Business in Asia could be troubled as the conflict between China and Japan escalate.
There have been reports of an unofficial ban of rare earth metals being shipped to Japan. Chinese government officials are denying it, but Dudley Kingsnorth, the executive director of the Industrial Minerals Company of Australia, reports that he has heard from several contacts that the ban will last through until the end of the month, at which time it will be reassessed on whether to renew.
Japan detained a Chinese fisherman over a territorial dispute earlier in the month. China is demanding that the man be released.
“It is certainly a step down a big downward slope,” says Nicholas R. Lardy, senior fellow at the Peterson Institute for International Economics, in a recent interview.
China and Japan are two of the largest economies in the world.
“The Chinese are determined to humble the Japanese and they are willing to use rare earths to make their point.”
Lardy notes that rare earth materials are crucial to many of electronic components that Japan manufactures.
” So if Toyota can’t get these rare earth materials or doesn’t have enough stock pile of them, then Toyota will be out of production of their Prius vehicle in a very short period of time. This may be a case where sanctions do work since you really do have a lot of power. China is almost a monopolist in the supply of these very valuable materials.”
Lardy notes that China has about 90 percent of rare earth production. In the long run, Lardy says China will be a loser in this battle since Japan will be driven to forming a closer security arrangement with the U.S. as it seeks protection from an increasingly belligerent China.
He also states that in the long run, this action could backfire on China as it strains economic relations throughout the region.
In other news, leading economic indicators improved in August. Warren Buffet says we are still in a recession. Buffet’s yardstick is that we have to get back to the previous output level that we were running before the crash before we can consider ourselves out.