On Monday (March 1) environmental standards governing the production of rare earth minerals where issued by the Chinese government. Rare earths, which consist of 17 elements, are essential for high-tech industries ranging from wind turbines and hybrid cars to consumer electronics and guided missiles. China produces 97 percent of the global supply, with reserves accounting for 36 percent of the world's total. According to a report by the official China Daily newspaper, "The standards, which come into force on Oct 1, set strict emission limits possibly affecting at least 60 percent of companies in the industry and could lead to consolidation in the sector, industry sources said."

According to Wu Xiaoqing, vice-minister of environmental protection, illegal mining and "irrational" production have led to severe environmental degradation and have depleted reserves. He said that the higher compliance costs would drive up export prices, but did not say anything about domestic prices. China reduced export quotas by 11 percent for this year, after cutting export quotas 30 to 40 percent in 2010.

China blocked exports to Japan last fall when the territorial dispute over the Senkaku Islands heated up. This action raised concerns around the world about how Beijing could use it economic leverage for political goals. Japan is looking to help develop alternative sources in India and Vietnam. The only U.S. mine, at Mountain Pass in California, reopened in December. It was closed in 2002 because of environmental concerns and the then low prices China was charging for exports. American production may reach 40,000 tons by 2014, compared to 150,000 tons in China this year.

Existing Chinese enterprises will be given a two-year grace period from the standards, but newcomers will have to abide by them immediately, raising a high barrier to the entry of new firms. "Some small- and medium-sized smelters, unable to meet the standards, are likely to be taken over by bigger ones, which will boost consolidation in the industry," said Wang Zhenhua, secretary-general of the Shanghai Society of Rare Earths.

The use of environmental regulations to centralize control over raw earths will make it easier for the government to allocate the available supply for strategic uses, and to reward domestic firms and obedient foreign firms with favorable access. Beijing has been using its monopoly position to lure foreign high tech firms to locate in China, where additional demands can be imposed. In the real world, trade in vital products is seldom left to an "invisible hand" and U.S. policy should not be mislead by any such academic notions.