https://orcid.org/0000-0002-5320-7684
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Abstract
Studies identify cost as a key factor determining the effectiveness of economic sanctions. We argue that failing to account for market dynamics in the sector in which sanctions are imposed undermines the validity of estimates of the economic costs imposed on target countries, and we propose that market structure powerfully conditions sanctions effectiveness. To examine the effect of market structure, we trace the causal path through which economic sanctions purportedly lead to targets’ behavior changes, and we reveal the prevalence of adjustments that minimize the cost to the target. Our empirical data is drawn from a sanctions episode that can be evaluated as a best-case scenario for the imposition of effective economic sanctions: China’s 2010 embargo of rare earth elements supply to Japan. We show that Japan was able to adjust to avoid the Chinese sanction’s bite despite the dominance of Chinese producers and Japan’s seeming vulnerability as a key downstream consumer of rare earths. Our results show that measures of economic cost that fail to capture key components of market structure are not valid in assessing sanctions effectiveness, and the ability to impose economic costs on target countries is limited.
Acknowledgments
The authors thank seminar participants at the Council on Foreign Relations, Hong Kong University, the American Political Science Association annual meeting, and their home institutions, and two anonymous reviewers, for comments on previous versions of this paper. None of those commenters are responsible for any of the content.
Funding
Eugene Gholz also thanks the University of Texas at Austin’s Edward A. Clark Center for Australia and New Zealand Studies and the LBJ School of Public Affairs’ Policy Research Institute for their support of his research travel related to this project. Neither organization had any influence on the analysis, the writing of the article, or the decision about where and when to submit the manuscript for publication.
Notes
1 Farmer (Citation2000) considers these factors in estimating the cost that a sender pays by imposing sanctions.
2 The codebook is available at http://www.unc.edu/∼bapat/tiesusersmanualv4.pdf. It is not clear from the codebook whether “anticipated costs” refers to costs anticipated by participants in the sanctions episode themselves or to the coder’s estimate of what the imposed costs would have been.
3 Van Bergeijk and Siddiquee (Citation2017) discuss other aspects in which lack of transparency in the Hufbauer et al. dataset causes difficulties for sanctions research.
4 Those additional industries would then also be forced to adjust, and we would argue that the size of the cost imposed on the target country would depend on the market structure and dynamics of the additional sectors – following the same causal logic that we discuss in the sectors initially disrupted in the sanctions episode.
5 One straightforward way to measure this concentration is the Herfindahl-Hirschman Index (HHI) (Hughes & Long, Citation2015; Silberglitt, Bartis, Chow, An, & Brady, Citation2013).
6 This kind of reallocation famously took place in response to disruptions in oil markets, including the 1973 Arab oil embargo (Griffin, Citation2015).
7 The primary sanctions sender’s ability to use secondary sanctions to force alternative suppliers to cooperate – that is, the sender’s ability to increase effective sender or target concentration – also depends on the cost-benefit logic of sanctions effectiveness. We argue that scholars should use the same three explanatory variables and study the same causal dynamics in studies of cases that involve secondary sanctions as describe here in the simpler case where one sender sanctions one target.
8 Trade deflection and smuggling may be muted in multilateral sanctions episodes because the target might struggle to find substitute trading partners or to get neighboring governments to tacitly cooperate with smuggling. Slavov (Citation2007) found negative effects on sanctions targets’ neighbors’ trade volumes in a study of seven post-Cold War UN-initiated sanctions episodes. On the other hand, Chen & Garcia (Citation2016) document extensive trade deflection, smuggling, and other types of sanctions busting that limited the impact of the unilateral Chinese sanction on Norwegian salmon exports starting in 2010. Unilateral (or minilateral) sanctions are more common than truly multilateral ones, so it is worth studying the adjustment dynamics to unilateral sanctions. Clarifying the causal pathways of economic adjustment might also help build the case for multilateral sanctions.
9 We follow Van Evera (Citation1997, pp. 11–13)’s recommendation for drawing arrow diagrams of theories that show their causal mechanism, with the multiplication symbol used to show a condition variable that “govern[s] the size of the impact that IVs or intVs [independent variables or intervening variables] have on the DVs [dependent variables] or other intVs.”
10 In the future, researchers could build large-n datasets that include variables for sender concentration, target concentration, and target elasticity in the particular economic sectors involved in sanctions episodes.
11 See Shunsuke Tabeta, “Chugoku no rea aasu, tainichi yushutsu todokoru, nicchu seifu kinyu hitei, [Chinese Rare Earth Exports to Japan Stagnate: Japanese and Chinese Governments Deny Embargo]” Nihon Keizai Shimbun, September 23, 2010. The same newspaper explicitly linked the territorial dispute over the Senkaku Islands with the rare earths embargo. Yasuhiko Futoda, “Rea aasu ha doro ka takara ka: chugoku gaiko no buki no seitai [Rare Earths: Mud or Treasure: The Real Face of the Weapon of Chinese Foreign Policy],” Nihon Keizai Shimbun, September 26, 2018.
