for and compete with the immense economic presence that China has already achieved, they will always face a problem with enforcing these rules. However, by looking at history, it appears they only have themselves to blame, as they were willing to put up with this
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behavior in the past, and have shown China that its an effective way to get what they want. As long as China has the significant market for foreign goods, government control of their domestic market and retains strong ties with the U.S., it will be difficult to get them to change tactics. China has no urge to cut off trade completely; its too dependent on foreign investment and involvement at this point. Mertha argues that under Transnational Trade Deterrence, In order to make his deterrent threat credible, the defender must demonstrate both the capability and the will to carry out the threat.51 China is sending a message to the world that anyone not willing to trade under their rules exposes themselves to disadvantage. If China wants something, it will find a way to get it, so other countries will need to work within that paradigm. If the U.S. and other powers hope to compete with this idea effectively, they will need the means and the will to call Chinas bluff.

25

Bibliography:
Alabaster, Jay. "Japan Says China Resuming Exports of Rare Earths." The Associated Press (2010 Nov 18). http://www.businessweek.com/ap/financialnews/D9JIUO782.htm [accessed 22 Nov 2010]. Bradsher, Keith. "China Said to Widen Its Embargo of Minerals." The New York Times (Oct. 19, 2010). http://www.nytimes.com/2010/10/20/business/global/20rare.html?src=busln&scp=7&sq=China %20rare%20earth&st=cse [accessed October 25th, 2010]. Brautigam, Deborah. The Dragon's Gift: The Real Story of China in Africa. New York: Oxford University Press, 2010. China, People's Republic of, "China Makes Breakthrough in Market Economy Status ", Embassy of the People's Republic of China in India http://www.chinaembassy.org.in/eng/jjmy/t92884.htm (accessed 11 28 2010). Chow, Daniel. "Counterfeiting and Chinas Economic Development " In Hearing on Chinas Enforcement of Intellectual Property Rights and the dangers of the Movement of Counterfeited and Pirated Goods into the United States. Washington, DC: U.S.-China Economic and Security Review Commission, 2006. Clark, Robert, "Huawei Gets $30b Credit Line from Cdb ", telecomasia.net http://www.telecomasia.net/content/huawei-gets-30b-credit-line-cdb (accessed Nov 30 2010). Cohen, Warren I. America's Response to China: A History of Sino-American Relations. 5th ed. New York: Columbia University Press, 2010. Crothers, Brooke. "China's Rare Earth Embargo Triggers Price Hikes." cnet News (Nov 8, 2010). http://news.cnet.com/8301-13924_3-20022161-64.html [accessed 20 Nov 2010]. George, Alexander, and Richard Smoke. Deterrence in American Foreign Policy: Theory and Practice. New York: Columbia University Press, 1974. Guttman, Jeannine, "Congressional Leaders Cite Telecommunication Concerns with Firms That Have Ties with Chinese Government", Senate Committee on Homeland Security & Governmental Affairs http://hsgac.senate.gov/public/index.cfm?FuseAction=Press.MinorityNews&ContentRecord_id= c5c9f6ca-5056-8059-7681-fa566fb50120 (accessed 11 30 2010). Hepeng, Jia, and Di Lihui. "Xu Guangxian: A Chemical Life." Chemistry World (2009 April). http://www.rsc.org/chemistryworld/Issues/2009/April/XuGuangxianAChemicalLife.asp [accessed 29 Nov 2010]. Hufbauer, Gary Clyde, Yee Wong, and Ketki Sheth. Us-China Trade Disputes: Rising Tide, Rising Stakes. Washington DC: Institute for International economics, 2006. Hurst, Cindy. "Chinas Rare Earth Elements Industry: What Can the West Learn?" Journal of Energy Security (Mar 2010). [accessed 20 Nov 2010].

