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by David Urani

With a bill moving through Congress intended to label China as a currency manipulator (already passed through the House) and to open the door for more tariffs on Chinese goods, the trade war between the U.S. and China has officially reached Defcon 5. Our desire to have a level playing field in the export market is being contended by China, who by no means wants to give up its exporting prowess on low priced goods. China has flinched once by agreeing to let the yuan rise in a controlled fashion, but the problem is just that, it is controlled. In reality, the recent moves in the yuan have been paltry and both sides know it. That's a tough battle to get started for us though, considering China has a number of different angles to retaliate from. The most significant advantage that China has in the global trade arena, however, is its control of the rare earth metals market.

Tacked onto the bottom of the periodic table are a number of related metals that you probably wouldn't recognize the name of, but are becoming ever more important in our daily lives. They are the key to smaller computers, high powered batteries, and alternative energies. Take for instance lanthanum, ten pounds of which are used in the battery of every Toyota Prius and are also a key component to high powered wind turbines. Then there is indium which powers the most cutting edge solar panels. The fact is, our economy is likely to be defined by rare earth metals over the long term as miniature computers and alternative energies take center stage. Not to mention, rare earth metals are central in almost every facet of our military technology.

The kicker is that China holds 95% of the world's rare earth metals supply. Although rare earth metals are in fact quite abundant on this planet, China is the only place that currently has the capabilities to produce them in large quantities. The United States produces virtually none of these metals currently, partially because of our small supply, but also because of environmental concerns for mining them. Estimates show us being upwards of 10 years away from legitimate rare earth metal production capabilities; that's if we decide we want to.

Meanwhile, China has already begun to strong arm the world with its hold of rare earth supplies. In July, China reduced its rare earth export quota by 72%, sending prices soaring. Not only that, but it also has export taxes ranging from 15% to 25% on the metals. That's the kind of regulation that makes it quite difficult for companies in other countries to produce things like solar wafers cheaply. Considering cost is one of the biggest barriers holding alternative energies from taking off, the U.S. administration will want to be very careful where it steps. An ominous example comes from an incident earlier this month when a Chinese fishing trawler collided with Japanese coast guard boats, which resulted in the capture of several Chinese fishermen. Although the details aren't confirmed, word has it China halted, or at least threatened to halt, its exports of rare earth metals to Japan, which soon released the fisherman.

With the battle heating up and the rhetoric getting stronger, investors will be more than aware of the potential backlash from China. As mentioned above, the U.S. does hold a relatively small amount of rare earth metals and one such holding, Molycorp (NYSE:MCP), is publicly traded. It has its hands in everything from green energy to electric vehicles, to high tech, to defense. In 1Q10, the Company generated just $2.92 million of revenue, but you can bet that if that Chinese supply line starts to get questioned businesses will be trying to get every last drop out of them.

Source: Rare Earth Metals: China's Death Grip on the Trade War