12 “Chugoku: “Rea aasu, taiko shudan ni tsukawazu” Senkaku Jiken go [China: “Rare Earths Not Used as Retaliation” Following Senkaku Incident]” Nihon Keizai Shimbun 15 October, 2010. The Chinese government’s denial has led Iain Johnston to question whether the alleged rare earths incident should even count as a sanction’s episode (Johnston, Citation2014). Japanese customs data, measured at the ports where rare earths enter Japan, showed ‘no obvious pattern’ of changes, while Johnston suggests that a Chinese embargo should have led to systematic drops of all kinds of rare earth arrivals at all ports. But the normal volume of trade in rare earths is quite small, and even a small ship with a cargo partially composed of rare earths smuggled out of China would be sufficient to account for deliveries that satisfied a substantial fraction of normal Japanese demand. We believe China in fact tried to interrupt REE exports and that China made resumption of rare earth exports contingent on Japan’s acquiescence to a political demand – that is, that the episode was an economic sanction. Chen & Garcia (Citation2016) discuss similar evidence regarding the China-Norway salmon sanctions episode, along with a possible theoretical explanation for China’s ‘subtle’ sanctions. For purposes of examining the causal pathways of target adjustment and decision-making, it matters much more that the Japanese thought that they were facing an economic sanctions episode; determining whether in fact China intended to sanction Japan is less relevant.
13 “Jisshitsuteki na kinyu sochi [Voluntary emergency measures]”. Rare Earth Elements Committee, Japan Society of Newer Metals, “Rea aasu sangyo ga chokumen shita mondai to sono taio [Issues Faced by Rare Earth Elements Industry, and Response]” Presentation to Mining Subcommittee, Resources and Fuels Committee, Energy Research Council, Ministry of Economy, Trade, and Industry. 5 June, 2014, p. 3.
14 Official from Non-Ferrous Metals Bureau, Ministry of Economy, Trade, and Industry. Interview with authors. 13 March 2014. This assessment was independently noted by a reporter who covered the sector for the major Japanese business daily, the Nihon Keizai Shimbun. He noted that the Chinese central government always faces difficulties implementing central orders so it was unsurprising that different customs houses responded differently, but he asserted that it was clear that at the time of the Senkaku Incident there was a central government order. Reporter from Nihon Keizai Shimbun, interview with authors, 14 March 2014.
15 Officials from Ministry of Foreign Affairs, Interview with Authors, 14 March 2014.
16 Martin Fackler and Ian Johnson, “Japan Retreats in Test of Wills with the Chinese,” New York Times, September 25, 2010, p. A1.
17 Kaeda Keizaisho, “Rea aasu mondai ‘keizai seicho no ookina shogai ni’ [The Rare Earths Problem will be a ‘Large Impediment to Economic Growth’]” Nihon Keizai Shimbun, September 24, 2010.
18 The tonnage of material processed in a rare earth operation is tiny compared to the amount involved in better-known mining industries like iron ore and coal. Interview with rare earth expert Dudley Kingsnorth, Perth, Australia, October 2015.
19 China’s mining dominance stemmed from a combination of low labor costs, relatively lax environmental regulation, and the fact that China’s biggest rare-earth mine also produces iron ore, providing another revenue stream to help cover the mine’s fixed costs. Ted Niles, “Western Rare Earth Discoveries May Just Feed China,” Financial Post, February 9, 2012.
20 Hiroko Tabuchi, “Block on Minerals Called Threat to Japan’s Economy,” New York Times, September 29, 2010, p. B1; Rare Earth Elements Committee, Japan Society of Newer Metals, “Rea Aasu Sangyo ga chokumen shita mondai to sono taio [Issues Faced by Rare Earth Elements Industry, and Response]” Presentation to Mining Subcommittee, Resources and Fuels Committee, Energy Research Council, Ministry of Economy, Trade, and Industry. 5 June 2014.
21 Development Bank of Japan, “Rea aasu no jukyu doko to gijutsu rikkoku ni muketa kadai [Supply and Demand Changes for Rare Earths, and Issues related to becoming a Technology Leader]” Kongetsu no Toppikusu No. 169-1, Development Bank of Japan 20 December 2011. Available at: http://www.dbj.jp/pdf/investigate/mo_report/0000008822_file5.pdf (accessed April 22, 2017).
