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Journal of Business Ethics

, Volume 138, Issue 4, pp 627–648 | Cite as

Wealth Effects of Rare Earth Prices and China’s Rare Earth Elements Policy

  • Maximilian A. Müller
  • Denis SchweizerEmail author
  • Volker Seiler
Article

Abstract

Rare earth elements (REEs) have become increasingly important because of their relative scarcity and worldwide increasing demand, as well as China’s quasi-monopoly of this market. REEs are virtually not substitutable, and they are essential for a variety of high-tech products and modern key technologies. This has raised serious concerns that China will misuse its dominant position to set export quotas in order to maximize its own profits at the expense of other rare earth user industries (wealth transfer motive). In fact, export restrictions on REEs were the catalyst for the U.S. to lodge a formal complaint against China in 2012 at the World Trade Organization (WTO). This paper analyzes possible wealth transfer effects by focusing on export quota announcements (the so-called MOFCOM announcements) by China, and the share price reactions of Chinese REE suppliers, the U.S. REE users, and the rest of the world REE refiners. Overall, we find limited support for the view of a wealth transfer in connection with MOFCOM announcements only when disentangling events prior to and post the initiation of the WTO trial, consistent with the trial triggering changes to China’s REE policy and recent announcement to abolish quotas. We do find, however, that extreme REE price movements have a first-order effect on all companies in the REE industry consistent with recent market trends to enable hedging against REE price volatility.

Keywords

Announcement effects Event study Export quotas Rare earths elements World trade organization 

Abbreviations

AR

Abnormal return

CAR

Cumulative abnormal return

CAAR

Cumulative average abnormal return

CD

Compact disk

Ce

Cerium

CJV

Cooperative joint venture

CNY

Chinese yuan

CRSP

Center for Research in Security Prices

CSMAR

China Stock Market Trading Database

Dy

Dysprosium

Er

Erbium

etc.

et cetera

Eu

Europium

EU

European Union

EWI

Equally weighted index

FE

Fixed effects

FOB

Free on board

GATT

General agreement on tariffs and trade

Gd

Gadolinium

Ho

Holmium

JV

Joint venture

Kg

Kilogram

La

Lanthanum

Lu

Lutetium

Na

Not available

Na

Not applicable

Nd

Neodymium

NeFeB

Neodymium iron boron

Max

Maximum

Min

Minimum

MRI

Magnetic resonance imaging

MOFCOM

Ministry of Commerce of the People’s Republic of China

Nobs

Number of observations

OLS

Ordinary least squares

Pr

Praseodymium

Pm

Promethium

REE

Rare earth element

ROE

Return on Equity

Sc

Scandium

Sm

Samarium

SmCo

Samarium cobalt

Std. Dev.

Standard deviation

TMR

Technology Metals Research

T

Metric ton

Tb

Terbium

Tm

Thulium

TV

Television

U.S.

United States

USD

U.S. dollar

USGS

U.S. geological survey

UWI

Usage-weighted index

WSJ

Wall street journal

WTO

World Trade Organization

Y

Yttrium

Yb

Ytterbium

Z

Atomic number

Notes

Acknowledgments

The authors are grateful to editors of the special issue “Business Ethics in Greater China” and two anonymous referees for many helpful comments. The authors thank Harald Elsner, Mike Gilroy, Gareth Hatch, Wenxuan Hou, Dudley Kingsnorth, Juliane Proelss, Milena Petrova, Craig Wilson, Mark Schopf, and Heike Schreckenberg, as well as the participants of the Journal of Business Ethics Special Issue Conference on Business Ethics in Greater China: Past, Present, and Future and the 12th INFINITI Conference on International Finance for helpful comments and suggestions. All remaining errors are ours.

Supplementary material

10551_2015_2773_MOESM1_ESM.docx (122 kb)
Supplementary material 1 (DOCX 121 kb)

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Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  • Maximilian A. Müller
    • 1
  • Denis Schweizer
    • 2
    Email author
  • Volker Seiler
    • 3
  1. 1.WHU – Otto Beisheim School of ManagementVallendarGermany
  2. 2.Concordia UniversityMontrealCanada
  3. 3.University of Paderborn, International Economics and MacroeconomicsPaderbornGermany

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