RE-CONTROL THE MARKET FOR STRATEGIC POWER: CHINA’S REREGULATION OF ITS RARE EARTH INDUSTRY A Dissertation Presented to The Academic Faculty by Yujia He In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in International Affairs, Science and Technology in the Sam Nunn School of International Affairs Georgia Institute of Technology August 2016 COPYRIGHT © 2016 BY YUJIA HE RE-CONTROL THE MARKET FOR STRATEGIC POWER: CHINA’S REREGULATION OF ITS RARE EARTH INDUSTRY Approved by: Dr. Fei-Ling Wang, Advisor Dr. John McIntyre Sam Nunn School of International Affairs Scheller School of Business Georgia Institute of Technology Georgia Institute of Technology Dr. John Garver Senior Fellow Jane Nakano Sam Nunn School of International Affairs Energy and National Security Program Georgia Institute of Technology Center for Strategic and International Studies Dr. Margaret Kosal Sam Nunn School of International Affairs Georgia Institute of Technology Date Approved: May 12, 2016 ACKNOWLEDGEMENTS I would like to start by thanking my thesis advisor Fei-Ling Wang for believing in my project from the very beginning and for believing in my ability to carry it through. Dr. Wang guided me through this project with unwavering support and wise shepherding. This PhD dissertation would not exist without his thoughtful guidance, customized mentorship, and close reading. I am also deeply indebted to his encouragement and advocacy, always timed to when I need them the most, his pragmatic advice about both scholarship and professional development, and his generous time and patience with me throughout my PhD years. His exceptional commitment to scholarship, excellence in teaching, and passion for the study of the political economy of China has been a true inspiration to me. My next indebtedness is registered to my committee members. I thank John Garver for his many insightful conversations about Chinese politics and political economy, for his kind support and recommendation for funding applications, and for providing me critical feedback on various versions of the draft. I thank Margaret Kosal for her interest starting in the early stage of this project, and for always asking probing questions that lead to enlightening discussions and interesting findings. I thank John McIntyre at the Scheller School of Business for teaching me International Business Environment, for providing opportunities to present my research to the business community, and for always being available for encouragement, valuable advice and information on both the thesis topic and on professional development. I thank Jane Nakano at the Center for Strategic and International Studies in Washington D.C. for iii sharing with me her expert views on energy and resource policy in both the U.S. and Asia, for making the time to discuss the project with me since the early stages of writing, and for giving me sound advice about professional development. The Sam Nunn School of International Affairs and Georgia Tech provided me a caring and dynamic environment for learning which shaped my interdisciplinary research and intellectual interests. I thank Dr. Brian Woodall for showing me example of a great teacher imparting knowledge to students as a teaching mentor, for expanding my understanding about Japan and East Asia, and for support for my research and travel while directing the program. I thank Dr. Kirk Bowman for teaching me Comparative Politics, and for his valuable advice for this project when teaching me Research Design. I thank Dr. Esther Skelley Jordan and Dr. Peter Brecke for sound advice in empirical research methods, teaching pedagogy, and kind encouragement for my professional growth. I thank Dr. Alasdair Young for the opportunity to assist his research on the WTO and the European Union, thereby expanding my knowledge about global trade issues and the WTO disputes. I thank Dr. Katja Weber and Dr. Jenna Jordan for teaching me International Affairs and for their warm support and feedback for me at several stages of the research project. I thank Dr. Michael Best and Dr. Mark Zachary Taylor for checking in on my progress and providing support for research and conference travel while directing the graduate program. I thank Assistant Director Vince Pedicino for always providing critical support and help throughout the PhD study. I feel very grateful for the intellectual support and emotional affinities from my PhD cohort, especially Tong Zhao and Jonathan Huang who set a high standard for my work and had many delightful conversations with me about PhD research and Chinese politics. I thank Dr. David iv Lawrence at the Center for the Enhancement of Teaching and Learning (CETL) for teaching me writing and online communications, and for giving me practical advice about