Wealth Effects of Rare Earth Prices and China's Rare Earth Elements Policy

Abstract

The strategic importance of rare earth elements (REEs) has become increasingly important because of their relative scarcity and worldwide increasing demand, as well as China’s quasi-monopoly of this market. REEs are virtually not substitutable, and they are essential for a variety of high-tech products and modern key technologies. This has raised serious concerns that China will misuse its dominant position to set export quotas in order to maximize its own profits at the expense of other rare earth user industries (e.g., the wealth transfer motive). In fact, export restrictions on REEs were the catalyst for the U.S. to lodge a formal complaint against China in 2012 at the WTO. This paper analyzes possible wealth transfer effects by focusing on export quota announcements (so-called MOFCOM announcements) by China, and then calculating share price reactions for Chinese REE suppliers, U.S. REE users, and the rest of the world REE refiners. The results of the multivariate regression analyses do not support the view of a wealth transfer in connection with the MOFCOM announcements. This suggests that export quotas may be viewed more as a public scapegoat, and have limited influence on markets. We find instead that extreme REE price movements should be the topic of concern, as they have a significant impact on share prices for all companies in the REE industry.

Keywords: Announcement Effects, Event Study, Rare Earths Elements, WTO

JEL Classification: F13, F52, G14, Q31, Q34, Q37, Q38