Jiang, Jianguo, and Allen T. Cheng, "Huawei Gets $10 Bln Credit Line for Expansion Abroad (Update5)", Bloomberg http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.0n0gKHxjVo&refer=top_world _news (accessed Nov 30 2010). King, Byron, "Rare Earth Elements: A Beginners Guide", The Daily Reckoning http://www.dailyreckoning.com.au/rare-earth-elements/2008/06/19/ (accessed Nov 21 2010). Landler, Mark, and Sewell Chan. "Taking Harder Stance toward China, Obama Lines up Allies." The New York Times (2010 Oct. 25). http://www.nytimes.com/2010/10/26/world/asia/26china.html [accessed Oct. 26, 2010]. Mann, Jim. Beijing Jeep: The Short Unhappy Romance of American Business in China. New York: Simon and Schuster, 1989. Markoff, John, and David Barboza. "Chinese Telecom Giant in Push for U.S. Market." The New York Times (Oct. 25, 2010). http://www.nytimes.com/2010/10/26/technology/26telecom.html [accessed Oct. 26, 2010]. Mertha, Andrew. "Putting Your Mouth Where Your Money Is: How Us Companies' Fear of Chinese Retaliation Influences Us Trade Policy." In China's Foreign Trade Policy: The New Constituencies, edited by Ka Zeng, 59-72. London and New York: Routledge, 2007. Organization, World Trade, "Wto | Subsidies and Countervailing Measures Overview", World Trade Organization http://www.wto.org/english/tratop_e/scm_e/subs_e.htm (accessed Nov 21 2010). Reuters. "China Says Rare Earth Crackdown Will Not Cut Output." (2010 Nov 21). [accessed Nov 22 2010].

Warren I. Cohen, America's Response to China: A History of Sino-American Relations, 5th ed. (New York: Columbia University Press, 2010). 3 2 As it threatened to do during the Terranova incident of 1821. See Ibid. 4 3 Keith Bradsher, "China Said to Widen Its Embargo of Minerals," The New York Times (Oct. 19, 2010). http://www.nytimes.com/2010/10/20/business/global/20rare.html?src=busln&scp=7&sq=China%20rare%20earth &st=cse (accessed October 25th, 2010). 4 Ibid. 5 Cindy Hurst, "Chinas Rare Earth Elements Industry: What Can the West Learn?," Journal of Energy Security (Mar 2010) (accessed 20 Nov 2010). 20 6 Reuters, "China Says Rare Earth Crackdown Will Not Cut Output," (2010 Nov 21) (accessed Nov 22 2010). 7 Jay Alabaster, "Japan Says China Resuming Exports of Rare Earths," The Associated Press (2010 Nov 18). http://www.businessweek.com/ap/financialnews/D9JIUO782.htm (accessed 22 Nov 2010). 8 Although articles in the New York Times point to this figure being 95%, other news sources have gone as high as 97% to as low as 90%. In none of the cases do the authors of the articles reference where the figure comes from, so it may be somewhat higher or lower than what any claim. However as the Obama administration and other nations have reacted strongly to these events, its likely a reasonable estimate.

