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

61 Pages Posted: 15 Feb 2015 Last revised: 12 Feb 2020

See all articles by Maximilian A. Müller

Maximilian A. Müller

ESMT Berlin

Denis Schweizer

Concordia University

Volker Seiler

Xi'an Jiaotong-Liverpool University

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Date Written: February 14, 2015

Abstract

Rare earth elements (REEs) have 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 (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 the share price reactions of Chinese REE suppliers, U.S. REE users, and the rest of the world REE refiners. Overall, we find limited support for the view of a wealth transfer in connection with MOFCOM announcements only when disentangling events prior to and post the initiation of the WTO trial, consistent with the trial triggering changes to China’s REE policy and recent announcement to abolish quotas. We do find, however, that extreme REE price movements have a first order effect on all companies in the REE industry consistent with recent market trends to enable hedging against REE price volatility.

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

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

Suggested Citation

Müller, Maximilian A. and Schweizer, Denis and Seiler, Volker, Wealth Effects of Rare Earth Prices and China's Rare Earth Elements Policy (February 14, 2015). Journal of Business Ethics, Vol. 138 (4), 627-648. Available at SSRN: https://ssrn.com/abstract=2565018

Maximilian A. Müller

ESMT Berlin ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://faculty-research.esmt.berlin/person/maximilian-muller/bio

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

Volker Seiler

Xi'an Jiaotong-Liverpool University ( email )

111 Ren'ai Road
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

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