China's power play

Reuters

In the world of prized metals, dysprosium lacked a certain star power. It lies deep in the so-called f-block of the periodic table—that free-floating part near the bottom you never used in high school chemistry—along with the other so-called rare-earth elements with tongue-twisting names like neodymium and lutetium. No one ever set out with mule and pick-axe to find dysprosium. It occurs only as a constituent part of other mineral compounds, which explains why its name derives from the Greek for “hard to get at.”

But in recent months, dysprosium has shed its obscurity to prove that, like oil or diamonds, it can serve as leverage in an international dispute. Its debut took place shortly after Sept. 7, when Japan seized the crew of a Chinese fishing boat that had rammed two Japanese coast guard vessels near the Senkaku Islands, a string of barren rocks jutting from the East China Sea that has been a source of tension between the two countries for centuries. Infuriated by Tokyo’s refusal to turn over the skipper of the trawler, Beijing retaliated in a way no one expected: it cut off Japan’s supply of dysprosium, along with 16 other rare earth metals. Dysprosium and its chemical cousins are the lifeblood of Japan’s vaunted high-tech industries, used in everything from iPhone screens to the electric motor of the Toyota Prius. China, it turns out, produces 93 per cent of the world’s supply of them, having gotten into the market 25 years ago, then flooded the globe with cheaply mined product during the late 1990s. Today, if you want a shipment of dysprosium, you buy it from China.

The results of its embargo were impressive, if frightening. Within days, executives with some of Japan’s biggest manufacturers were warning production could grind to a halt if the two sides didn’t resolve their differences. Tokyo quickly capitulated, freeing the Chinese trawler captain and calling a commission to identify alternative sources of rare earth elements. On Sept. 28, China turned the dysprosium tap back on.

Crisis averted—for now. But China’s power play was the latest in a string of moves that have rattled its neighbours and forced Western leaders to recalibrate assumptions about the trustworthiness of the world’s next superpower. China’s threats of trade sanctions against Norway over the awarding of the Nobel Peace Prize to imprisoned dissident Liu Xiaobo, along with its recent use of its rare earth metals monopoly to raise diplomatic pressure on the U.S., have called into question its past pledges to keep international politics separate from trade. So too has its steadfast refusal to revalue its currency upward, a move that might ease pressure on U.S. manufacturers, but more importantly engender goodwill among American lawmakers. But most troubling of all has been Beijing’s increasing aggressiveness in territorial disputes with neighbours like Vietnam—and its heated rhetoric when Washington has spoken up on their behalf. When the U.S. announced in August it would insert itself into Beijing’s talks with Southeast Asian nations, aimed at creating a dispute-resolution framework for these increasingly bitter turf battles, Chinese Foreign Minister Yang Jiechi flat out accused the Americans of “an attack on China.”

These developments would be less unnerving were they not unfolding against the backdrop of a military expansion the likes of which hasn’t been seen since the Cold War. Beijing’s annual spending on its armed forces has almost doubled since 2003 to reach $150 billion, according to the most recent estimates published in an annual Pentagon report to Congress, and its navy is now the largest in Asia, with 60 submarines and some 214 surface vessels, including 74 destroyers and frigates. Much of its arsenal is arrayed across the strait from Taiwan. Yet China’s new naval base on Hainan Island speaks to a renewed desire to control international shipping traffic on the South China Sea. Among other things, it features a James Bond-style underground port, which allows submarines to come and go undetected.

To James Holmes, a professor of strategy at the U.S. Naval War College, the implication is clear. “They’re building up sufficient military force to change thinking in Washington in times of crisis,” he says from his office in Newport, R.I. “If they can credibly threaten to thwack the U.S. Navy as it’s trying to rush units into the region, that really changes things for President Obama, or whoever’s making the decisions. Getting into a tussle in the western Pacific, and coming up on the short end, is one of the few things that could cost us our superpower status in an afternoon.”

Thwack? Tussle? Losing superpower status? Two years ago, when the Beijing Olympics were ending amid toasts to multilateralism, it seemed churlish to even raise such scenarios. China was now a full-fledged member of the World Trade Organization and a charter member of the international system; Confucius Institutes were springing up across the Western world to foster understanding of Chinese values—a sure sign the People’s Republic was mastering the art of soft power. Even long-time Sino-skeptics like Prime Minister Stephen Harper were tempering their complaints about spying, greenhouse gas emissions and human rights abuses in the belief that China was accepting its new role as a responsible player in the world order.

Those assumptions weren’t so much wrong as incomplete, says Martin Jacques, author of When China Rules the World, a 2009 book that predicts China will force sweeping change on neighbours and competing powers alike. Beijing’s recent foray into soft power, he says, was merely one layer of its long-haul strategy to spread its influence throughout Asia and, eventually, the world. The only question was when it would be forced to take off the velvet glove, says Jacques, and the turning point was the economic downturn. “It forced issues to the fore that its leaders would happily have left to the next generation,” he says. “The result, you could say, has been to foreshorten China’s rise.”

The prime example is the dispute over the yuan, which by last week was threatening to trigger an all-out global currency war. While Western leaders, led by members of the U.S. Congress, voice alarm about manufacturing jobs vanishing overseas due a cheap yuan, China’s leaders see themselves hurtling toward a floating currency much faster than they’d hoped. They note that per capita income in China still lags far behind that of other industrialized countries, and are convinced that allowing the yuan to float would forestall the country’s development by driving up the price of its exports, casting millions out of work. “A sharp appreciation of the currency would cause economic and social challenges at home,” Lan Lijun, China’s ambassador to Canada, told reporters in Ottawa last week. “You will see a gradual appreciation of the currency. But we’ll do it according to China’s conditions.”

Alas, China’s conditions may prove good for no one, not even China. While Beijing’s economic brain trust has grudgingly permitted to allow the yuan to appreciate about 20 per cent over the past five years, it has intervened to keep the currency far below its real value. As a result, other countries are devaluing to ensure their exports stay competitive with China’s, a race for the bottom that economists warn could touch off a destructive trade war. In September, lawmakers in the U.S. House of Representatives passed a law enabling the White House to take trade sanctions against China unless it softens its position.

The same brinksmanship now pervades China’s approach to its territorial disputes, in which until recently it showed a spirit of measured co-operation. Two years ago, for example, Beijing signed an agreement with Japan to jointly develop potentially rich oil and gas reserves on the Senkakus, despite their centuries-old dispute over the islands, currently held by Japan. Japan’s decision to seize the Chinese trawler put that deal at risk, but even those familiar with the Sturm und Drang of Beijing’s foreign policy were caught off guard by its direct resort to crippling trade action. “It’s indicative of a willingness to ramp up, to escalate,” says Paul Evans, director of the Institute of Asian Research at the University of British Columbia. “And the negative responses on the part of other countries to [China’s] behaviour should be sending warning signals to Beijing.”