Lynas in the crosshairs of the US-China trade war
COMMENT | The Trump administration’s launch of its trade war against China eighteen months ago has had wider implications. It not only escalated into a larger dispute between the two countries; it has led to trade distortions with ramifications for a wide range of countries.
The supply chains that had been created as part of the globalization effort have been disrupted. Third countries, including Malaysia, have been negatively affected.
Malaysia is becoming vulnerable in two critical ways. At the broadest level, as a trading nation, Malaysia is affected by the turbulence in the global business environment resulting from the actions of the world’s two largest economies.
The US-China dispute has resulted in a fracture in supply chains. For example, Malaysia exports electronic parts to China. These parts are then incorporated into finished products which are in turn exported to the United States.
With the United States imposing tariffs on Chinese exports, the demand for finished products decreases, which in turn leads to lower Chinese imports from Malaysia. This example shows how supply chains work due to globalization. Therefore, the US-China dispute would create upheaval in trade patterns involving other countries, including Malaysia.
One example is the impact on the highly controversial Australian company Lynas Corp, which operates a rare earth processing plant located in the Gebeng industrial zone in Kuantan.
a Japanese sogo sosha funds Lynas Corp’s Australian plant – the Sojitz Corporation. The latter was joined by the Japan Oil, Gas and Metals National Corporation (Jogmec), a government agency that has invested $ 250 million to enable Lynas to produce 850 tonnes of rare earths per year for ten years.
Lynas and Sojitz Corporation reached an agreement in 2010 to reduce Japan’s dependence on China as a source to meet Japanese demand for rare earths. It was the year Beijing slashed rare earth exports by 40% and blocked the shipment of minerals to Japan over the Sensaku Islands dispute.
The Lynas facility is the only major rare earth producing plant outside of China, and the facility supplies about a third of Japan’s rare earth demand. Lynas Corp is now the world’s second largest producer of rare earths, followed by Russia, India and Brazil. The Lynas facility has recorded a cumulative investment of RM 2.6 billion since its inception in 2008.
Sojitz and Jogmec injected money again to save Lynas from collapse. As such, Lynas has yet to enjoy the pioneer status granted by the Malaysian government.
China, on the other hand, produces nearly 80% of the world’s production of rare earths. Malaysia finds itself embroiled in the trade war between the United States and China alongside other friendly countries like Japan and Australia. China’s past threats to cut exports if implemented would make the Lynas facility a critical source of rare earth supplies for Japan and its longtime ally, the United States.
Over the past decades, the Three Powers have been among the top five trading partners and investors in Malaysia. Malaysia is therefore likely to be vulnerable to pressures from these major economic partners. Such a scenario does not appear far-fetched and has been the subject of speculative analysis by Stratfor Worldview, a Texas-based “geopolitical intelligence platform”.
Malaysia has returned to an “east-facing policy” and is trying to balance its relations with these three great powers. Prime Minister has visited Japan three times and successfully obtained a ten-year term samurai bond for an amount of 1.8 billion US dollars. There seems to have been a misunderstanding by protecting Japanese investments in Lynas by allowing the company to continue its operations despite strong opposition mounted by Malaysian activist groups.
The latter based their opposition on the environmental risks posed by radioactive waste disposal systems. At the same time, Malaysia ensured that US demand for rare earths was met from the Kuantan facility.
Finally, Malaysia hedged its bets with China by reinstating some key projects that were initially canceled. The trade war between the United States and China may be a battle between two global giants, but as the saying goes, when elephants fight, it is the grass that is trampled on.
The author is Executive Director of the International Institute for Public Policy and Management (Inpuma), Universiti Malaya. She is Professor of Business History in the History Department of the Faculty of Arts and Social Sciences at Universiti Malaya.
The views expressed here are those of the author / contributor and do not necessarily represent those of Malaysiakini.