Brooke Crothers, "China's Rare Earth Embargo Triggers Price Hikes," cnet News (Nov 8, 2010). http://news.cnet.com/8301-13924_3-20022161-64.html (accessed 20 Nov 2010). 10 World Trade Organization, "Wto | Subsidies and Countervailing Measures Overview", World Trade Organization http://www.wto.org/english/tratop_e/scm_e/subs_e.htm (accessed Nov 21 2010). 11 Gary Clyde Hufbauer, Yee Wong, and Ketki Sheth, Us-China Trade Disputes: Rising Tide, Rising Stakes (Washington DC: Institute for International economics, 2006). 64 12 People's Republic of China, "China Makes Breakthrough in Market Economy Status ", Embassy of the People's Republic of China in India http://www.chinaembassy.org.in/eng/jjmy/t92884.htm (accessed 11 28 2010). 13 Hufbauer, Wong, and Sheth. 67 14 People's Republic of China. 15 Hufbauer, Wong, and Sheth. 75 16 Cerium, Dysprosium, Erbium, Europium, Gadolinium, Holmium, Lanthanum, Lutetium, Neodymium, Praseodymium, Samarium, Terbium, Thulium, Ytterbium, and Yttrium; Byron King, "Rare Earth Elements: A Beginners Guide", The Daily Reckoning http://www.dailyreckoning.com.au/rare-earth-elements/2008/06/19/ (accessed Nov 21 2010). 17 Hurst. 10 18 Ibid. 11 19 Taken in context of recent events, this quote may draw up images of the Arab oil embargo of 1973, which had the same dire consequences for western markets highly dependent on foreign energy. - Ibid. 20 Ibid. 4 21 Ibid. 16 22 Ibid. 21 23 Ibid. 20 24 Ibid. 21 25 Jia Hepeng and Di Lihui, "Xu Guangxian: A Chemical Life," Chemistry World (2009 April). http://www.rsc.org/chemistryworld/Issues/2009/April/XuGuangxianAChemicalLife.asp (accessed 29 Nov 2010). 26 Cohen. 21 27 Jim Mann, Beijing Jeep: The Short Unhappy Romance of American Business in China (New York: Simon and Schuster, 1989). 191 28 Ibid., 193. 29 This may have been the cost of doing business in China, where many business deals are conducted informally or behind the scenes through previously established relationships known as guanxi. Washingtons lack of sympathy may have been a result of not knowing the conditions on the ground in China, and presuming that business negotiations were always conducted in a Western manner. 30 Mann, 197. 31 Daniel Chow, "Counterfeiting and Chinas Economic Development " in Hearing on Chinas Enforcement of Intellectual Property Rights and the dangers of the Movement of Counterfeited and Pirated Goods into the United States (Washington, DC: U.S.-China Economic and Security Review Commission, 2006). 32 Ibid. 33 Andrew Mertha, "Putting Your Mouth Where Your Money Is: How Us Companies' Fear of Chinese Retaliation Influences Us Trade Policy," in China's Foreign Trade Policy: The New Constituencies, ed. Ka Zeng(London and New York: Routledge, 2007). 66 34 Ibid. 59 35 Ibid. 59 36 Ibid. 62 37 This may also be influenced by Chinas deliberate devaluation of the Yuan. 38 Alexander George and Richard Smoke, Deterrence in American Foreign Policy: Theory and Practice (New York: Columbia University Press, 1974). 11 39 Ibid. 48 40 Ibid. 51

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Jeannine Guttman, "Congressional Leaders Cite Telecommunication Concerns with Firms That Have Ties with Chinese Government", Senate Committee on Homeland Security & Governmental Affairs http://hsgac.senate.gov/public/index.cfm?FuseAction=Press.MinorityNews&ContentRecord_id=c5c9f6ca-50568059-7681-fa566fb50120 (accessed 11 30 2010). 42 John Markoff and David Barboza, "Chinese Telecom Giant in Push for U.S. Market," The New York Times (Oct. 25, 2010). http://www.nytimes.com/2010/10/26/technology/26telecom.html (accessed Oct. 26, 2010). 43 Huawei has denied any connection to the Peoples Liberation army - Ibid. 44 Deborah Brautigam, The Dragon's Gift: The Real Story of China in Africa (New York: Oxford University Press, 2010). 74 45 Jianguo Jiang and Allen T. Cheng, "Huawei Gets $10 Bln Credit Line for Expansion Abroad (Update5)", Bloomberg http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.0n0gKHxjVo&refer=top_world_news (accessed Nov 30 2010). 46 Robert Clark, "Huawei Gets $30b Credit Line from Cdb ", telecomasia.net http://www.telecomasia.net/content/huawei-gets-30b-credit-line-cdb (accessed Nov 30 2010). 47 Brautigam. 67 48 Ibid. 78 49 Hurst. 25 50 Mark Landler and Sewell Chan, "Taking Harder Stance toward China, Obama Lines up Allies," The New York Times (2010 Oct. 25). http://www.nytimes.com/2010/10/26/world/asia/26china.html (accessed Oct. 26, 2010). 51 Mertha. 64