22 Another way to describe the combination of high sender concentration and high target concentration would be a situation of symmetry or mutual dependence. One might presume that if China depends on selling REE to Japan and cannot readily send the REE to any other market, then the cost of imposing the REE sanction would be high to China. However, that fact would be unlikely to change the expected effectiveness of the sanction: by imposing the sanction, China accepted the costs (revealed preference), and Japan was confronted with the decision of whether to comply with China’s demand so that Japan would stop bearing its cost of the disruption. It is possible that the high cost to the sender would tempt the target to turn the sanctions episode into a “war of attrition,” where the target would refuse to concede, draw out the episode, and hope that the cost to the sender would lead the sender to back down first (van Bergeijk & van Marrewijk, Citation1995). Such an extended episode would actually aid our “pathway case” research design by providing more opportunity to observe market dynamics.
23 “Rea aasu ha, saisei enerugii nado no wagakuni no sentan sangyo ni fukaketsu na genso de aru ga, chugoku no yushutsu seisai sochi no kyoka ni kiin suru kyokyu risuku no kenzaika no keiken wo fumae, arata na kyokyugen no kakuho ga motomerarete iru tokoro de aru.” JOGMEC, Rea aasu taisekibutsu no shigen potensharu hyoka hokokusho [Report on the Resource Potential of Rare Earth Deposits], 6 July, 2016.
24 Nihon no rea aasu seisaku to WTO teiso [Japan’s Rare Earths Policy and the WTO Case],” Kaikanko Senryaku Kenkyu vol. 5, no. 2 (2015), pp. 119–122.
25 Manuel Quiñones, “‘Sick Industry’ Struggles to Take on China,” E&E News, September 9, 2015.
26 Author interviews with rare earth traders and consumers, Tokyo, March 2014.
27 Glenda Korporaal, “Lacaze Puts Struggling Lynas Back on Track,” The Australian, May 17, 2016; Jeff Yoders, “Rare Earths MMI: Japanese Investors Save Lynas Corp.” MetalMiner, November 8, 2016, https://agmetalminer.com/2016/11/08/rare-earths-mmi-japanese-investors-save-lynas-corp/ (accessed March 14, 2017).
28 Peg Brickley, “Mountain Pass Rare Earths Mine Gets Financing,” Wall Street Journal, August 31, 2016; Timothy Puko, “Prized ‘Rare Earth’ Minerals Feel Scorch of Tariffs,” Wall Street Journal, November 29, 2018.
29 Eugene Gholz, “The Rare Earths Industry Can Weather Any Chinese Trade Battle,” CNN Business Perspectives, July 23, 2019.
30 Rare metals manager of a major Japanese trading house, interview with authors, 10 March 2014.
31 The Japanese government’s stockpiling program includes the 17 rare earth elements as a specialized category within the 31 types of rare metals. It does not stockpile all of the metals that it monitors in the program, and it is not clear from public documents that the Japanese government had a rare earths stockpile at the time of the crisis in 2010, nor that it has one today.
32 Managers at a Japanese rare earth manufacturer, interview with authors, 12 March 2014. Sprecher (Citation2016, pp. 89–91) reports a similar inventory expansion at Santoku, a major Japanese rare earths company that had stored a one-year supply of grinding waste from magnet manufacture to recycle into new magnets – a process that was immediately technically feasible but not economically profitable at precrisis prices. Rather than tapping the inventory, Santoku’s customers demanded that Santoku expand it to two years’ supply during the crisis.
33 Interview with rare earth mine executive, January 2015; Rare Earth Elements Committee, Japan Society of Newer Metals, “Rea aasu sangyo ga chokumen shita mondai to sono taio [Issues Faced by Rare Earth Elements Industry, and Response]” Presentation to Mining Subcommittee, Resources and Fuels Committee, Energy Research Council, Ministry of Economy, Trade, and Industry. 5 June, 2014, p. 4.
34 “Lynas Triples Production,” Kalgoorlie Miner, January 9, 2014, p. 10.
35 Akiko Fujita, “US Mine Aims to Loosen China’s Grip on Rare Earth Materials,” Yahoo Finance, May 30, 2019.
36 Peter Ker, “Rare earths miner Lynas Corporation posts $78.5m half-year profit,” Australian Financial Review, March 5, 2018; Michael Bailey, “China rare earth quota cut to help ASX producers,” Australian Financial Review, April 29, 2018.
37 Yoshitaka Taniguchi, “Rea aasu wo meguru chugoku no senryaku to nihon no taio [Rare Earth Elements, Chinese Strategies and Japanese Responses]”, International Energy Economics Japan, 25 October, 2012, p. 9.
