Power Up

For some countries, trade policy is the stuff of arcane rules and wonky bureaucracy. But for centuries in China, trade has been the biggest bugaboo of foreign affairs. Every Chinese knows about the moment their country was forcibly "opened" to the West: British merchants compelled Beijing to allow imports of opium—a baleful product that many Chinese nonetheless desired—in the 19th century. More recently, though, the tables have turned. China has come to possess a raft of things coveted by those same foreign powers: cheap labor, abundant capital, and, as it turns out, the world's greatest supply of so-called rare earths—metals essential for everything from hybrid cars to iPods to precision-guided weaponry.

Which is why this past weekend's Sino-U.S. row isn't just about lowly rubber and poultry. (On Friday, President Barack Obama decided to impose a tariff of up to 35 percent on Chinese tires for the next three years; in response, Beijing threatened to return the favor with possible tariffs on American auto parts and chicken meat.) A Chinese Foreign Ministry spokeswoman called the U.S. move a "grave" form of protectionism, but episodes like these also give nationalistic Chinese an excuse to demand that Beijing hoard those rare-earth metals. It is already doing so, and its own protectionism may end up reshaping the global economy.

You're not alone if you can't name any of these rare-earth minerals. Words like yttrium, holmium, lanthanum, and thulium don't exactly roll off the tongue. All you have to know is that China has a near stranglehold on such ores, currently producing 95 percent of the world's supply and claiming about 60 percent of known reserves within its borders, mostly in the region of Inner Mongolia. The region's vice governor, Zhao Shuanglian, declared in early September that China planned to streamline the domestic rare-earth industry, impose export controls, and establish a national reserve mechanism. "We're not taking a short-term view of just trying to prop up rare-earth prices," he maintained.

Over the past decade, China has honed its competitive edge in producing rare earths, thanks to cheap labor, improved quality, and economies of scale. Extraction is a dirty job—in some cases crushed ore is doused with hot sulfuric acid—and therefore requires costly environmental-protection measures in developed countries. The combination of these factors, and a flood of cheap Chinese ores in the '90s, persuaded many mining enterprises in other countries with rare-earth reserves—from the United States to Russia—to reduce or even cease production. The biggest U.S. rare-earth mine at Mountain Pass, Calif., was closed, for instance, though it's now being revived by Molycorp Minerals.

Problem is, it takes up to a decade to develop a rare-earth mine on a commercial scale. Yet these 15 metallic elements happen to be essential in many emerging green technologies. They go into electric vehicles, into all the methods yet conceived for reducing carbon monoxide and microparticles in engine exhaust, and into high-performance metallurgy behind wind gearboxes. To name just one use that is bound to grow: rare earths are a key component (reportedly at least 12 kilos' worth per battery) in Toyota's famous green car, the Prius. Jack Lifton, a freelance analyst who works on rare-earths, estimates that global trade in these metals is roughly $2 billion annually, but the total market for the products that depend on them is up to $100 billion per year.