communicating my research to different audiences. This project would not have succeeded without generous financial and institutional support from several agencies. I thank the Horowitz Foundation for supporting this dissertation project through the generous Horowitz Foundation for Social Policy Grant. I thank the the support of the Ford Foundation-funded New Generation China Scholars Program at my local affiliation the University of Chicago Center in Beijing, in particular Prof. Dali Yang, Prof. William Parish, Manager Xueming Liang, and fellow scholars and staff members at the Center. In China and the U.S. many scholars and professionals have kindly provided expert knowledge at various stages of my project, as well as friendship and support in field work. Those who I can name include Gareth Hatch, James Hedrick, Rosalyn Hsueh, Bruce Dickson, Jost Wuebbeke, Matthew Baltz, David Abraham, Eve Bower, May Tan- Mullins, Guo Chaoxian, Zhu Yongfeng, Chen Zhanheng, Yan Chunhua, Liu Weihua, Wu Yiding. Many more industry professionals and government employees, classmates at my alma mater Peking University College of Chemistry, and friends at local regions have opened door to me to serve as interviewees, informants, helpers, personal introduction, often on anonymous basis, for which I feel deeply indebted to. Finally I thank my mother and father, without whose emotional support I would not be here. Growing up in China, I feel privileged to be born into a family that embraces both the traditions of hard work for education and the openness to take detours to explore different disciplines, languages and cultures. Their decades of work experience for state- v owned companies instilled in me an early interest in studying the role of the state in China’s development. I am grateful for their profound support and inspirations. vi TABLE OF CONTENTS Page ACKNOWLEDGEMENTS iii LIST OF TABLES x LIST OF FIGURES xi LIST OF SYMBOLS AND ABBREVIATIONS xvi SUMMARY xix CHAPTER 1 INTRODUCTION 1 1.1 Theoretical Framework 3 1.2 Research Design & Methodology 17 1.3 Rare Earth Elements as Critical Minerals 17 1.4 A Primer on China’s Reregulation of Rare Earths 20 1.5 Significance & Policy Relevance 34 1.6 Organization of the Study 35 CHAPTER 2 LITERATURE REVIEW 38 2.1 Literature on State-market Relations 39 2.2 Literature on State Capacity 55 2.3 Literature on China’s Rare Earth Industry 62 CHAPTER 3 RESEARCH DESIGN & METHODOLOGY 69 3.1 Research Design 69 3.2 Data Collection and Analysis 71 Chapter 4 RARE EARTH INDUSTRY: AN ANALYSIS OF GLOBAL SUPPLY AND DEMAND 78 4.1 Criticality of REEs 79 vii 4.2 Global Supply of REEs 85 4.3 China’s REE Deposits and Major Mining Regions 90 4.4 Non-Chinese Supply of REEs 96 4.5 Global REE Demand 111 4.6 Global REE Production Chain 115 4.7 China’s Position in the Global Production Chain 127 CHAPTER 5 STATE-LED DEVELOPMENT UNDER PLANNED ECONOMY (1949-1977) 138 5.1 Pre-PRC Rare Earth Deposit Discovery 139 5.2 Developing the Rare Earth Industry for National Defense 139 5.3 Political Campaigns Hampered Development 144 5.4 Industry Growth despite Political Turbulences 147 CHAPTER 6 STATE-LED RAPID MARKETIZATION AND DEVELOPMENT (1978-1997) 152 6.1 Macro-level Economic Change: Transition towards the Market Economy 153 6.2 Goals and Narratives of the State 159 6.3 Industry-Specific Regulatory and Policy Changes 165 6.4 National-level Institutional Changes 179 6.5 Industry Development Outcomes 200 6.6 Conclusion 225 CHAPTER 7 STATE REREGULATION UNDER DEEPENING ECONOMIC REFORM (1998-2007) 228 7.1 Macro-level Economic Change: Expansion of Domestic Market Economy and International Trade 228 7.2 Goals and Narratives of the State 238 7.3 Industry-Specific Regulatory and Policy Changes 248 viii 7.4 National-level Institutional Changes 257 7.5 Industry Development Outcomes 278 7.6 Conclusion 300 CHAPTER 8 MORE STATE REREGULATION TIGHTENING CONTROL OVER THE INDUSTRY (2008-PRESENT) 303 8.1 Macro-level Economic Change: Post-Crisis Development of Market Economy 303 8.2 Goals and Narratives of the State 308 8.3 Industry-Specific Regulatory and Policy Changes 325 8.4 Examination of Beijing’s Alleged Rare Earth Export Halt to Japan 348 8.5 National-level Institutional Changes 355 8.6 Industry Development Outcomes 362 8.7 Reregulation with Losers 387 8.8 Conclusion 389 CHAPTER 9 EXPLAINING REGIONAL VARIATION IN STATE CAPACITY OF REREGULATION 393 9.1 Geographical Concentration of Local Mining Deposits 393 9.2 Technology Intensity of Local Mining Production 396 9.3 Local Market Concentration of Mining Licenses 397 9.4 Conclusion 401 CHAPTER 10 CONCLUSION 402 REFERENCES 410 ix LIST OF TABLES Page Table 1 REE Deposit Information by Province in China 92 Table 2 Utilization Ratio and Service Lifetime of REE deposits in 2002 94 Table