38 Rare Earth Elements Committee, Japan Society of Newer Metals, “Rea aasu sangyo ga chokumen shita mondai to sono taio [Issues Faced by Rare Earth Elements Industry, and Response]” Presentation to Mining Subcommittee, Resources and Fuels Committee, Energy Research Council, Ministry of Economy, Trade, and Industry. 5 June, 2014, p. 4.
39 “Nihon kokunai de rea aasu kaku genso no daitai ya shoshigenka no kenkyu kaihatsu ga ikki ni susumi, kyokyutozetsu risuku wo teigen saseru koka ha atta. Ippo, ichibu no rea aasu ni tsuite ha, heiji ni modotte kara mo juyo ha kaifuku sezu, jukyu baransu ga akka shite iru.” Rare Earth Elements Committee, Japan Society of Newer Metals, “Rea aasu sangyo ga chokumen shita mondai to sono taio [Issues Faced by Rare Earth Elements Industry, and Response]” Presentation to Mining Subcommittee, Resources and Fuels Committee, Energy Research Council, Ministry of Economy, Trade, and Industry. 5 June, 2014, p. 10.
40 “Nihon kakuchi de rea aasu shiyo sakugen wo tema to shita jigyo ga jikko sare, sono hotondo ga sakugen koka wo hatsugen suru jotai made itatte iru.” Kazuhiko Komumura, “Rea aasu kiki wo hete, nihon no seizo gyokai ni mieta mono [What I Saw of Japan’s Manufacturing Industry through the Rare Earths Crisis] NRI Public Management Review], vol. 123 (October 2013), p. 5.
41 Consumer products using rare earth magnets are listed in Hitachi Metals, LTD. and Hitachi Metals North America, LTD.’s Complaint under Section 337 of the Tariff Act of 1930, as Amended, filed with the US International Trade Commission in August 2012.
42 Interview with rare earth magnet producer executive, December 2013; Megan Geuss, “Toyota’s New Magnet Won’t Depend on Some Key Rare-Earth Minerals,” Ars Technica, February 28, 2018.
43 “Hitachi Metals Reduces Rare-Earth Dysprosium in Electric-Motor Magnets,” Automotive Engineering Online, April 5, 2013; John Kell, “Molycorp in Venture for Japan Facility,” Wall Street Journal, November 30, 2011; Jim Witkin, “A Push to Make Motors with Fewer Rare Earths,” New York Times, April 22, 2012, p. AU2. Other magnet manufacturers like Shin Etsu and Vacuumschmelze make similar products.
44 Rare Earth Elements Committee, Japan Society of Newer Metals, “Rea ga chokumen shita mondai to sono taio [Issues Faced by Rare Earth Elements Industry, and Response]” Presentation to Mining Subcommittee, Resources and Fuels Committee, Energy Research Council, Ministry of Economy, Trade, and Industry. 5 June, 2014, p. 9. Some demand changes can be attributed to factors other than innovation. The shift to LED lighting, for example, contributed to the fall in demand for yttrium separately from government and industry efforts to recycle or reduce the amount of yttrium used in fluorescent lighting.
45 It is also possible that the embargo failed because China did not really commit to it. We do not have access to evidence of the internal Chinese decision-making regarding the embargo, so we cannot assess China’s level of effort or whether they view the episode as a success or a failure. We do know China ended the embargo upon return of the fishing boat captain—the proximate issue in the episode but not the long-run goal of changing in the status of the Senkaku Islands.
46 Japanese Ministry of Foreign Affairs, “Trends in Chinese Government and Other Vessels in the Waters Surrounding the Senkaku Islands, and Japan’s Response,” July 3, 2018, available at https://www.mofa.go.jp/region/page23e_000021.html; “Japan Coast Guard Seeks to Boost Response Time with New Bases for Large Patrol Ships,” Japan Times, January 16, 2018.
47 Jason Rogers, David Stringer, and Martin Ritchie, “China Gears Up to Weaponize Rare Earths in Trade War,” Bloomberg, May 28, 2019; Ernest Scheyder, “Exclusive: Pentagon Races to Track US Rare Earths Output Amid China Trade Dispute,” Reuters, July 12, 2019.
48 Development Bank of Japan, “Rea aasu no jukyu doko to gijutsu rikkoku ni muketa kadai [Supply and Demand Changes for Rare Earths, and Issues related to becoming a Technology Leader]” Kongetsu no Toppikusu No. 169-1, Development Bank of Japan 20 December 2011. Available at: http://www.dbj.jp/pdf/investigate/mo_report/0000008822_file5.pdf (accessed April 22, 2017).
49 Data from Rare Earths Division, Japan Society for Newer Metals. Note that the original table lists “Neojim” (usually written as neodymium) and “Jijim” (usually written as “didymium,” for a blend of neodymium and praseodymium used in magnet production).